Indian Business Environment

Many countries today are seeking ways to boost their business environment in an increasingly hostile and increased global competition. Outlined below are the structural transformations undertaken by the government that have had a positive impact on the growth of the Indian economy & improving the rankings of India in terms of Business Environment among 183 countries of the world. Industrial climate Moving from a policy of considerable control over the private sector through licensing; control over imports of capital, raw material, technology and capital goods to an Industrial policy boosting role of the private sector and foreign investment in the Indian economy through the deregulation process. Investors incentive Making the rupee convertible on the current account, and exchange rates are market-determined. The vast and growing middle-class population provides a large domestic market. Opening the Indian equity markets to foreign investors, development of capital markets by starting in1994, the National Stock exchange as a computer-based trading system, reforms of India's banking infrastructure and the financial services sector: Increased investor protection with change in Company Director Liability norms, improved disclosure norms with the amendment of security laws giving SEBI the legal authority to register and regulate all security market intermediaries. Starting & Closing a Business Fewer number of calendar days of pre registration, registration and post registration. Paid in minimum capital requirement only for certain regulated sectors such as Airlines, Telecom. Employing Workers Skilled manpower and professional managers are available at moderate cost. Introduction of minimum wage requirements in certain labour intensive industries, mandatory legal requirements on dismissal for economic reasons & fixed term labour contracts. Measures undertaken to increase flexibility in the regulation of hiring, working hours and dismiss all in a manner consistent with the conventions of the International Labor Organization (ILO). Free-trade zones Introduction of a policy allowing setting up of Soft ware Technology Parks (STPs) for export of computer software and other export-oriented units (EOUs). Trading Across Borders Fewer documents required by Customs Authority of India for clearance of goods shipped. Easy custom clearance along with better port and terminal handling with increased private sector cooperation (Mundra Port in Gujarat). Removal of quantitative restriction in manufactured consumer goods in 2001, reduction in tariff levels/import duty on number of nonagricultural goods from a peak of 400% in 1991 to 12.5% in2005-06.

Legal Framework enforcing contracts Reduced number of days to resolve commercial sales disputes over the internet with the introduction of IT Act , 2000. Lower attorney and enforcement cost as a percentage of claim value.

Introduction into Indian Business Environment India is today a land of business opportunities and a perfect destination for new ventures. New business opportunities in India are enormous and ever growing. India is an emerging market and among the hottest destinations in the World today. For starting a business in India or starting a new company in India, it is mandatory for foreign investors to obtain government of India approval. Foreign investors can start a new company or business in the form of Company incorporation in India, or forming a joint venture in India. Major laws that affect the growth of foreign investments in India are Foreign Exchange Management Act 1999 (FEMA), the Companies Act 1956, the Industrial Act 1951, the New Industrial Policy of 1991 (NIP). Business set up in India requires proper legal advice to ascertain the eligibility and applicable restrictions. The foreign investors can start a business in India in various forms such as Branch office, Liaison office, or Project office. Branch office refers to foreign companies engaged in trading or manufacturing activities abroad which are allowed to set up a branch office in India for the purpose of trade with the approval of the government of India and may remit outside India the profit of the branch, subject to the RBI rules after payment of applicable Indian taxes. Liaison office could be established with the approval of the government of India but cannot undertake any commercial activity either directly or indirectly. The scope of a liaison office is limited. Project office refers to foreign companies planning to execute some project which can start a project offices in India to carry out the activities related to the project. A general permission from the government of India can be obtained. Introduction to Foreign Direct Investments (FDI) Foreign Direct Investment (FDI) in India has increased due to the efforts of the Indian government. The government of India has made several changes in its economic policies to direct the huge flow of FDI in India to boost the economic growth of the country. Foreign capital in India flows in the form of NRI deposits, investments in commercial banks, investments in debt and stock market. India has the most liberal and transparent policies on FDI. FDI up to 100% is allowed under the automatic route in all the activities except those which require approval of the government. India has continually sought to attract FDI from the Worlds major investors. Currently FDI is allowed in financial services also including the Credit card business. FDI investments are permitted through financial collaborations, private equity or preferential allotments, in joint ventures. FDI is not permitted in arms, nuclear, railway, coal& mining industries. FDI play a significant role in the developing economy like India. There are some advantages of FDI in India such as: booming factor for the growth of economic life of the country; opened a wide spectrum of trading activities in India; ensures employment opportunities in a developing economy like India; increased technological advancement in India; achievement of financial stability, growth and development.

Type of Economy India stands as a vibrant and diverse country whose economy is increasingly integrating with the world economy. The sweeping economic reforms in the last decade have had far reaching consequences. The business environment in the country is considered conducive for achieving high level of sustainable growth. To begin with, when India regained its independence in 1947, it encouraged selfsufficiency. This was to build up Indias industry and diminish its dependence on foreign trade. Economic growth was inadequate until the Government lessened state control on the economy during the 1970s. The Government was still in control over certain industries in the early 1990s, and economic growth was achieved with the help of loans by foreign countries till 1991. But this was also the same time as that of the Gulf War, which dealt a severe economic blow to India with a spurt in oil prices. Post the economic reforms in 1991, the spirit of economic freedom revived bringing sweeping changes in its wake. The ambitious economic reforms aimed at decontrolling the economy and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. Presently, India is one of the key emerging markets in the world. The countrys skilled managerial and technical manpower match the best available in the world and a middle class whose size rivals the population of the USA or the European Union, provide India with a distinct cutting edge in global competition. GE Capital terms it unique, PepsiCo finds it one of the fastest growing and Motorola is sure it will turn into a major sourcing center. Indian operations have occupied center stage in these giants global networks. The Market One of the important factors responsible for the strong interest of foreign investors in India is the size and potential for growth of the domestic market. Sweeping sociological changes have been brought about by rapid urbanization, explosion of electronic media, education and increasing domestic and foreign travel and changing nature and composition of expenditure, with growing emphasis on brands, product quality, features and convenience. Consumer Markets The vast and growing Indian market is a reality. The increase in number of households headed by salary earners, professionals and businesspersons and the emergence of a thriving consumer finance business are expected to continue the consumerism boom. Expenditure on consumer durables such as washing machines, refrigerators and color televisions has shown an impressive growth since the 1990s. India offers one of the largest markets in the world for manufactured items of mass consumption such as clothing, footwear, detergents and cooking oil. Rural Markets Rural areas, where nearly 72 percent of Indians live, have witnessed rapid market growth in recent times, driven largely by agricultural growth, income redistribution, and inroads made by audio-visual media. The rural share of the market for durable goods has grown steadily over the last few years, and in items such as bicycles, mechanical wristwatches, radio / transistors etc the share of the rural market has been in excess of 75 percent. Marketing Infrastructure India has an extensive sales and distribution network. It is estimated that there are over one million market intermediaries-wholesalers, stockists, transporters and retailers that are involved in the distribution of a variety of consumer goods. Marketers use this network to access nearly 3,800 cities and towns and over half a million villages. While urban areas have a range of distribution outlets from large

supermarkets and superstores to the smaller neighborhood retail stores, almost every village in India is catered to by small shops that are part of the local supply network. Consumer Finance Extensive banking networks of the country support widespread sales and distribution network. Consumer financing is an accepted form of consumer goods marketing in India. The presence of several non-banking finance companies engaged in leasing and hire-purchase activities have also given a fillip to consumer good sales. The credit card market too has shown tremendous growth in recent years. Industrial Market An average annual growth rate of 5.3 percent in industrial production over the period 1996-97 to 2002-03 has stimulated rapid growth in the market for plant and machinery, chemicals, plastics, instruments, components, metal products and transport equipments. Over this period, capital goods production grew at an average of 6.5 percent annually, while basic and intermediate goods grew at an average of 4 percent and 5.9 percent respectively. Production of consumer goods grew at an average of 5.8 percent during the same period. During 2002-03, capital goods and consumer goods grew the fastest, at average rates of 10.5 percent and 7.1 percent respectively. Leading Industries India has built a diverse industrial sector, which is currently one of the largest in the developing world. The major industries are automobiles and auto ancillaries, iron and steel, aluminum, textiles and garments, pharmaceuticals, chemicals and petrochemicals, oil and gas and other hydrocarbons, electricity, telecommunications, information technology and business processing outsourcing services, healthcare and biotechnology. The country is fast emerging as a leading sourcing base for global players in auto and auto ancillaries, pharmaceuticals, IT and business process outsourcing services, research and development services and engineering services. Since the commencement of economic reforms in 1991, successive Governments have implemented strong measures to liberalize the business environment and boost industrial growth. The elimination of licensing requirements for all but six industries has ushered in an era of competition and imparted dynamism to the industry. Substantial reduction in import tariffs on raw materials and intermediate products, coupled with rationalization of excise duties, have eased access to inputs and reduced costs. In addition, public sector enterprise reforms have received a strong fillip during the last three to four years, with the earlier disinvestment process being replaced by definitive privatization through the sale of enterprises to strategic investors to place them on the path of profitability and long-term growth. Lastly, the Government of India and several State Governments are in the process of investing significantly in sprucing up the countrys infrastructure roads, seaports, airports, electricity and telecommunications to enable the country realize its growth potential. Energy, Chemicals and Utilities. Oil and Natural Gas India is the sixth largest consumer of primary energy in the world. Over the years, the countrys primary energy consumption has grown at a rate faster than that of the world. The principal driver of this growth has been growth of the Indian economy. Crude oil import requirement is expected to reach 190 million metric tonnes perannum by 2011-12. The requirement of additional refining capacity is pegged at 40 million tonnes per annum by the year 2010 to meet domestic consumption. Further, extensive oil and gas distribution infrastructure such as cross country pipelines, port terminals, and strategic reserves are also required to be developed to meet with the projected energy requirements. On supply side, the scenario seems encouraging with new oil and gas discoveries by companies such as Cairn and Reliance. The country is expected to witness many more discoveries in the near future with the opening of new blocks in deep water, shallow offshore and onland areas through the National Exploration Licensing Policy (NELP) of the Government.

Mining With its abundance of natural resources, to which minerals hold particular importance, India produces 4 fuel minerals, 11 metallic minerals, 52 non-metallic and 22 minor minerals, a total of 89 mineral products. The total value of mineral production was approximately US $11.902 billion in 200102, of which the value of minerals other than petroleum and natural gas was around US $6.716 billion. The metallic production is accounted for by iron-ore, copperore, chromate, zinc concentrates, gold, manganese ore, bauxite and lead concentrates. Amongst the non-metallic minerals, more than 90 percent of the aggregate value is shared by limestone, magnesite, dolomite, barytes, kaolin, gypsum, apatite and phosphorite, steatite and fluorite. FDI is allowed in the mining sector and most proposals for FDI in the mining sector are eligible for investment without obtaining the Government permission, provided the prescribed ceiling are adhered to. Technology, Communications and Entertainment. Information Technology The Information Technology (IT) industry in India comprises, software services, manufacture and trading of computers and computer peripherals and IT enabled services (ITES). Indias IT industry is amongst its fastest growing industries and it grew at the rate of 17 percent during 2003, recording revenues of Rs 7.93 billion. In fact, during the period 1999-02, the Indian IT industry recorded a compounded annual growth rate (CAGR) of more than 40 percent, which is approximately double the growth rate of IT industries in many of the developed countries. The key driver for this growth has been the increase in revenues from software services. The share of software services in the overall IT industry in India has been increasing continuously, growing from 42.11 percent in 1995 to more than 75 percent in 2003. The Government has from nascent stage recognized IT as an important vehicle in the development of the country. According to a World Bank study, India is the preferred location for software vendors for its quality and cost. In view of the advantages and opportunities that exist in India with respect to the IT industry, many leading IT multinationals have set up operations in India. These include Microsoft, Novell, Oracle, Sun Microsystems, Dell Computers, IBM, Unisys, SAP, Adobe, Cadence, Computer Associates, Motorola, Digital, HP and Texas Instruments. The hardware industry in India has largely catered to the needs of domestic consumers, with marginal exports. The domestic hardware industry has focused attention on producing and developing low-cost computing solutions including personal computers. Major players in this sector include foreign players like IBM, Dell, HP / Compaq, Acer, Apple etc and Indian players such as Zenith and HCL. Given the availability of relatively cheap and high quality human resources, the second largest English speaking population in the world and its location in a convenient time zone, India offers excellent opportunities for outsourcing. In fact the Indian ITES sector is dominated by the captive back office operations of large multinational companies. Telecommunications The telecom industry is one of Indias fastest growing industries and comprises fixed line and mobile telephony. In 2002-03, total number of new telephone connections was 8.94 million, of which 2.68 million were basic services connections (including wireless in local loop mobile) and 6.26 million were cellular services connections. Fixed line telephony comprises three distinct market segments, local i.e. basic services, national long distance (NLD) and international long distance (ILD). Historically, the basic services sector was the monopoly of the state owned/ controlled operators such as Bharat Sanchar Nigam Limited (BSNL), Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL).

Entertainment The Indian entertainment industry has outperformed the Indian economy and is one of the fastest growing sectors in India. Currently, there are 35 companies in the industry that are listed on the Indian stock exchanges. The Indian entertainment industry can be broadly categorized into films, television, television software, music, radio and live entertainment and event management. Films. The immense popularity of films as a source of entertainment and vast cultural diversity of the Indian population has been instrumental in making India the largest producer of films in the world. This segment is poised to grow at an impressive rate in the future, driven primarily by expansion in exhibition infrastructure and development of multiplexes, availability of finance from institutional sources, exports of film and animation software, etc. Television. There has been a rapid growth in television penetration and the number of television channels with the entry of private television channels in the early 1990s. From a near zero base in the early 1990s, the number of cable television households have grown at a scorching pace to a current estimate of 41.5 million. Today, India is the third largest country after USA and China in terms of number of cable viewers. Further, it is expected that the industry would grow to a size of approximately Rs 70 billion by 2005. Music. The Indian music industry is characterized by dominance of Hindi film music, capital intensiveness and generation preferences. This industry is currently undergoing a phase of gradual reinvention with increased focus on development of non-Hindi film music segment, market and product expansion and organized music retailing. Financial Services Indias financial services sector is in a process of rapid transformation and reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The financial services industry can be broadly divided into banking, capital markets (asset management / mutual funds and portfolio investors), insurance companies and non-banking financial intermediaries / institutions. Non Banking Financial Institutions Non-Bank Finance Companies (NBFCs) provide loans and hire purchase finance, mostly for retail assets. NBFCs are required to be registered with RBI, which has extensive supervisory and regulatory powers over NBFCs. Housing Finance Companies (HFCs). As the name suggests, the primary objective of these companies is to extend finance to the public for housing purposes. The sector was earlier dominated by Housing Development Financial Corporation (HDFC), which had a 66 percent share in 1998. Credit Rating Agencies The following entities rate corporate debt, including debentures and commercial paper: CRISIL, Indias first credit rating agency, ICRA; and CARE. They also rate the credit risk of companies; a factor often used by nationalized banks in evaluating loan applications.

Infrastructure Roads India has an extensive road network of more than 3.3 million kilometers making it one of the largest in the world. Roads occupy an eminent position in transportation as they carry an estimated 70 percent of freight and 85 percent of passenger traffic in the country. Traffic in road is growing at 7 to 10 percent annually while vehicle population has been growing, during the past few years, at around 12 percent annually. The Government has formulated several policy initiatives to attract private investment. Till date, 34 projects have been taken up by the private sector and an investment of Rs 60 billion has been committed by them. 18 such projects have been completed and toll is being collected by them. Ports India has about 13 major ports and 184 operable minor and intermediate ports (of which 139 are operable) along the 5,560 kilometers long Indian coastline. Major ports handled around 75 percent of the countrys port traffic a total traffic of 313 million tonnes during the year 2002-03. Foreign equity upto 100 percent is permitted in construction and maintenance of ports and harbors and in projects providing support services to water transport, such as operation and maintenance of piers, loading and discharging of vehicles without requirement of an approval. Civil Aviation India is one of the fastest growing markets in the world in both passenger and cargo traffic. India has world-class international and domestic airports (shared with defense). Currently there are 7 scheduled private operators and 22 non-scheduled operators operating these services. Private operators cater to 52.6 percent of the domestic air traffic. With growing tourism & commercial activity India is sure to see a boom in civil aviation. Investment Climate and Foreign Trade Foreign Investment Framework The Foreign Direct Investment (FDI) regime has been progressively liberalized during the course of the 1990s (particularly after 1996). Most restrictions on foreign investment have been removed and the procedures have been simplified. With very limited exceptions, foreigners can invest directly in India, either wholly or as a joint venture. Today, there are very few industries wherein foreign investment is prohibited. It is allowed in virtually all sectors, subject to Government permission in certain cases. Moreover, investment ceilings, which are applicable in certain cases, are gradually being removed. Foreign Investment Policy Indias economic policies are designed to attract significant capital inflows into India on a sustained basis and to encourage technology collaborations between Indian and foreign entities. Policy initiatives taken over the last few years have resulted in inflows of foreign investment in diverse sectors of the economy. India welcomes FDI in virtually every sector, except those of strategic concern such as defense (opened up recently to a limited extent), railway transport and atomic energy and where the existing and notified sectoral policy does not permit FDI beyond a certain ceiling. Economic Policies and Incentives for Foreign Investment Following are the select notable features of the foreign investment policies and incentives: No Government approval required for FDI in virtually all the sectors / activities, except a small negative list notified by the Government. Decisions on all foreign investment proposals are usually taken within 30 days of application. Free repatriation of capital investment and profits thereon is permitted, provided the original investment was made in convertible foreign exchange. Indian capital markets are open to foreign institutional investors. Indian companies are permitted to raise funds from international capital markets.

Special investment and tax incentives are given for exports and sectors such as power, electronics, software and food processing. Single window clearance facilities and investor escort services have been provided in various states to simplify the approval process for new ventures. Major Trading Partners and Leading Imports and Exports Trading Partners The United States has replaced the former Soviet Union as Indias major export market. Japan is Indias largest trading partner in Asia and third largest trading partner worldwide. Australia is a primary source for supplies of cooking coal, pulses, wool and non-ferrous metals. Foreign Trade Policy The new Export and Import Policy (EXIM) announced by the Government seeks to complete the process of Indias integration with the global economy by removal of quantitative restrictions and seeks to provide fresh direction to exports by setting up Agricultural Export Zones and providing special benefits to SEZs. The new EXIM policy is outward looking and liberal and is the logical conclusion to Indias commitments under the WTO agreement. Most goods are freely importable on payment of specified customs duty. A small number of goods fall in the prohibited / restricted list of imports. Such restrictions are generally on grounds of national security, health and environmental protection. There are no quantitative restrictions on import of capital goods and intermediates. Further, import of second hand capital goods older than 10 years is permitted only against import licenses. Other Incentives Duty drawback available for imported raw materials for export production. Duty free import of raw materials possible for export production in specified conditions. Concessional duty rate available for capital goods under the Export Promotion Credit Guarantee Scheme. Imports from certain countries permissible at reduced rates. Raw materials, intermediates and components meant for manufacture of goods for export, can be imported duty free against an advance license. Input - output norms have been laid down to determine the amount of duty free import of inputs allowed for specified products to be exported. Issue of duty free license under this scheme is subject to achievement of positive value-addition and export obligations. Exports & Impors Export of goods is allowed freely, except for few restricted items. Exports are the major focus of Indias trade policy, and a thrust area in the new economic policy of the country. The export promotion package compares favorably with incentives offered anywhere in the world. It makes a special effort to attract foreign investors to set up EOUs and units in SEZs. Principal Exports: Traditional exports include cotton yarn and textiles, readymade garments, leather goods, gems and jewellery, and agricultural products. However, information technology services, engineering products, and chemicals and pharmaceuticals are rapidly growing export segments now. Principal Markets for export: USA, Canada, UK, Germany, Japan, Italy, France, Netherlands and Belgium in the OECD region, UAE and Saudi Arabia in the OPEC region, Brazil and Mexico in the Latin American region, and China, Hong Kong, Singapore, Bangladesh and Sri Lanka from the Asian region. Principal imports: Capital goods, crude petroleum and petroleum products, gold, precious and semiprecious stones, chemicals, edible oils, electronic goods and coal. Principal Markets for import: USA, UK, Japan, Germany, Belgium and Switzerland in the OECD region, Iran, Kuwait and Saudi Arabia in the OPEC region, South Africa from the African region, China, Hong Kong, Malaysia, South Korea, Singapore, Indonesia and Thailand in the Asian region and Australia.

Tariff Liberalisation The current trade policy is characterized by rationalized tariff levels and removal of quantitative restrictions. There has been a consistent decline in the rates over the past 7 years, from peak rates of 350 percent in June 1991 to 35 percent in 2000-01. Most capital goods imports attract a basic customs duty at the rate of 25 percent. Import duties on equipment are lower for projects in specific sectors. The tariff structure is favorable for companies wanting to import equipment to set up projects in the infrastructure sector. The Union Government has boosted the upbeat economic sentiment, and in an effort to sustain the feel good factor announced a set of significant customs and excise duty reductions across all sectors. These changes have come into effect from January 2004. Specifically, the peak rate of basic customs duty has been reduced from 25% to 20% and the special additional duty (SAD) at 4% has been abolished. Significant excise duty concessions have also been extended to sectors, prominent amongst which are infrastructure, IT, telecom and electronics. Companies Forms of Enterprise Following are the principal forms of business organization in India: Corporations both public and private Partnerships Sole proprietorships Corporations incorporated in India and foreign corporations having presence in India are regulated by the provisions of the Companies Act, 1956. The Companies Act, 1956, has been enacted to oversee the functioning of corporations in India. The registrar of companies and the Company Law Board, both working under the Department of Company Affairs, have been entrusted with the responsibility to ensure compliance with the provisions of the Companies Act, 1956. Brief Description of Major Types of Corporate Forms Corporations in India may be broadly classified into public sector and private sector corporations. Private Corporations A private corporation incorporated under the Companies Act, 1956 has the following characteristics: -the right to transfer shares is restricted; -the maximum number of its shareholders is limited to 50 (excluding employees); -no offer can be made to the public to subscribe to its shares and debentures -no invitation or acceptance of deposits from persons other than members directors or relatives is allowed. Public Corporations A public corporation is defined as one that is not a private corporation. A subsidiary of a public corporation is also treated as a public corporation. A public corporation is required to have a minimum paid up capital of Rs 0.5 million. Foreign Corporations Foreign corporations that are incorporated outside India but having presence in India in the form of representative offices, project offices, branch offices, etc. are also governed by the Companies Act, 1956, which contains special provisions for regulating such entities.

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