USA Report on Business in India

In News

Recently, the State Department of the United States of America (USA) has released the report ‘2021 Investment Climate Statements: India’, highlighting that India is a challenging place to do business.

About the Report

• The US Department of State’s Investment Climate Statements provide country-specific information on the business climates of more than 170 countries and economies.
• They are prepared by economic officers stationed in embassies and posts around the world and analyze a variety of economies that are or could be markets for US businesses of all sizes.
• These Statements address market conditions, including issues critical to maintaining high standards, such as labor protections, environmental considerations and responsible business conduct. 
  • Topics Included: Openness to Investment, Legal and Regulatory Systems, Protection of Real and Intellectual Property Rights, Financial Sector, State-Owned Enterprises, Responsible Business Conduct and Corruption.
• The reports highlight those areas in which countries have improved local investment conditions, as well as remaining barriers that may hinder opportunities for US companies.

Major Highlights

• It noted that the Indian government continued to actively court foreign investment.
• India enacted ambitious structural economic reforms, including new labor codes and landmark agricultural sector reforms, that should help attract private and foreign direct investment.
• In February 2021, the Finance Minister announced plans to raise USD 2.4 billion through an ambitious privatisation programme that would dramatically reduce the government’s role in the economy.
• In March 2021, the Parliament further liberalised India’s insurance sector, increasing the Foreign Direct Investment (FDI) limits to 74 per cent from 49 per cent, though still requiring a majority of the Board of Directors and management personnel to be Indian nationals.
• In response to the economic challenges created by Covid-19 and the resulting national lockdown, the Government of India enacted extensive social welfare and economic stimulus programmes and increased spending on infrastructure and public health. 
• The government also adopted Production Linked Incentives to promote manufacturing in pharmaceuticals, automobiles, textiles, electronics, and other sectors.
• These measures helped India recover from an approximately eight per cent fall in GDP between April 2020 and March 2021, with positive growth returning by January 2021.
• However, India remains a challenging place to do business.
  • New protectionist measures, including increased tariffs, procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science, and Indian-specific standards not aligned with international standards, effectively closed off producers from global supply chains and restricted the expansion in bilateral trade.
  • Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry.
    • For example, approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of “Indian management and control”.
• The US has requested India to foster an attractive and reliable investment climate by reducing barriers to investment and minimising the bureaucratic hurdles.
  • A welcoming investment climate can help attract high quality, durable investment and support global recovery from the Covid-19 pandemic.

Forign Direct Investment

• It refers to the conditions when a company or investor takes ownership and controls operation in a business entity in another country.
• With FDI, foreign companies are directly involved with day-to-day operations in the other country which implies that along with bringing money, they also bring knowledge, skills and technology.
• It is an important non-debt monetary source for India’s economic development.
  • Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country.
• FDI Routes
  • Government Route: For investment in business sectors requiring prior approval from the Foreign Investment Promotion Board (FIPB).
  • Automatic Route: For investment in business sectors that do not require prior approval from the government.
• Categories
  • Horizontal: It refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country.
  • Vertical: It is the one in which different but related business activities from the investor’s main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company.
  • Conglomerate: It is one where a company or individual makes foreign investment in a business that is unrelated to its existing business in its home country.
• The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy. 
  • The Department for Promotion of Industry and Internal Trade (DPIIT) makes policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases which are notified by the Ministry of Finance as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 under the Foreign Exchange Management Act, 1999 (FEMA).
• In January 2021, a report by the United Nations Conference on Trade and Development (UNCTAD) highlighted that in 2020, developing nations accounted for 72 per cent of global FDI, the highest share on record.
  • China was the world’s largest FDI recipient in 2020, with flows rising 4 per cent to USD 163 billion.
    • High-tech industries saw an increase of 11 per cent in 2020 and cross-border mergers and acquisitions rose by 54 per cent, mostly in Information and Communication Technology (ICT) and pharmaceutical industries.
  • India recorded positive growth of 13 per cent, boosted by investments in the digital sector.

Government Initiatives to Boost FDI

• The Government of India aims to achieve USD 100 billion worth of FDI inflows in the following two years, making India the top recipient of greenfield FDI Inflows in the world.
• Proposal to commence the auctioning of 5G spectrum.
• National E-Commerce Policy (draft) to encourage FDI in the marketplace model of e-commerce to ensure a level playing field for all participants.
• Revised FDI rules to e-commerce allowing 100 per cent FDI in the marketplace-based model of e-commerce.
• Launch of National Digital Communications Policy, 2018 with a target of increasing FDI inflows in the telecommunications sector to USD 100 billion by 2022.
• Removal of the need for government approval for FDI up to an extent of 100 per cent in Real Estate Broking Services.
• Strengthening the single-window clearance system for fast-tracking approval processes for Japanese investors in India.
• Doing away with the approval of the Department of Revenue and mandating clearance of all proposals requiring approval within 10 weeks after the receipt of application.
• The Government introduced a Production Linked Incentive (PLI) scheme for the various sectors which gives large impetus to the FDI inflow.
• Invest India is the official investment promotion and facilitation agency and works with investors through their investment lifecycle to provide support with market entry strategies, industry analysis, partner search and policy advocacy as required.
• Pro-Active Governance and Timely Implementation (PRAGATI) Initiative, a digital, multi-modal platform to speed up the government’s approval process, especially in the case of major projects.

Source: IE