India Country Commercial Guide
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Doing Business in India: 2014 Country Commercial Guide for U.S. Companies INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2010. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES. Chapter 1: Doing Business In India Chapter 2: Political and Economic Environment Chapter 3: Selling U.S. Products and Services Chapter 4: Leading Sectors for U.S. Export and Investment Chapter 5: Trade Regulations, Customs and Standards Chapter 6: Investment Climate Chapter 7: Trade and Project Financing Chapter 8: Business Travel Chapter 9: Contacts, Market Research and Trade Events Chapter 10: Guide to Our Services 1 Return to table of contents Chapter 1: Doing Business in India Market Overview Market Challenges Market Opportunities Market Entry Strategy Market Overview Return to top The Republic of India is the 18th largest export market for U.S. goods. Two-way trade reached $63.7 billion in 2013. U.S. companies exported $21.9 billion worth of goods to India, dominated by civil aircraft and spare parts, machinery and electrical machinery which accounts for approximately 30 percent of the total trade. The U.S. presently has a trade deficit with India. U.S. imports comprise primarily diamonds, pharmaceuticals and petrochemical products. The stock of U.S. foreign direct investment (FDI) in India was $29.5 billion in 2012 (latest data available). India’s sizeable and rapidly growing domestic market, growing financial markets, large English-speaking population, and stable democratic government make it an attractive destination for U.S. business. It is the 11th largest economy in the world and third largest Asian economy. However, India underperforms relative to its vast potential. Major areas of concern include corruption, caps on foreign direct investment (FDI), inadequate financing at reasonable rates, complex and lengthy investment approval and land acquisition processes, antiquated labor laws, and poor enforcement of contracts and arbitration judgments. Economic growth slowed significantly to 4.4 percent in 2013. The IMF estimates GDP growth for 2014 will increase to 5.4 percent, from 4.7 percent the year prior, reflecting optimism about a good monsoon and the ability of the new government to advance much-needed reforms. U.S. FDI in India is largely in the professional, scientific, and technical services, finance/insurance services, and the information service sectors. Major U.S. companies include: AECOM, Bank of America, Bell Helicopter, Black and Veatch, Coca-Cola, DuPont, Dow, Federal Express, General Electric, General Motors, Jacobs Engineering, KFC, Lockheed Martin, McDonalds, Microsoft, Kimberly Clark, PepsiCo, Raytheon, United Airlines, among others. The fast growing franchising industry in the last two years attracted U.S. major food service brands such as Dunkin’ Donuts, Krispy Kreme Donuts, Starbucks, and Burger King, establishing their businesses in metropolitan areas as well as Tier 1 and Tier 2 cities. India is the eighth fastest growing source of FDI into the U.S. The total stock of FDI from India into the U.S. is $8.9 billion. The Indian rupee suffered instability in 2013, ending the year 13 percent lower after suffering a drop of over 20 percent in the Spring. Two years of steady depreciation reflect slowing economic growth and rising macroeconomic imbalances. Key issues in 2013 were inflation, a large fiscal deficit and a widening current account deficit due largely to oil imports and fuel subsidies. Another concern for the Indian government was the sharp decline in FDI inflows. This decline was triggered by concerns about tightening global liquidity conditions and India’s relative macroeconomic stability. Over the summer, the Reserve Bank of India (RBI) took a series of steps to stabilize the currency and limit capital outflows, which further damaged investor confidence. However, new leadership at the RBI in September 2013 focused on improving policy transparency and restoring market confidence. The former UPA coalition government enacted a handful of new laws in 2013 that, if properly implemented and enforced, could improve the country’s overall business climate. The Companies Act offers significant improvements to corporate governance procedures, imposing stiffer penalties for fraud, increasing protection for investors and creditors, simplifying processes for creating and closing businesses, and mandating greater transparency in financial disclosures. India held the largest elections in world history with over 600 million voters from April to May 2014. The Bharatiya Janata Party (BJP) government won a decisive majority, the first in 30 years. The economic priorities of new Prime Minister Narendra Modi include: enhancing the ease of doing business, substantially augmenting India’s power generation capabilities, plus upgrading infrastructure and urbanization of Tier 2 and Tier 3 cities. Many economists consider that the previous UPA government, partly due to the demands of a large and diverse coalition, had allowed economic policy to drift. There are expectations that the new central government with a strong majority in Parliament will better steer economic policy, improve government 2 transparency, and facilitate investment in manufacturing and infrastructure to stimulate growth and job creation. Market Challenges Return to top Infrastructure Problems with the country's roads, railroads, ports, airports, education, power grid, and telecommunications are significant obstacles as the nation strives to achieve its full economic potential. India’s ongoing urbanization, together with rising incomes, has resulted in a heightened need for improved infrastructure, both to deliver public services and to sustain economic growth. India is seeking to invest $1 trillion in its infrastructure during the 12th Five-Year Plan (2012-2017) and is looking for private sector participation to fund half of this massive expansion largely through its home-grown Public-Private Partnership (PPP) model. U.S. companies have been successful in certain areas of India’s infrastructure development, but competition from other countries is becoming stiffer. As a result, U.S. industry’s market share in India in this sector has been declining. Unfortunately, the PPP model has encountered significant barriers slowing the development of numerous metro transit, road/highways, airport, mining and energy projects. High Tariffs and Protectionist Policies Import duties continue to be comparatively very high. Exporters and investors are also faced with non- transparent and often unpredictable regulatory and tariff regimes. Most U.S. services are still strictly excluded from the market. According to the World Bank survey for 2014, India is ranked 134th out of 189 countries due to its difficult business climate. Moreover, it is ranked 186th in enforcing contracts. Local Content Requirements The Indian government is pursuing local content requirements in specific areas including information and communications technologies (ICT), electronics, and solar energy to spur an increase in the manufacturing sector’s contribution to GDP. These policies negatively affect U.S. exporters. With regard to ICT, which has been a particular area of concern this past year, India recently drafted a policy expressing preference for domestically manufactured telecommunications and ICT products in government procurement, citing security concerns. In addition, all telecom and ICT products that have security implications have to be notified to the Department of Telecommunications by all Ministries. In April 2013, the Indian government announced that all imported ICT equipment would require mandatory licensing and certification from accredited labs in India. The limited number of labs has created yet another hurdle for U.S. exporters seeking to have their products quickly certified for sale and use here. This regulation has not been fully enforced. This preferential market access (PMA) policy could result in hindering imports of innovative technologies, forcing the government to choose from a limited pool of approved locally-manufactured products for its ICT procurement needs. Most alarmingly, procurements by private telecom companies could be affected as well. Of similar concern is a newly evolving cloud computing policy, which could mandate that all government data remain in India, effectively denying market access to any foreign cloud storage companies. Compulsory Registration, Testing and Certification In January 2013, new product labeling and safety testing requirements came into force for imports of electronic goods under the authority of Bureau of Indian Standards (BIS). Prior to the deadline, there were issues related to the precise requirements as well as a significant backlog for pending applications. The Government of India made some last minute adjustments to ease the impact of the new mandates, and subsequently have some willingness to engage industry to lessen the burden and streamline the registration process. While the BIS requirement and process adds to the cost of U.S. exporters, the overall impact is not material. There is also a pending July 1 2014 deadline that requires local testing of imported telecom and information technology (IT) products by the Department of Telecommunications (DoT)-accredited labs even if the products have been tested as part of the Common Criteria Recognition Arrangement (CCRA) alliance, to which India is a signatory. However, India lacks the laboratory infrastructure to fulfil this mandate, and