India’s attractiveness as a target for foreign investment is based on many factors, but some of the most important are the sheer size of the domestic market fuelled by growing purchasing power and size of the Indian middle class, successive democratically elected governments and a vast pool of talented workforce.
As per the World Investment Report 2016 by the United Nations Conference for Trade and Development (UNCTAD), India continues to be among the top ten countries in terms of Foreign Direct Investment (FDI) inflows globally and the fourth in developing Asia. India’s FDI inflows have increased to $ 44 billion in 2015 as compared to $ 35 billion in 2014, and the growth has been across the board, the report said. There has also been a surge in investments in 2016 mainly on account of the Make in India initiative, alongside liberalization measures and reforms initiated by the government.
Since becoming Prime Minister of India in May 2014, with a landslide victory and lower house majority in parliament not seen in 30 years, Narendra Modi has been seen as a beacon of hope for India’s prospects, both economic and otherwise.
The government is engaged in mammoth efforts to improve the ease of doing business and to attract investments into the country. These efforts have resulted in improving India’s ease of doing business ranking by 12 places to the 130th position in the World Bank’s Doing Business 2016 report.
Recently, the Indian parliament passed the Insolvency and Bankruptcy Code, 2016 and The Goods Service Tax (GST) Act. The Insolvency and Bankruptcy code aims to ensure a time bound process for recovery and resolution, while the GST Act will streamline numerous state and central taxes creating a pan India market, which is expected to add 1 – 2 % to GDP.
Another significant development is passage of the legislation creating commercial benches in select high courts and amending a law on arbitration for speedy settlement of high value business disputes.
Liberalised regulations have also made the environment more favourable for Mergers & Acquisitions (M&A) in India, although deal activity until recently was dominated by Private Equity and Venture Capital funding rather than strategic M&A.
Major Investing Countries
As the date from the Indian government, Norway invested US$ 182,84 million between April 2000 to March 2015 making it the 37th largest investor in India.
Sectors Attracting Investment
The Government of India has recently relaxed the FDI policy in 15 sectors, such as raising the foreign investment limit for some sectors, easing the conditions for others and putting many on the automatic route for approval. The sectors that benefited from the relaxation include defence, real estate, private banking, defence, civil aviation, single brand retail and news broadcasting. The new rules provide for easier exit from investment in the construction sector while foreign investment limit in defence and airlines was allowed up to 49 % through the automatic route. Banks were allowed fungible FDI investment up to 74 %, which means that FII investment in private banks can rise to this limit.
The Government of India recently relaxed the FDI policy norms for Non-Resident Indians (NRIs). Under this, the non-repatriable investments made by the Persons of Indian Origin (PIOs), Overseas Citizens of India (OCI) and NRIs will be treated as domestic investments and will not be subject to FDI caps.
The government has also raised FDI cap in insurance from 26 – 49 % through a notification issued by the DIPP. The limit is composite in nature as it includes foreign investment in the form of foreign portfolio investment, foreign institutional investment, qualified foreign investment, foreign venture capital investment, and non-resident investment.
India’s cabinet cleared a proposal which allows 100 % FDI in railway infrastructure, excluding operations. Though the initiative does not allow foreign firms to operate trains, it allows them to invest in areas such as creating the network and supplying trains for bullet trains.
India is likely to grant most favoured nation (MFN) treatment to 15 countries that are in talks regarding an agreement on the Regional Comprehensive Economic Partnership (RCEP), which would result in significant easing of investment rules for these countries.
The Government of India plans to further simplify rules for FDI such as increasing FDI investment limits in sectors and include more sectors in the automatic approval route, to attract more investments in the country.
Below are the investment opportunities in some of the major sectors:
India’s car market has the potential to grow to 6 million-plus units annually by 2020. Electric cars are likely to be a sizeable market segment in the coming decade.
The Government of India recently introduced the National Aviation policy which allowed newly launched airlines to commence international operations immediately, provided they deploy 20 aircraft or 20 % of total capacity (in term of average number of seats on all departures put together), whichever is higher for domestic operations. Previously, an airline had to operate domestically for five years before commencing international operations. The foreign investment limit in Domestic Scheduled Passenger Airlines and Regional Air Transport Services has been increased to 100 %, from 49 %. However FDI beyond 49 % will be under the government approval route, and foreign airlines will not be allowed to invest beyond 49 %, which remains a deterrent. To aid modernization and to ease pressure on existing airports, the government has recently permitted 100 % FDI under the automatic route in brownfield airport projects. Previously, FDI up to 74 % was automatic, while FDI beyond 74 % required government approval.
New Investment opportunities in India are in the areas of
- Drug discovery and clinical trails
- Medical devices manufacturing
- Secondary agriculture
In November 2015, FDI up to 49 % was permitted without government approval. In June 2016, this was further liberalised allowing foreign investment above 49 % through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded. The above limit is also applicable to manufacturing of small arms and ammunitions.
Oil and gas:
Securing supplies is expected to remain on top of India’s energy agenda for the foreseeable future. While exploration activity has taken place on land and in shallow basins across the country, it is believed by many that deep water and ultra-deep water oil and gas resources hold the key to substantially increasing domestic production. This creates a plethora of opportunities for strategic investors having relevant technical expertise and financial muscle.
The Indian government has a target of growing its renewable energy capacity to 175 GW by 2022, from about 43 GW currently. Of the 175 GW, 100 GW will be from solar power, 60 GW from wind power, 10 GW from bio energy and 5 GW from small hydro power. This presents significant opportunities for investment in the sector.
The Government of India has launched the INR 400 bn (~ US$ 6 bn) National Infrastructure Investment Fund (NIIF). The government will invest INR 200 bn (~ US$ 3 bn) while an equal amount will come from the private sector including overseas funds.
In order to encourage investment in the sector, the government is considering innovative models. One such model currently under consideration is the Toll-Operate-Transfer model which would be well suited to institutional investors such as Pension Funds and Sovereign Funds who are averse to taking construction risks but are adequately equipped for making long term investments. Under this model, the investor pays a lump sum concession fee and receives the right to toll the asset for a period of 25 years or more.
In India, ports fall under two categories, 12 major ports which fall under the purview of the Central Government, and nearly 200 minor ports which fall under the purview of state governments and enjoy greater operational autonomy. To provide autonomy to the major ports, the government has proposed a new legislation replacing the Major Port Trust Act which could further open up opportunities for investment in the ports sector. The government is also focused on developing inland waterways and coastal shipping, harnessing India’s 14500 km of inland waterways. The target is to increase the modal share of coastal and inland waterways by 10 % to 2020.
With the fourth largest rail network in the World, most of the major cities looking to develop metros and dedicated freight corridors under construction, there are ample opportunities for investment in the rail sector. FDI up to 100 % is now permitted in rail infrastructure, a sector that was hitherto closed to foreign investment.
The Smart Cities Mission is an urban renewal programme targeting 100 cities, developing sustainable and well managed infrastructure. The selection of cities is based on competitive bids submitted by the States, and about 60 smart cities have been announced so far. According to a Deloitte study the Smart City Mission will require at least US$ 150 billion investment in 5 – 7 years with private sector being the significant contributor (almost US$ 120 billion).
Water and waste management:
The National Mission for Clean Ganga is another flagship programme which aims to create comprehensive infrastructure to treat domestic & industrial waste, and support development of a long term river basin management plan. The investments required to create the necessary treatment and sewerage infrastructure, and maintenance costs for the first 5 years would be shared between Centre and State Governments on a 70:30 basis, while targeting eventual revenue generation. The Clean Ganga programme present opportunities for investments in water and waste treatment facilities.
Real Estate and Construction Development:
Foreign investment up to 100 % has been permitted in the construction sector since 2005, but subject to many conditions, which has now been relaxed. The minimum floor area requirement has been removed. Minimum investment requirement, the time frame for completion of foreign investment and exit conditions have been made less stringent. Foreign investment in construction projects, particularly commercial projects and platform deals has seen a recent pickup in activity.
Market Advisor, Innovation Norway, India