India’s e-commerce market is growing exponentially.
The latest data presented by the software industry body NASSCOM shows that India’s online market share grew at the rate of 19 percent last year and will touch an estimated US$33 billion in 2017.
In this article, we discuss some of the major drivers shaping the momentum in favor of e-commerce in India, as well as key legal and regulatory considerations for online businesses.
Significant improvements in technology and the rapid pace of growth in the digital payments sectorover the last three years have increased the number of Indians buying online.
In 2016 alone, over 69 million Indians bought their apparels and accessories, books, mobiles, laptops, and other electronic items online. By 2020, this number is expected to rise to over 175 million – owing to the technology transformation led by the rise in the use of smartphones and tablets, and improved access to the low-cost internet.
India’s e-commerce market is estimated to reach US$200 billion in the next decade on the back of these factors.
For now, however, industry watchers will be observing how the Walmart-buyout of homegrown startup Flipkart impacts growth of online retail in India, and if it makes further in-roads in tier II and III cities given the American giant’s experience in traditional discount retailing, logistics, and supply chain management.
The unprecedented deal is the biggest in the e-commerce world, with Walmart having acquired a 77 percent stake in Flipkart, India’s version of Amazon.com Inc. This acquisition effectively brings the rivalry between the two deep-pocketed US retail giants to India.
Overall, the growing popularity of online purchasing and low investment risks present immense opportunities for traditional retailers. Leading players in the fashion retail industry like H&M and Zara have already introduced e-commerce platforms as an additional channel for sales and consumer reach.
While online sales are a key strategy for businesses to expand their consumer base, the following market trends and issues must be borne in mind while considering India’s e-commerce industry.
In terms of total sales and revenue, tier-I cities such as Delhi, Mumbai, Bangalore, and Kolkata are leading markets for online sellers: eight out of every 10 orders come from these cities.
Delhi NCR, for example, is the largest online purchasing city – making one-third of the country’s total online purchases, followed by a distant Mumbai.
At the same time, 75 percent of India’s population resides in non-metropolitan cities, the market scope for which cannot be ignored.
Moreover, these rural towns and lower tier cities are fast emerging as promising markets for online retail – driven by rising disposable incomes, access to the internet, smartphone usage, and an aspirational and young population influenced by global consumer trends.
Conscious of these market trends, online retailers are already adopting strategies to diversify their consumer base. These include reaching out to customers in their native languages, attractive discounts, and cash back offers, and implementing loyalty programs to retain existing consumers.
Nevertheless, even as maximizing their consumer base is important, it is essential that online retailers address demands specific to tier I cities to maintain growth momentum. These include working out advanced and faster delivery options, better personalization of products, smoother check-out processes, and a better user experience overall.
Overall, it is estimated that about 1.3 million online sellers could emerge in India by 2020, nearly 70 percent of whom will be based out of tier 2 and tier 3 cities. Further, about 20 percent of these online businesses will be run by women. The trends are inevitable – as more buyers begin to shop online so will sellers need to put up shop online.
India is predominantly a cash economy. Despite government-led initiatives such as Digital India, Jan Dhan Yojana-Aadhaar-Mobile (JAM) scheme, and demonetization, which were in part geared to encourage a less-cash economy, much of India continues to prefer dealing in cash.
Further, while Delhi, Mumbai, Bangalore, Hyderabad, and Kolkata have shown an increase in digital payments – lower tier cities are yet to shift their payment preferences. Overall, 60 percent of the total e-commerce payments in India are still made using the cash-on-delivery (COD) option.
Even as the reluctance to go cashless remains, India’s digital payments infrastructure is evolving to address the security, convenience, and accessibility concerns of Indian users. This is evident in the proliferation of startups in India’s financial technology sector: more than 600 new enterprises have emerged in the field of lending, payments, insurance, and trading.
In addition, global technology giants such as Google and Whatsapp are in deliberations with the Indian government to integrate their highly secured digital payment services with the Unified Payments Interface (UPI). Adoption of UPI-based payments by these high-tech companies will significantly improve digital payments security and boost its demand in India.
In India, legal issues and compliance related to e-commerce vary as per different business models. To start an e-commerce business, companies must pay attention to the following legal and regulatory matters.
Business license for online firms
Online businesses in India must obtain relevant licenses and registration from federal and state government authorities before they establish their online presence. Some of the important licenses include:
Different e-commerce services require different licenses and registration in India. Therefore, it is advisable for online businesses to seek professional support or outsource their legal obligations to a third party.
Since e-commerce platforms constantly generate valuable intellectual property (IP) in the form of updated technology, branding, design, software, and other material – it is absolutely essential for such entities to understand their IP rights and ownership status, and stay abreast of the latest regulatory changes.
IP violations are a common concern for e-commerce businesses as it is difficult to monitor violations globally.
To protect online businesses against anonymous IP infringers, Indian law allows companies to seek ‘John Doe’ orders. This provision allows a company to protect its possible IP loss due to copying and publishing, against an unknown person.
Further, India has an established ‘cyber cell’ under its police department to tackle issues related to cyber security. Matters such as hacking, virus dissemination, software piracy, credit card fraud, and phishing can be registered under this cell.
Online data protection
Online sales require an exchange of personal data from the buyer to the seller, and so it becomes very important for businesses to pay attention to the country’s relevant privacy and data protection laws.
The use of personal information on the web in India is governed by the Information Technology (IT) Act of 2000, while other aspects of online businesses are covered under laws such as the Payment and Settlement Systems Act of 2007 and the Consumer Protection Act of 1986.
FDI regulations for e-commerce
In India, foreign direct investment (FDI) rules for e-commerce is complicated: up to 100 percent under the automatic route is permitted in Business to Business (B2B) firms but FDI in Business to Consumer (B2C) e-commerce firms is permitted only under certain circumstances. This has resulted in innovative and complex e-commerce models to overcome the restrictions.
A ‘marketplace’ (B2C) model implies that the entity is only a facilitator and cannot hold inventory that it sells, as is the case under ‘inventory based’ (B2B) model.
Additionally, certain conditions apply:
(i) Companies must not have more than one vendor account for more than 25 percent of sales on their marketplace; and,
(ii) Companies must not directly or indirectly influence the sale price of goods being sold.
India Briefing publishes news concerning foreign direct investment into India, including the most important tax, legal, and accounting issues. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
Last week, the federal government notified industrial development schemes for three states in India – Jammu and Kashmir, Himachal Pradesh, and Uttarakhand.
The schemes will benefit new and existing industrial units in the manufacturing and service sectors; providing easier access to capital investments, among other incentives.
The Industrial Development Scheme for Himachal Pradesh and Uttarakhand, 2017 will apply for the period from April 1, 2017 to March 31, 2022, with retrospective effect.
Similarly, the Industrial Development Scheme for Jammu and Kashmir, 2017 will be effective from June 15, 2016 to March 31, 2022, with retrospective effect.
The micro, small, and medium enterprise (MSME) sector will enjoy preference in the determination of eligible industrial units for the government’s investment and subsidy schemes.
The project cost of applicant units will be appraised by a Scheduled Commercial Bank or government financial institution before the proposal of assistance is forwarded to the Empowered Committee, Department of Industrial Policy and Promotion.
New industrial units, in both the manufacturing and services sectors, which undertake substantial expansion will be eligible for further benefits.
These include bio-technology and hydel power generation plants up to 10 Megawatt.
However, a negative list of goods will not be eligible for the subsidy scheme, including those that come under polluting industries. An illustrative list of such industries in the state of Uttarakhand may be accessed here.
As mentioned above, the scheme is applicable to the states of Jammu and Kashmir, Himachal Pradesh, and Uttarakhand.
Under the scheme, the government will provide:
India Briefing publishes news concerning foreign direct investment into India, including the most important tax, legal, and accounting issues. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
India provides several tax and non-tax benefits to business and investors investing in the country.
While local jurisdictions, such as states, may also provide tax incentives for businesses, country-wide incentives are most widely applicable, and are broadly organized into four categories: location-based, industry-specific, export-linked, and activity-based.
These benefits, subject to specified conditions, include incentives for units situated in special economic zones (SEZs) or less-developed regions; incentives for specific industries, such as power, ports, highways, electronics, and software; newly set-up Indian companies, startupsrecognized under the National Startup Policy, and establishing a new industrial undertaking.
Incentives are also available to non-resident companies in the form of presumptive taxation in areas such as shipping, oil and gas services, aircraft, and power industries, among others.
Special economic zones have been set up throughout the country in order to promote competitive business environments.
Both developers and occupiers of SEZs enjoy substantial long-term tax holidays and concessions that are worth exploring when establishing an operation in India, although these may be phased out under the direct tax code (DTC) for SEZs that are operationalized after March 31, 2020.
Presently, units in SEZs enjoy 100 percent income tax exemptions on export income for the first five years, 50 percent for the next five years thereafter, and 50 percent of the plowed back export profit for another five years.
Other benefits include a refund of integrated goods and services tax (IGST) on goods imported by units and developers of SEZs, easy refund procedure of input GST paid on procurement of goods and services if any, and minimal compliance requirement and return filing procedure.
Units in SEZs also receive additional benefits from respective state governments in the form of stamp duty exemption, VAT exemption or refund, and electricity duty exemption.
Conditions for SEZ developers
Conditions for SEZ unit
Businesses set t ing up, under taking, or manufacturing units anywhere in the notified regions of the northeast and Himalayan states of India are eligible for special tax benefits.
The notified regions include northeastern states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, and Tripura and Himalayan states of Jammu and Kashmir, Himachal Pradesh, and Uttarakhand.
A deduction of 100 percent of business profits for a period of 10 years is permitted for companies manufacturing, producing goods, providing eligible services, or undergoing substantial expansion between July 1, 2017, and March 31, 2027.
Further, a refund is available on excise duty payable on specified value addition for 10 consecutive years.
A refund is not available with respect to the manufacture or production of tobacco, pan masala (betel leaf ), plastic carry bags of less than 20 microns, or goods produced by petroleum and gas refineries.
Service sectors eligible for the benefits include hotels (two stars and above), nursing homes (25 beds or more), old age homes, vocational training institutes for hotel management, catering and food crafts, entrepreneurship development, nursing and paramedical, civil aviation related training, fashion design and industrial training, IT related training centers, IT hardware manufacturing units, and biotechnology.
To strengthen the startup ecosystem in the country and provide support, the Indian government offers several tax benefits to startups recognized under the National Startup Policy.
Benefits include a tax holiday for a period of seven previous years, beginning from the year the startup is incorporated; exemption from tax on long-term capital gains; and approval to set-off carry forward losses and capital gains in case of a change in shareholding pattern.
As a form of further relief, the government also provides an exemption from angel investment tax, introduced in 2012.
An eligible startup under the National Startup Policy is a company that holds an eligible business certificate from the inter-ministerial board of certification under the Department of Industrial Policy and Promotion (DIPP).
The company must be incorporated on or after April 1, 2016, but before April 1, 2021.
Additionally, the total turnover of such a company must not exceed Rs 250 million (US$3.87 million) in any of the previous years beginning on or after April 1, 2016, and ending on March 31, 2022.
For newly set-up Indian companies, the government has announced a discounted CIT rate of 25 percent – plus applicable surcharge and education cess – with effect from FY 2016-17.
The company may avail the discounted rate, provided it fulfills the following conditions:
India Briefing publishes news concerning foreign direct investment into India, including the most important tax, legal, and accounting issues. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
As a region, ASEAN has dramatically outpaced the rest of the world in terms of its growth per capita since the late 1970s. Income growth has remained strong since 2000, with average annual real gains of more than 5 percent. Over the years, with the gradual opening up of its economies, increasing demographic dividend, low labor costs, and a steady growth, ASEAN has emerged as one of the most attractive foreign capital destinations in Asia. From the region’s financial services capital in Singapore to its low-cost manufacturing hubs in Vietnam, the ASEAN region offers numerous opportunities for businesses interested in establishing operations or trading in Asia.
In terms of low-cost manufacturing, Vietnam, in particular, has made great strides as a manufacturing hub attracting significant investment from foreign businesses. Manufacturing accounts for 25 percent of its total GDP. Over the years, Myanmar too has grown into a manufacturing base for industries producing textiles and garments, food and beverages and construction materials. Similarly, Cambodia, Lao PDR, and the Philippines have shown a significant potential in their manufacturing activities. The average monthly wage of a manufacturing worker in these countries is considerably lower in comparison to other manufacturing hubs in Asia, such as China.
Foreign businesses planning to set up operations in ASEAN can benefit tremendously from the low cost production facilities that also offer numerous tax incentives and fiscal benefits. (as shown in the table below).
Additionally, businesses can utilize the benefits available under ASEAN’s FTA with its regional partners to exports manufactured products to newer markets. Other benefits available under the FTAs include reduced importer costs, increased access to a wide range of products eligible for preferential treatment, improved customs clearance times, and less complicated trade procedures. Through FTAs, businesses can access more raw material, intermediate inputs, and capital goods with competitive prices and better quality.
Further, the establishment of an ASEAN Economic Community (AEC) offers a possible avenue for businesses to capitalize on the region’s economic dynamism. Exporters can tap into areas of strong consumer demand, including the food and beverage, agriculture and seafood, healthcare, financial services, telecommunications, and education sectors.
By Alexander Chipman Koty, Dezan Shira & Associates,
Last week on April 25, the State Council announced that China will cut more than RMB 60 billion (US$9.5 billion) worth of taxes for small and micro enterprises and high-tech firms.
The tax cuts come in the form of seven measures designed to reduce costs for small companies and stimulate innovation. According to a government statement, “The move aims to reduce the cost for innovation and entrepreneurship, energize small and micro businesses, and spur job creation.”
The cuts come shortly after China reduced its value-added tax (VAT) rates as part of an RMB 400 billion (US$64 billion) tax cut package. In his Work Report at the Two Sessions meetings in March, Chinese Premier Li Keqiang said that China would cut up to RMB 800 billion (US$126 billion) worth of taxes for businesses and individuals in 2018.
The seven tax cut measures are:
Measures one and two will be effective from January 1, 2018 until December 31, 2020. Measures three, four, and five will be implemented from January 1, 2018, while measure six will be implemented from May 1, 2018. Measure seven will be implemented from January 1, 2018 for CIT and from July 1, 2018 for personal income tax.
These latest tax cuts for high-tech firms come as Chinese President Xi Jinping has vowed to redouble efforts to develop China’s domestic tech capabilities – namely through the controversial Made in China 2025 program – amid trade tension with the US.
The US recently announced that it would prevent US companies from doing business with Chinese telecom equipment giant ZTE as punishment for violating sanctions on Iran. The decision will cause a major challenge for ZTE due to its reliance on US technology.
In recent days Xi has likened the development of China’s indigenous tech capabilities to the country’s massive Three Gorges Dam project and its development of nuclear weapons, underscoring the importance of the mission.
By Melissa Cyrill, Dezan Shira & Associates,
President Xi Jinping played host to India’s Prime Minister Narendra Modi last week in the city of Wuhan, Hubei province.
Over two days, from April 27 to 28, the two leaders maintained a careful bonhomie – assuring journalists and strategic hawks alike of their relaxed conversations and broad agenda.
The ‘informal’ summit came as a surprise to many, marking less than a year since China and India came close to blows over the disputed border region of Doklam, situated between Tibet and Bhutan.
But, a year can be a long time in international politics.
Today, as US President Trump directly pushes for increasing trade protectionism, the Korean peninsula edges towards some form of reconciliation without Chinese interference, and India readies itself for a general election in 2019, Xi and Modi, both, find themselves increasingly needing the other.
That means showcasing diplomatic prowess, securing their regional importance, and preserving the globalized economic order based on free trade and commerce, critical to their status as the world’s largest and fastest-growing emerging economies.
It is especially the latter – confronting Western trade protectionism – that may have pushed China to talking with India so soon.
To the neutral bystander, the Chinese appeal for free trade may come across as more than a little hypocritical. After all, China has a ballooning trade deficit with most countries, including India and the US. While India’s trade deficit lies at US$51.1 billion, the US had a deficit of US$375 billion last year.
This is because exports from China have no barriers, but Chinese customs are often charged with obstructing imports, many say, over unclear grounds. China, in fact, uses trade as a strategic tool – it knows the power of its market size and the prize that is widening the access to it.
Nothing illustrates this better than the following: China actively avoids importing rice, buffalo meat, medicine containing insulin, and aluminum alloys from India. These are all products that enjoy huge market demand in China and which it makes sure to source from other countries.
The US position has been less than diplomatic, if not highly unrealistic – Trump has demanded that China import more American cars, aircraft, soybeans, and natural gas. (The two sides will conduct trade talks in early May; Trump has opted for inflexibility, threatening to impose tariffs worth US$150 billion on China.)
Modi, on the other hand, has so far been more circumspect, as neighbors need to be. India may have held its ground firmly over political irritants, but it remains open to talks and visits.
Nevertheless, on the matter of the trade deficit, China and India struck discordant notes after the Wuhan summit.
China released a pithy statement, saying both nations “will tap into the full potential of business and investment cooperation, set new targets, harness positive forces, and explore new ways of cooperation to achieve win-win results”.
Meanwhile, India’s foreign ministry released a statement saying, “The two leaders agreed to push forward bilateral trade and investment in a balanced and sustainable manner by taking advantage of complementarities between their two economies.”
India remains skeptical of the Belt and Road Initiative (BRI) and its convenient inclusion of multiple regional infrastructure projects.
Moreover, the proposed China Pakistan Economic Corridor (CPEC) passes through Pakistan-Occupied Kashmir, which is a disputed territory between India and Pakistan.
This stance was upheld as India’s Minister for External Affairs Sushma Swaraj met with her Chinese counterparts just prior to Modi’s informal meeting with Xi. Modi will be visiting China once again in June for a summit of the Shanghai Cooperation Organisation (SCO).
No joint statement or specific resolution emerged after the Wuhan summit, which focused instead on optics and hitting reset on frozen bilateral ties.
A cursory look at their statements made to the media showcased starkly differing priorities on all the sticky issues: terrorism, border disputes, and trade. This leaves everything on the table for discussion at a later point, when the timing and atmosphere proves more conducive.
India, however, appears to be more willing to engage with China over its growing partnerships in India’s immediate backyard. Additionally, it has offered to export products of daily consumption in the Chinese market like soybean, fruits, and meat due to the US increase of trade tariffs.
China, for its part, may fear pushing India further towards a Quad-like alliance as Japan, US, and Australia contemplate the strategic containment of China.
Mutual anxieties could therefore foster warmer Sino-Indian ties in the near term.
By Dezan Shira & Associates,
Following meetings with Indian trade officials in the capital Delhi, Russian Deputy Economic Development Minister Alexy Gruzdev stated that the two countries have approved the creation of a mechanism that will eliminate existing limits and barriers in bilateral trade. Gruzdev was summing up the conclusions of the meeting of the co-chairs of the Indo-Russian intergovernmental commission on trade, economic, scientific, technological and cultural cooperation, which was held in New Delhi on Saturday.
Gruzdev stated, “All in all, one of the priorities of our further dialogue on the intergovernmental level should become the enlargement of trade and economic co-operation. The creation of a mechanism for the identification, analysis and elimination of barriers in our bilateral trade has been approved”.
Gruzdev also said that the bilateral trade between Russia and India amounted to US $7.3 billion in the first 10 months of the year, which is an increase of 19 percent compared to the same period in 2016.
“The India-Russia Trade Corridor is one to watch”, said Chris Devonshire-Ellis of Dezan Shira & Associates. Further, Chris Devonshire-Ellis said, “The EAEU has a significant and growing trade volume, while the Indian market has also been growing at significant rates. There is plenty of room for growth in this corridor, and infrastructure is already being put in place to develop this further.”
Indian companies have also been investing money in cities such as Vladivostok, which is the home of the Eurasian Diamond Exchange , while the two nations have established a joint investment fund and are working together on bilateral projects in both aviation, pharmaceuticals and agriculture.
By Andrea Bottega, Editor, India Briefing
Israeli investment in India is moving beyond traditional sectors like defense, and is tapping into India’s digital revolution.
Israeli investments in technology have typically favored Western nations where cultural barriers and price sensitivity play a diminished role. However, India’s burgeoning startup ecosystem and push for innovation is attracting Israeli tech companies who see potential in India’s rapid digitization.
These companies know that investing in India does not only mean access to a new, dynamic market, but also access to new sources of funding.
In January 2016, India crossed the one billion mark for mobile phone users. In June 2017, the number of data users in India leaped to 450 million; approximately four million additional Indians become data users each month.
Tech companies – both domestic and international – realize the brewing potential of participating in this unparalleled digital growth. Google, for example, recently rolled out new applications tailored explicitly for Indian smartphone users with low-RAM phones and relatively smaller data plans.
As an increasing number of Indians spend more time online and have better access to the internet, those traditionally ‘offline’ sectors will open up to technological innovation and digital servicing.
Meanwhile, India boasts of a thriving startup ecosystem with talent and backend resources readily available from the country’s information technology (IT) sector. Foreign firms understand that partnering with established domestic startups means profiting from existing networks and market experience.
Here, Israeli companies can leverage their expertise in areas of both technological innovation and traditionally offline sectors, such as healthcare, pharmaceuticals, agriculture, and resource management. By participating in these formative years of Digital India, Israeli investors will position themselves for long term growth in India’s digital boom.
Israeli investors largely look to Europe and North America when doing business abroad; additionally they are often unprepared to deal with the price sensitivity in India’s market and its contrasting business culture.
However, what India lacks in pricing capacity, it makes up for in sheer scale.
Adapting to this market will give Israeli investors access to one of the world’s rapidly expanding markets. Further, it will also prepare Israeli-based companies to do more business in emerging markets across Asia and Africa. In this scenario, India will serve as a testing ground for newly adapted Israeli products and services – positioning Israel to capture market potential in emerging economies with similar characteristics as India.
For a price sensitive country, India has a surprising number of high net worth individuals. From 2010 to 2017, on average, India added a new billionaire every month. The very richest in India, however, are only part of the growing ecosystem of domestic capital being invested both in and out of India.
Reliance, one of India’s biggest conglomerates, has already invested in a technology incubator in Jerusalem through the Israeli crowdfunding platform OurCrowd. In July 2017, OurCrowd signed a deal with LetsVenture – an India based crowdfunding platform for startups – to provide mutual access for funding in both countries.
Israeli investors active in India or working with Indian partners will gain up access to new sources of funding – for both their domestic and international operations.
With Israeli Prime Minister Netanyahu’s first India visit scheduled for early 2018, both leaders are actively working to improve diplomatic relations. Indeed, new bilateral agreements in tourism, education, and cultural exchange have increased awareness and focused attention on the untapped potential of improved business relations between India and Israel.
As India continues to invest in its digital infrastructure and connectivity, Israeli tech companies can leverage their expertise and innovation in reaching more services and products to the online Indian.
Finally, the experience of localizing products and services for the Indian market will prepare Israel-based companies for growth in other emerging markets – equipping Israel to participate in the digital revolutions of the developing world.
By Vasundhara Rastogi, Editor, India Briefing
India and the Hong Kong Special Administrative Region (HKSAR) of China recently entered into a double tax avoidance agreement (DTAA). After years of negotiation, the bilateral DTAA was approved on November 10, 2017.
When it comes into force, the India-Hong Kong DTAA will hold important tax implications for international businesses operating in both countries. The agreement will also benefit trading companies that do not have a permanent presence in India but service to an India-based entity.
Non-resident Indians (NRIs) and foreign nationals doing business in India make profits in India as well as in other countries of operation. Such businesses often have to pay tax twice on the same source of earned income or profit in India.
As a general principle, international businesses in other countries are taxed on their territorial income, which is the income generated within the territory of that country. India, on the other hand, imposes a corporate income tax on the worldwide income of business enterprises that have a permanent presence in India. As a result, India-based multinational companies deriving income from other countries face double taxation on their earned income.
A DTAA creates a fair and certain tax environment for business activities carried out between two countries. It prevents international businesses from paying tax in the country where the income or profits are generated. Or, in some cases, it allows the country to deduct tax at source, and offers businesses a foreign tax credit to reflect that the tax has already been paid.
The methodology for double taxation avoidance, however, varies from country to country.
India has over 86 DTAAs in force with various countries, which provide tax relief on transactions carried out between India and those countries. Each DTAA specifies the agreed rates of tax and the jurisdiction on the specified types of income involved.
The India-Hong Kong DTAA offers similar provisions. The DTAA will give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India. It will provide clarity to businesses regarding tax rates and tax jurisdictions, as they will now be taxed in only one of the signatory countries. This will allow investors to be more confident about their investment decisions.
Other details regarding the DTAA are yet to be announced.
Chris Devonshire-Elllis of Dezan Shira & Associates comments: “Hong Kong has a very well established Indian diaspora that has been there for decades and has much wealth and business influence within the territory. It is a very positive sign that the DTAA has been agreed as businesses in both India and Hong Kong have finally been given better financial incentives work together and increase trade and prosperity in both their respective areas”.
By Andrea Bottega, Editor, India Briefing
During the 2015 financial year (FY), Italian companies invested US$334.7 million into India. In the first half of the 2016FY – according to India’s Department of Industrial Policy and Promotion (DIPP) – Italian investments into India already reached US$319.6 million.
Indeed, cumulative Italian investment into India is set to reach US$2 billion by 2020.
Italian companies are taking notice of India’s manufacturing capabilities and growing domestic consumer market. Italian companies are investing in India’s urban growth: participating in India’s Smart Cities Initiative while utilizing the country’s burgeoning tier II cities as strategic manufacturing sites.
Since 2014, India’s Prime Minister Narendra Modi has promoted India as an investment destination and global hub for manufacturing, design, and innovation.
India is streamlining bureaucracy and eliminating regulatory bottlenecks, appealing to foreign investors who are impressed with India’s rapid growth but weary of the country’s notorious red tape. In the last three years, the Indian government has eased 87 rules governing foreign direct investment (FDI) across 21 sectors including traditionally conservative sectors such as railway infrastructure and defense.
These reforms are paying off.
In the 2016FY India reported US$62.3 billion in FDI inflow – retaining its ‘crown’ as the top location for greenfield investment for the second consecutive year. In October, 2017, the World Bank ranked India at 100 in its Ease of Doing Business global rankings, a commendable improvement from its 130 ranking in 2016.
According to the Italian Embassy in India, there are approximately 600 Italian companies currently operating in the country. To put this figure in perspective, 1,500 German companies and 750 French companies are also active in India.
The highest FDI inflows from Italy to India sector wise include:
Traditionally, Italian companies have gravitated towards India’s major cities such as Delhi and Mumbai. But, with rapid urban growth, Italian manufacturers are identifying India’s growing tier II cities as strategic sites for doing business. These smaller cities offer competitive labor and real estate prices and are making dramatic improvements in connectivity and infrastructure.
For instance, Bonfiglioli, an Italian manufacturer of gearboxes and gear motors, will be investing US$13 million by February 2018 in order to expand their existing manufacturing plants near the southern city of Chennai as well as to establish a new facility in the western city of Pune.
Manufacturing in India’s tier II cities not only provides foreign companies with more direct access to India’s domestic market but serves as an export base to neighboring Asian countries.
During his recent diplomatic visit to India, Italian Prime Minister Paolo Gentiloni identified India’s ‘Smart City Mission’ as an important site for cooperation between the two nations. In 2014, the Indian government announced ambitious plans to transform 100 tier II and tier III cities into ‘Smart Cities’ by drastically improving connectivity and digitization, adequate housing, mobility, and waste management.
Italy currently has one of the highest number of ‘Smart Cites’ in Europe. As Gentiloni commented, Italian companies offer solutions in areas of urban rehabilitation, technological design, waste management, affordable housing, and energy management.
By investing in India’s planned urban growth, Italian companies are simultaneously improving their own opportunities in urban centers where they operate. Improving connectivity and infrastructure in tier II cities will increase the productivity of Italian manufactures while making their products more mobile.
As Indian cities continue to grow, Italian investors can both shape and harness this momentum – expanding their presence not just in India but in nearby Asian markets.
India is becoming an increasingly important investment destination for Italian companies. Italy’s government and private sector are working together to create deeper economic ties between the two nations. In April 2017, Italy’s largest business delegation to date visited India led by Ivan Scalfarotto, deputy minister for economic development.
Diplomatic visits and business delegations will only shine a brighter spotlight on India’s market potential. As investment into India’s urban growth continues, Italian companies will view India as a strategic manufacturing hub – providing competitive rates and direct access to growing markets.
By Srinivas Raman, Editor, India Briefing
Last year, India’s federal government led by Prime Minister Narendra Modi announced the demonetization of high value currency. This was a drastic economic measure introduced and implemented overnight, without any public consultation.
This year, November 8 marked the one year anniversary of the policy announcement: it was commemorated alternately as ‘Anti-Black Money Day’ by the federal government and a ‘Black Day’ by the political opposition.
One year on, the impact of demonetization continues to be felt across the Indian economy, as analysts attribute the slowdown of industrial activity, job losses, and lagging trade and commerce to its surprise implementation. Here we take stock of the policy’s genesis and its major outcomes.
On November 8, 2016, Modi announced live on national television that the existing banknotes of denominations – US$7.50 (Rs 500) and US$15.34 (Rs 1000) – would be invalidated as legal tender from the very next day.
He also announced that new banknotes of denominations – US$7.50 (Rs 500) and US$30.69 (Rs 2000) – would be issued in their place. Holders of demonetized currency would be given a limited window of time to make bank deposits or exchange their old currency for new from scheduled banks.
The abrupt announcement shook India, and the next eight weeks saw chaos as the entire country bore the full brunt of demonetization without key institutional buffers in place.
In order to appreciate the scale and impact of the decision, a few vital facts must be laid bare.
First, the demonetized currency accounted for 86 percent of Indian cash in circulation, and were the largest denominations of banknotes at the time.
Second, India’s economy and transaction behavior has historically dealt with and favored cash, both in rural and urban areas.
Third, the RBI was ill-equipped and slow to issue the quantum of new currency required in the first six weeks of demonetization; banks and ATMs were either unprepared or unable to meet the frantic demand for cash.
Further, in the weeks following demonetization, quantitative restrictions were imposed on a daily basis on the withdrawals allowed from ATMs and banks. In essence, the government restricted people from accessing their own hard earned money as cash in circulation had decreased.
Business as usual, across the length and breadth of the country, came to a grinding halt for months following demonetization. Employers were unable to pay daily wage workers, and were forced to retrench them en masse. In some cases, trade unions sued employers and writ petitions were filed against the federal government – challenging the constitutionality of the measure.
In extreme situations, patients died in hospitals due to shortage of cash to make payments; other fatalities were observed as people stood in long queues in banks and ATMs. At the same time, ATM machines were not properly calibrated in advance due to the secrecy around the decision, and were, consequently, unable to dispense the new currency in the initial weeks.
Curiously, despite numerous discomforts, the majority of Indians adopted a rather submissive attitude towards demonetization. Instead, they supported what they perceived to be Modi’s bold initiative to curb black money, remove forged currency responsible for terrorist financing, and end corruption.
Barring a few short lived protests from the opposition, most people suffered in silence, in hopes that their sacrifices would expose those who held unaccounted wealth and rid India’s economy of its black monies. This faith was overwhelmingly used by Modi and his associates in their defense of the drastic and economically irrational move.
Essentially, Modi based the cash bust on a fundamentally flawed premise: that the chunk of black money in India was stashed away in the form of high value currency, and demonetization would render all black money worthless, in a single blow.
In recent weeks, the Reserve Bank of India (RBI) report that 99 percent of the country’s demonetized currency has returned to its coffers – exposes just how farcical the logic behind demonetization was. The RBI report raises two inferences: either the amount of black money in the economy was grossly overestimated or those who held such wealth successfully evaded the consequences of demonetization by outwitting the government’s simplistic plan.
The latter appears to be more probable. It shows that demonetization was indeed poorly formulated and executed, and failed to achieve its primary objective – black money eradication. This could be because black money in India is usually stored in the form of immovable property and jewelry, making demonetization an entirely misguided exercise.
In addition, soon after the new currency printed by the RBI entered the market, rampant forgery followed. This showcased the inefficiency of demonetization in its failure to dismantle the structures and facilitators of corruption. Raids carried out across the country unearthed larges stashes of forged new currency. At the same time, the taxpayer’s money was heavily spent on printing of new banknotes even as the average person could only withdraw small amounts from ATMs and banks.
Meanwhile, demonetization was meant to be planned in absolute secrecy; only a handful of top government officials had prior knowledge. The government placed huge importance on the element of surprise, hoping to catch money launderers unawares. Yet, subsequent reports indicated that the news had spread through informal channels: those with political connections were forewarned months ahead, enabling them to convert their black money by purchasing high value assets and making discrete bank deposits.
Demonetization was replete with unintended consequences. Among these, were some positive ones, such as the timely interventions by digital payment apps like Paytm and Mobikwik. This somewhat eased the stress of a section of India’s smartphone enabled population.
Public-private partnership in the fintech sector also witnessed the integration of Google’s first ever India centric digital payment app ‘Google Tez’ with the federal government’s own app, BHIM (Bharat Interface for Money). Catalyzed by demonetization induced digitization, the fintech sector continues to flourish in India. The RBI recently allowed non-banking financial companies to operate peer to peer (P2P) lending platforms.
Bolstered by these upshots, the federal government became obsessed with digitizing India, and in the weeks after demonetization, introduced a number of reforms aiming to digitize tax, labor, and other key business compliances in line with Modi’s catchphrase – “less cash first, cashless society next”.
Another significant impact of demonetization has been financial inclusion. In the weeks following demonetization, tens of thousands of bank accounts had to be opened across the country by people who were previously outside of the banking and financial system, particularly in rural areas.
Today, the government hopes to enhance financial stability and accountability in the economy with its drive to link the Aadhaar number with all identification documentation. This is in addition to all bank accounts compulsorily linked to the Permanent Account Number (PAN) and Tax Account Deduction Number (TAN). Overall, these outcomes have widened the national tax base, providing a boost to public finance.
Nevertheless, even before India’s economy fully stabilized from the aftermath of demonetization, the Modi government introduced its landmark legislation: the Goods and Services Tax (GST). Since coming into effect on July 1, the GST system has run into an inordinate number of operational glitches due to improper planning and faulty administration. This has caused all manner of avoidable disruptions for business and traders, and sharpened monetary distress.
India is not the first country to have demonetized its currency. Several other economies have done the same thing for the same reasons. However, countries like New Zealand demonetized their currencies in a phased manner, and after prior consultation with stakeholders.
Regardless of the conclusion of demonetization, much of the distress in the Indian economy could have been avoided through the prior exchange of information among critical stakeholders. As facts stand, in August this year, India’s GDP growth fell to 5.7 percent from 7.9 percent, the same time last year. Finally, as shown by the RBI’s latest report, it is clear that the primary objective behind demonetization was ultimately a failure.
Nevertheless, despite the debacle of demonetization, one message rings loud and clear in India: the Modi government is serious in its stance against all forms of corruption, a departure from its predecessor government. Businesses in the country need to be conscious of their exposure to risks such as the under-reporting of assets, establishment of shell companies, lack of due diligence while negotiating new partnerships, or grey area tax practices.
By Ramya Boddupalli, Editor, India Briefing
Make in India is the government’s flagship program to revitalize the country’s flaccid manufacturing sector. When it was launched in 2014, Make in India stole headlines across the world – Prime Minister Narendra Modi and his government would finally make manufacturing in India viable. The initiative would attract foreign investment to grow the manufacturing sector, and create jobs for those that need employment. Many India hands thought Make in India would help the economy realize breakout growth.
Wieden + Kennedy deserve a lot of credit – Make in India set the stage for the new government. The broad policy direction was everything that India’s economy seemingly needed: removing barriers to foreign investment, improving the ease of doing business, as well as encouraging the development of infrastructure and the workforce. But after three years, what has changed?
The government removed most FDI barriers, but shock (demonetization) and poorly implemented (GST) reforms have caused some foreign investors to feel uncertain about India. The Smart Cities and Skill India initiatives – designed to create modern infrastructure and up-skill the labor pool, respectively, are great ideas, but have become social media bait for online trolls.
In a more competitive policy environment, Make in India would likely have been deemed a failure. This government is still struggling with basic industrialization and mass employment when other governments – like China – are developing technology-driven industry. The now-in-opposition Congress party had set the bar very low by 2014, making Modi’s Make in India platform look like a godsend, but India now needs something more than a good public relations campaign.
The government liberalized FDI policy by allowing automatic route for over 50 percent investment in 25 sectors including railways, defense, medical instruments, and telecom. Consequently, the FDI inflow grew by 20 percent in 2014-15 and 2015-16.
In 2016-17, the country attracted its highest ever FDI of US$60 billion. Significantly, the manufacturing sector saw a 38 percent increase in investment in 2016-17.
Major firms including General Motors, Apple, and Foxconn name-checked Make in India when announcing big ticket manufacturing projects in the country, while countries including Japan, South Korea, Sweden, and Germany have pledged larger investments and technical support to India. In the most recent example, the Japanese Prime Minister committed to investing across sectors – automotive manufacturing, startups, and infrastructure.
Manufacturing activity has certainly picked up in the country. Data published by DIPP in December 2016 shows that industrial activity rose by 29 percent during 2015-16 over the previous fiscal. Much of this growth is concentrated in three states – Karnataka, Madhya Pradesh, and Maharashtra, which were in any case already established manufacturing bases.
Ultimately, however, Make in India has not resolved all the issues that it set out to do.
India’s manufacturing and transport infrastructure is also severely inadequate to enable businesses to conduct their operations smoothly. The government has initiated six major industrial corridors, dedicated railway freight corridors, and port development projects, but none of them are operational – optimists project 2019 as possible.
FDI inflows show that much of the funds are diverted towards stressed assets or brownfield projects. In 2015, nearly 23 percent of the total FDI inflow were invested in brownfield projects, increasing to 48 percent in 2016. Indeed, several global companies including US-based JC Flower and Apollo Global Management; Canadian fund Brookfield Asset Management; and, China’s Shanghai Fosun Pharmaceutical have set up joint ventures in India to buy up stressed assets.
India’s rank in the World Bank’s Ease of Doing Business has risen, but not many businesspeople will say that business in India has gotten any easier. As an example, there has also been a spurt in the number of stalled economic activities since September 2016. Economic projects – including in the infrastructure, manufacturing, and services sectors – are often stalled due to lack of government clearances, funds, raw materials, and other resources.
As of September 2017, the value of stalled projects stood at US$204.26 billion (Rs 13.22 trillion). In percentage terms, about 13 percent of all projects have been stalled, two-thirds of which are in the private sector. In the manufacturing sector, the stalled projects constitute about 25 percent of all activities in the sector. This trend has disturbed prospective investors, and resulted in a significant drop in the number of new projects announced this year.
Sudden, and at times contradicting, policy measures by the government is affecting businesses’ ability to plan their processes in advance. For instance, frequent changes in the GST rules is causing an environment of confusion and uncertainty in the economy. In another recent example, the luxury auto industry was blindsided by the government when the maximum levy was almost doubled, immediately after GST rates were set. Last year’s demonetization exercise also crippled manufacturing supply chains, leading to reduced industrial and shrinking retail activity.
Make in India has had a patchy, and rather subdued, impact on the Indian economy so far. While the initiative succeeded in creating new interest for investing in India, it has not been able to transform it into any significant rise in manufacturing activity. In fact, recent economic shocks delivered by a poorly implemented demonetization and GST have dampened investor sentiment, neutralizing Make in India’s impact.
Further, the global value chains that ushered in manufacturing hubs in East Asia are now rapidly transforming. Businesses no longer rely on cheap labor for production purposes, but are instead adopting technologies such as 3D printing and smart automation. The technology-driven ‘fourth industrial revolution’ or Industry 4.0 is changing the fundamentals of manufacturing processes. World over, major manufacturing giants are rapidly adopting robotics in industrial units. Robotics in Chinese manufacturing units, for example, is likely to grow by 150 percent in 2018.
Recent political developments have also increased protectionism in Western economies, which were traditionally the destination for goods made in East Asia. Export-dependent manufacturing may no longer be a viable economic model for emerging economies to emulate.
India must quickly adapt its policies to reflect the changing nature of the industry. The government is already revamping the National Manufacturing Policy, and revising Make in India to accommodate these changes. It is seeking to modernize its digital infrastructure to support the new era of manufacturing. But is it too little, too late?
The country cannot rely on big-ticket industrial units alone to transform into a manufacturing hub. It must create a positive environment for small and micro businesses to function and grow in. Policies for these businesses must include flexible credit instruments, good industrial linkages, relaxed labor norms, and provision of some managerial assistance for scaling up businesses.
Until the government develops the political willpower to take up these challenges, the burden will remain on the private sector to find trusted partners on the ground in India.
By Andrea Bottega, Editor, India Briefing
Italy is one of India’s most important trading partners in the European Union (EU). Through a series of trade delegations and government-led trade initiatives, the Italian authorities have succeeded in establishing a dynamic relationship with India predicated on political, economic and scientific cooperation.
Bilateral trade between both nations witnessed a strong growth until 2007, when the global recession led to a marked slowdown in the Italian economy. However, with new economic reforms taking place in both countries, bilateral trade is showing new signs of growth.
In the year 2016 financial year (FY), for example, trade between India and Italy rose to US$8.80 billion.
Italian businesses are becoming increasingly aware of the vast opportunities offered by the Indian market. Indeed, trade between Italy and India is rising at a growth rate of 30 percent.
In 2016, Italian exports into India amounted to US$3.9 billion dollars; Indian exports into Italy accounted for US$4.9 billion dollars. Italian businesses see India as an increasingly attractive trading partner.
Diplomatic engagement creating new trade opportunities
On October 30, 2017, Italian Prime Minister Paolo Gentiloni met Indian Prime Minister Narendra Modi in New Delhi, the first time an Italian Prime Minister has made a diplomatic visit to India since 2007. Relations between the two nations had soured in 2012 when on-duty Italian marines mistook two Indian fishermen for pirates, killing both men off India’s southern coast. Gentiloni’s visit to India represents a conscious attempt to rekindle diplomatic ties and strengthen bilateral trade.
During the diplomatic meeting, Gentiloni and Modi inked six Memorandums of Agreement (MoUs) aimed at enhancing cooperation in the following fields:
Improved bilateral ties between Italy and India are paving the way for increased economic cooperation. In May, 2017, the India-Italy Joint Economic Commission met in Rome – establishing joint working groups in the following areas:
In 2016, the India Italian Joint Committee, established under the Scientific and Technological Cooperation Agreement, approved several initiatives and projects to encourage cooperation in the sectors of science, technology and innovation with emphasis on sustainable agriculture, health care, biotechnologies and nanotechnologies.
This brand of ‘science diplomacy’ acts as a stimulant to bilateral trade: creating dialogue and new networks. India’s recent US$7 million investment into two energy beamlines at the Sincrotrone of Trieste is a testament to the opportunities strengthened engagement between Italy and India can produce.
India has made impressive strides in improving the ease of doing business. India remains one of the most competitive countries in South Asia, ranked 40th in the global competitiveness ranking of 137 countries by the World Economic Forum (WEF). National competitiveness is defined as a set of institutions, policies and factors that determine a country’s level of productivity. Improvement across most pillars of competitiveness, particularly infrastructure and higher education, reflects recent public investments in these areas. Strides in labor market efficiency, especially the nation’s ability to attract and retain talent, has also improved India’s WEF 2017 ranking.
Recently, the Government of India has launched a series of initiatives to facilitate investment, foster innovation, and build best in class manufacturing infrastructure in the country. These programs aim to attract foreign direct investment by eliminating excessive regulations and fostering a culture of bureaucratic transparency.
India can be the ideal partner for Italian companies looking to expand into emerging markets. Italian companies are actively participating in the Make in India campaign by offering collaborations in areas such as food processing, infrastructure, heavy machinery, renewable energy, advanced technology, as well as information and communication technology.
In approximate 800 Italian companies are already active in India. As engagement between the two nations continues to strengthen, Italian businesses looking to expand globally will come to see India as a natural choice.
By Melissa Cyril, editor, India Briefing
The ninth annual summit of the BRICS countries – referring to the institutional coalition of major emerging powers Brazil, Russia, India, China, and South Africa – took place in Xiamen this Sunday through Tuesday.
Coming on the heels of a prolonged military stand-off between India and China over border tensions, the summit presented the best opportunity to showcase business as usual.
Naturally, optics played its part: a much awaited handshake between Prime Minister Narendra Modi and President Xi Jinping followed by bilateral talks underlined the summit’s optimistic undertone.
Even more interesting though – the Xiamen Declaration by the BRICS nations explicitly condemned Pakistan-based terrorist groups – a major concession to the Indian side by the Chinese.
All of this points to both countries opting for a constructive and “forward looking” approach.
A 73 day stand-off at Doklam ended on August 28 – with India and China agreeing to a mutual disengagement.
The Doklam plateau is a disputed territory north of the tri-junction of Sikkim, Bhutan, and Tibet. Tensions began on June 16 when the Indian army intercepted Chinese road-building activity in the Doka La area of the plateau. Subsequently, the Bhutanese protested Chinese intervention into their territory – internationalizing the stand-off.
Yet, even as all sides indulged in media propaganda and political high-talk, India and China maintained diplomatic communications throughout.
Furthermore, the timing of the border dispute’s sudden resolution – just before the BRICS Summit at Xiamen – indicated that India’s participation was accepted as vital.
A primary reason is because at the top of China’s current foreign policy agenda is its One Belt, One Road (OBOR) vision. The OBOR seeks to establish infrastructure networks across Eurasia, including a China-Myanmar-Bangladesh-India Corridor and a China-Pakistan Corridor, the latter of which has India uneasy.
Just as important, however, are China’s expanding and deepening economic and business ties with India – both in terms of trade relations and private sector investments.
This is why economic considerations trumped geopolitical kinks in the latest face-off between the Asian giants.
Besides concerns over OBOR, China knows the importance of its access to the Indian markets, while India continues to remain dependent on Chinese imports. In 2016-17, China’s goods exports to India valued at a whopping US$61.3 billion as against India’s shipments worth US$10.2 billion.
Chinese business linkages with India are also increasing. The country’s foreign investments into India has accelerated in recent years; between June and August 2016 alone, Chinese firms invested US$2.3 billion into India. Chinese firms are especially invested in India’s technology startups – across a variety of sectors.
Finally, India’s economic programs like Make in India and Digital India have also courted Chinese interest in investing in manufacturing, infrastructure, and the strengthening of India’s digital ecosystem.
Ultimately, it makes the most business sense to make peace and carry on.
India is one of 112 countries to have ratified the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA), which took force on February 22 this year.
Intended to overcome the global slowdown in trade, the TFA introduces new best practices for member-states to ensure the easier movement of goods across international borders.
Nations who have ratified the agreement will be expected to implement changes to their customs infrastructure within two to three years. However, the basic set of provisions have to be implemented by the least-developed countries (LDC) within one year.
In recent times, growing protectionism and doubts over the effectiveness of trade liberalization have put a damper on long-standing trade relationships across the world, including among western countries.
The TFA is, therefore, an important international institutional mechanism; if successful – it will allow states to consolidate their trade linkages, and better engage with the global trading network.
Below, we ask key questions on how will the TFA boost business in India, reduce costs, and improve the overall quantum of international trade.
The TFA stands for a series of reforms that will improve transparency, mobility, and predictability in the conduct of trade across borders.
Breaking this down, it means that signatories to the agreement will need to create a non-discriminatory business environment, and independently notify various provisions fulfilled.
To achieve this, countries like India are introducing faster clearance procedures, better conditions for freedom of transit for goods, improved appeal rights for traders, as well as reduction in fees and formalities connected with the import and export of goods.
Industry watchers believe that the TFA will rationalize prices or reduce the overall cost of doing business. Moreover, since the new trade rules will come into effect via coordination between private sector and government stakeholders, instead of by diktat, introduction of the new trade procedures and mechanisms should be smoother.
The Federation of Indian Exports Organizations estimates that based on present trade figures, reforms under the TFA could create additional trade of about US$15-20 billion.
The WTO’s forecast is similarly optimistic – estimating an average decrease in trade costs of member-states by 14.3 percent.
Full implementation of the TFA will likely reduce time to import goods by over 36 hours, and to export goods by around 48 hours. This is a reduction in time taken by 47 percent (imports) and 91 percent (exports) over the current average.
Coordinating the reform efforts at the federal level, is the National Committee on Trade Facilitation (NCTF) – established under Article 23.2 of the WTO agreement.
Operations undertaken by the NCTF will be steered in tandem by the federal government’s Revenue Secretary and Commerce Secretary.
In order to avoid delays in execution – the NCTF has already adopted a 76 point National Trade Facilitation Action Plan (NTFAP).
Actions under this plan are categorized into short, medium, and long-term to enable efficient and systemic reforms.
Major initiatives under the NTFAP include:
By Melissa Cyril, editor, India Briefing
India and Japan marked their 12th annual bilateral summit last week. A two-day blitz of investment pledges and the much hyped Mumbai-Ahmedabad bullet train, it showcased a relationship that is fast maturing into a strategic economic partnership.
The timing is also all but expected.
Both Prime Minister Narendra Modi and his Japanese counterpart, Prime Minister Shinzo Abe have promised resurgent economies to their voters.
Further, both countries are increasingly uneasy over China’s naked ambitions, despite having flourishing trade and business ties with the mainland.
These common concerns have manifestly transformed current Indo-Japanese bilateral engagement.
Japanese aid and investments into India are not just filling critical infrastructure gaps in the country, but are also directly benefit Modi’s economic reforms programs: Make in India, Skill India, Digital India, as well as Startup India.
At the recent summit, Japanese agencies – Japan International Cooperation Agency (JICA) and Japan External Trade Organization (Jetro) – coordinated interactions with 450 Japanese firms, including Mitsubishi Heavy Industries, Hitachi, Suzuki Motor, Keidanren or the Japan Business Federation, Mitsui, and Toyota Motor.
Even more important, though, was the participation of medium-sized (worth US$1 to 10 billion) companies from Japan. These firms are looking at a wide range of sectors in India: manufacture of tractors, agro-chemicals, real estate, construction, defense, and infrastructure.
The following are key areas that have fostered strong economic relationships between India and Japan in recent years.
Aid for development: JICA is Japan’s national agency responsible for managing its overseas development assistance. Aid funding is a pillar of Japanese foreign policy, and underlines its past relationships with other Asian countries like Thailand, Malaysia, South Korea, and China.
In 10 years, JICA has provided India with soft loans worth US$23.36 billion at 0.1 – 1.4 percent rates, repayable over 30 to 50 years, for infrastructure projects in transport (55 percent or US$11.37 billion), water (16 percent or US$4.67 billion), energy (13 percent or US$12.07 billion), and agriculture and forestry (seven percent or US$3.63 billion) sectors, among others.
JICA’s latest marquee project is the US$17.18 billion bullet train, from Mumbai(Maharashtra state) to Ahmedabad (Gujarat state). The bullet train project will create 24,000 jobs, locally manufacture key components, and will, therefore, entail technology transfers.
Major transport projects that have been backed by JICA include the Delhi Metro Rail (the first network in the country), Western Dedicated Freight Corridor (India’s largest railway project between the National Capital Region and Mumbai), roads, bridges, and tunnels in the northeast states, and cargo handling structure in Chennai and Visakhapatnamports.
Foreign Investments: FDI from Japan is around US$4.7 billion today, climbing steadily from around a mere US$512 million in 2006. Japan now ranks third, responsible for eight percent of total accumulated FDI inflows into India from April 2014 to March 2017.
At the summit last week, 15 Japanese firms signed agreements to invest in Gujarat. This includes automaker Suzuki Motor’s plans to expand its production capacity from 250,000 to 750,000 units annually. Suzuki Motor will also partner with fellow Japanese firms Denso and Toshiba to manufacture lithium-ion batteries for electric vehicles; the factory will be set up at Hansalpur in Gujarat by 2020.
Infrastructure push in northeast India: This region is the country’s gateway to Southeast Asia and shares a historic connection with Japan. Recently, the India-Japan Coordination Forum for Development of North East was established to execute infrastructure building projects such as connectivity and road network development, electricity generation, and disaster management. Towards this objective, Japan will extend a loan of US$348.7 million to India for its ‘North East Road Network Connectivity Improvement Project’.
A memorandum of understanding was additionally signed at the bilateral summit to combine the aims of Japan’s Free and Open Asia-Pacific strategy and India’s Act East Policy. This strategy feeds into the vision behind the proposed US$40 billion Asia-Africa Growth Corridor (AAGC) to connect Africa, Southeast Asia, and India’s northeast. These initiatives come in the backdrop of repeated Chinese incursions into India’s border territory and the South China Sea, and the imposition of its Belt and Road Initiative (BRI) that has left many uncomfortable in the region.
Support for startups in India: Japanese firms invested about US$1.43 billion in Indian private equity and venture capital deals in the first half of 2017 – more than triple the amount in 2016 (US$459 million). Telecommunications giant SoftBank Group Corp., accounted for 98.9 percent of this amount (US$1.40 billion). Other Japanese investors are Mistletoe Inc., GREE Ventures Inc., and Rebright Partners Ltd.
A diverse array of Indian startups have benefited: agricultural marketing Ninjacart, logistics service platform Lets Transport, digital community platform POPxo, real estate service provider Property Share Online Platform Ltd., adventure travel startup Deyor Adventures Ltd., wellness startup Healthians, and Balance Hero Co. (an app enabling prepaid mobile phone users to check their remaining credit balance). Even lesser known Japan-based investors such as Beenos Inc., Digital Garage Inc., and GMO Internet Inc. are now interested in Indian startups.
SoftBank Group Corp.’s investment arm, SoftBank Capital, has invested about US$4 billion in 2017, primarily in the consumer internet space. This includes US$1.4 billion in One97 Communications Ltd., which operates India’s largest digital payment and commerce platform Paytm in May, and US$2.4 billion into homegrown e-commercegiant Flipkart in August.
SoftBank Capital previously backed Indian startups Snapdeal, Grofers, Ola, and Oyo. In future, its investments will be facilitated through a US$100 billion tech-focused fund called Vision Fund. The fund has contributions from Saudi Arabia and Abu Dhabi, besides Apple Inc. and Qualcomm Inc.; it is the single largest capital pool in the world of private equity and venture capital.
Skilling India: Japan is also assisting India’s initiatives towards its workforce capacity-building. Four Japan-India Institutes for Manufacturing (JIMs) will be set up to train workers.
The Japan International Training Cooperation Organization (JITCO), which is a government-instituted body focused on human resource development, has also rolled out a program to up-skill Indian (industrially trained) blue-collar manpower for Japanese firms. Selected workers will be sent to Japan for a three-year, on-the-job training course.
In the healthcare sector, discussions are ongoing between the two governments to train and send nurses from the northeast Indian states to Japan.
The two countries are economically engaged at multiple levels.
Even if the momentum is sluggish on one front, such as trade, it is flourishing in terms of investments and private equity interest.
Strategic interests, and a retreating US in the Indian Ocean Region (IOR), have pushed Japan to seek a closer defense relationship with India. This is complemented by India’s own regional interests.
Both countries are powerhouse economies in Asia, although at differing stages of development. Yet, Japan’s growth has been stagnant for years now, further burdened by an aging population and a shrinking workforce.
As Prime Minister Abe says, the “Ja” of Japan and the “I” of India together makes “Jai”, the Hindi word for victory.
By Bradley Dunseith, editor, India Briefing
India’s regulatory framework on foreign direct investment (FDI) in retail is one of the most complex in the world. But, navigating this perplexing system means gaining access to one of the world’s fastest growing consumer markets.
This article outlines India’s regulatory landscape for FDI in retail while offering suggestions on how foreign businesses can successfully maneuver through them.
The Indian government categorizes retail into two types: single-brand and multi-brand.
As the names suggest, single-brand retail refers to businesses that sell only a single brand of goods to consumers. Multi-brand retail refers to businesses that sell multiple brands through one outlet such as Wal-Mart.
If a foreign business owns more than one brand, that business has to apply for FDI approval for each individual brand. A foreign company cannot sell these brands in the same outlet.
The Department of Industrial Policy and Promotion (DIPP) permits 49 percent of FDI into single-brand retail under the ‘automatic route’ and 100 percent FDI with government approval.
To obtain government approval for 100 percent FDI, foreign retailers must comply with the following conditions:
A 30 percent Indian sourcing minimum is the most difficult condition for foreign businesses to comply with. For instance, the requirement disqualifies luxury productswith place-specific sourcing needs. Furthermore, vulnerable supply chains and inconsistent quality control makes it difficult for foreign retailers to depend on domestic sourcing.
Currently, India allows 51 percent FDI in multi-brand retail, 100 percent FDI into multi-brand food retail, and 100 percent FDI into e-commerce retail. All three categories require government approval with stringent conditions.
To obtain approval for the general category of multi-brand retail, foreign businesses must invest a minimum of US$100 million with 50 percent of their investment going into backend infrastructure within the first three years. Furthermore, the company can only sell products made in India – giving their domestic competitors a huge advantage.
So far, only British-based Tesco has established multi-brand retail outlets in India under these conditions. In partnership with the Tata Group’s Trent Hypermarkets Ltd, Tesco has established its India outlets in Maharashtra and Karnataka, under the brand name Star Bazaar and Star Market.
To obtain approval for 100 percent FDI into multi-brand food retail, retail outlets are restricted to exclusively selling food. These food items must be either produced or processed in India.
Recently, the DIPP approved Amazon’s investment request for multi-brand retail in food. Amazon will invest US$515 million in food retail over the next five years.
FDI into multi-brand e-commerce falls under the automatic route. But, e-commerce companies have to abide by the ‘marketplace model’ and cannot act as a retailer themselves. This means that no more than 25 percent of an e-commerce platform’s sales can go to a single company. E-commerce companies cannot invest in inventory.
The ruling Bharatiya Janata Party (BJP) has been inconsistent in their attitude towards FDI in multi-brand retail. The BJP’s 2014 election manifesto opposed FDI into multi-brand retail though they never tightened the existing regulations established by the previous regime. Federal ministers have hinted at easing these regulations further but the government has not made any official announcements.
Successfully navigating through India’s complex FDI regulations on retail means more decision-making autonomy and increased potential of profits for foreign companies. While India’s sourcing norms on single-brand retail create barriers for many companies entering the Indian market, they also pose opportunities for foreign businesses to solidify their Indian presence.
India is making slow, inconsistent progress at easing regulatory norms on retail – establishing a presence now will position foreign businesses to greatly benefit from future changes in the regulatory landscape.
India badly needs more efficient, simplified supply chains. Though the sourcing norms on single-brand retail are stringent, cultivating supply sources means greater quality-control. Foreign businesses cultivating their own sourcing will protect themselves from subsequent efficiency leakages and supply chain disruptions.
Foreign retail companies can also team with Indian partners who can later become suppliers. Foreign retail companies can set up wholly-owned outlets in India once their partnership succeeds.
Finally, the Indian government’s exact criteria on sourcing norms lacks transparency. Companies which manufacture “state of the art” or “cutting edge” technologies are exempt; however, what cutting edge means remains ambiguous.
When Elon Musk tweeted that India’s rigid sourcing norms were creating obstacles in making Tesla cars in India, the Indian government tweeted back. Under the @makeinindia twitter handle, the government clarified to Musk that his manufacturing would not require minimum local sourcing requirements.
Conversely, Apple has urged the Indian government to exempt them from the sourcing norm. However, in May 2016, the Finance Ministry rejected this recommendation: granting Apple permission to set up single-brand retail without any relaxation in the sourcing norm.
When it comes to navigating India’s regulatory system, public attention pays off.
By Bradley Dunseith, editor, India Briefing
Canadian foreign direct investment (FDI) into India reached an estimated US$14 billion in 2016. Much of this inflow came from large asset management companies and pension funds, which see India as an ideal destination for stable, long term investments.
Summarizing this optimistic view of India’s economic growth, Michael Sabia, President and CEO of Caisse de dépôt et placement du Québec (CDPQ), has called India’s potential “bright in a world of gray.”
Why are Canadian investors suddenly so charmed with India?
India’s economy is growing at 6.1 percent per year. By 2022, India will have the world’s largest and youngest labor force. The middle class is expanding, fueling a dynamic consumer market. The country is now one of the most popular destinations for FDI in the world, reaching a record US$60.1 billion in FDI inflow in the 2016 financial year (FY).
India needs stronger and more expansive infrastructure to make this economic growth sustainable. Canadian pension funds, which look for long term investments, like CDPQ, Ontario’s Teachers Pension Plan (OTPP), and the Canadian Pension Plan Investment Board (CPPIB) have begun investing in India’s power, construction, and logistics sectors.
In the first half of 2017, CPPIB became India’s top investor in real estate, entering two deals worth US$750 million, collectively.
The OTPP’s US$200 million investment in the digital startup Snapdeal attests to both the importance of India’s startup sector as well as India’s growing digital economy. With the Indian government’s push towards Digital India, private players are increasingly investing in digital infrastructure.
Large Canadian investment groups like Brookfield and Fairfax have also begun investing in commercial and retail real estate and infrastructure. In 2016, Fairfax invested US$321 million into the Bengaluru international airport.
Canadian investors are betting on India’s growth.
By investing in India’s growing infrastructure, Canadian investors are writing themselves into India’s growth story.
While the pace of urban migration in India is increasing productivity, it is burdening the operational capacity of cities. Under initiatives such as Smart Cities or Skill India, the Indian government is working to make urban growth sustainable. But, the government still requires huge investments to improve and expand its strained infrastructure.
Canadian investors are not only helping to make this growth sustainable; they are incorporating themselves into the fabric of India’s economic development.
Nonetheless, Canada’s rising investments into India are still minuscule in comparison to other countries’ contributions. According to the Department of Industry and Policy Promotion (DIPP) under the Ministry of Commerce and Industry, Canada is only India’s 23rd biggest investor.
The rise of protectionism throughout Western nations and widespread cynicism towards globalization are calling into question once dependable trading relationships. As the Canadian government prepares to renegotiate the North American Free Trade Agreement (NAFTA), Canadian businesses should look to new partners to stimulate growth.
India’s expanding economy, its ballooning consumer market, and new economic reforms like the Goods and Services Tax (GST) – set to make doing business in India easier – making the country a perfect partner.
India is Canada’s largest trading partner in South Asia. Yet, Canada’s growing investment footprint in India has not yet translated into the same kind of ‘brand’ recognition other countries possess.
But, in important ways, this is changing.
An approximate 1,000 Canadian companies are active in India; 400 of them have a physical presence. In the last nine months, eight Canadian cabinet ministers have visited India, along with numerous trade envoys – fostering important relationships between the business communities of both countries.
On July 2, 2017, Air Canada began four weekly nonstop flights between Toronto and Mumbai – adding to their existing direct connections between Toronto and Delhi as well as Delhi and Vancouver. Improved connectivity will increase new business opportunities as traveling between India and Canada becomes easier and faster.
As Canada becomes an increasingly important part of India’s growing economy, Canadian businesses will have the opportunity to re-brand Canada. In India’s growth story, Canada will have its own part to tell.
By Bradley Dunseith, editor, India Briefing
Australia’s growth prospects in India are expanding.
Among key opportunities identified by the country’s entrepreneurs are: investing in India’s higher education and vocational sectors and India’s growing renewables market. India’s rapid growth has resulted in the need for complex, skill-oriented jobs on one hand, and accelerated its energy consumption and requirements, on the other.
When looking at the Indian education and training sector, Australian investors observe that India’s large labor supply does not automatically serve the country’s high employment targets. Rather, the availability of labor is now becoming a challenge for the government as industrial innovation and automation necessitates up-skilling and technical training.
Accordingly, this sector has captured the imagination of startups and foreign investors – incentivized by the Modi government’s support for private sector participation.
In the case of India’s energy markets, Australia’s trade and business relationship with India previously centered on the former being a major supplier of coal to India. Today, as India is focused on developing its clean and renewable energies industry, Australian companies are embracing new opportunities in the fast-growing market.
In this article, we focus on how Australian businesses are investing in the above industries – education and clean energy. Lastly, we discuss how Australian investors can improve their experience in India by approaching the country’s markets on a state-by-state basis.
India is one of the fastest growing emerging markets. However, like the country’s infrastructure, training programs and educational courses have not been able to keep apace of this surge in growth.
By 2022, India is expected to have the world’s largest, young workforce – nearly 900 million strong. But, without high quality education and effective training programs, India’s growing labor pool could become more of a liability than an asset.
Consequently, India’s federal government is increasingly looking to the private sector and to foreign players for support in training its massive workforce.
In 2015, the Modi government launched a new initiative titled ‘Skill India’ that seeks to train 400 million Indians by 2022. Complementary initiatives, such as ‘Make in India,’ or ‘Startup India’ aim to create a whole ecosystem of readily available skilled labor, develop supply chains, create manufacturing growth, and boost consumption.
Australian businesses investing in high quality programs training India’s workforce are not only capturing this newly emerging market opportunity. They are building a bigger space for Australian players to be a part of India’s growth over the long term.
In fact, Australian training models and services are already successfully establishing themselves in India. Sydac, a South Australian company, secured a major US$30 million contract to provide simulation training to the state-owned Indian Railways.
The governments of both countries are working together to increase Australia’s presence in India’s higher education and vocational sectors. In 2015, Australia and India signed a Memorandum of Understanding (MoU) on education, training, and research. More recently, in April 2017, Australia brought a Skills Mission to Delhi titled “Skilling a Global Economy.”
Australia is a leader in clean and renewable energy, and India is pushing to dramatically increase its renewable power capacity. A recent Ernst & Young (EY) report showcases India’s move up to the second spot in the ‘Renewable energy country attractiveness index’ 2017 from the third position it held in the last two years.
During the 2015 UN Climate Change Conference in Paris, Indian Prime Minister Narendra Modi announced that his country would add 160 gigawatts (GW) of wind and solar energy by 2022. India has struggled to keep up with these ambitious goals. However, the country is still rapidly expanding both its wind and solar energy production. As of April 2017, India generated 5,400 megawatts (MW) of wind energy and 12 GW of solar energy annually.
Establishing Australian vocational training programs, which teach Indian technicians to maintain and repair wind turbines or solar panels – for instance – will spur increased demand for clean technologies made in Australia. By highlighting and leveraging this kind of expertise, businesses can foster a whole ecosystem of interest for Australian exports.
According to the Australian Trade and Investment Commission’s 2015 International Business Survey, Australian companies identify India as one of its most important – albeit difficult – markets abroad.
How can foreign players make India a more manageable place to do business?
One way is to approach the country on a state-by-state basis.
Each Indian state has its own language, customs, and regulations. Preparing to engage with all 29 states at once will leave foreign businesses overwhelmed and frustrated. Targeting a single state, on the other hand, can make those cultural differences and business barriers feel surmountable.
A great example of this approach is in the sister-state relationship forged between South Australia and Rajasthan; the two states signed an MoU to the effect in 2015.
In a federal constitutional set up, state governments are usually able to implement reforms and streamline bureaucratic procedures faster than the federal government. In India, states often compete with one another for foreign funding by trying to provide the most attractive incentives for doing business within their unique state.
By approaching India one state at a time, Australian businesses will have higher success rates in navigating the country’s business climate. Moreover, a concentrated emphasis on individual states will better showcase Australia’s unique expertise – adding to the country’s ‘brand power’ while integrating Australia into India’s continued growth.
The Eurasian Economic Union and India will sign a deal this Saturday, paving the way for negotiations on a future free trade zone agreement, the Chairman of the Eurasian Economic Commission’s Board Tigran Sarkisyan has said.
Speaking on the sidelines of the St. Petersburg International Economic Forum, Sarkisyan stated, “We announce the start of a negotiation process with an eye on signing a free trade zone pact. Two ministers – the trade ministers of Russia and India – will sign a document on the issue.”
Sarkisyan said he met with Indian Prime Minister Narendra Modi in St. Petersburg. “We discussed trade and economic relations between the Eurasian Economic Union and India. We noted with satisfaction that both sides are interested in signing a treaty of this kind, and the results of a research into the issue demonstrate that it will be a win-win situation for India and the EAEU. We agreed that work should continue to make us prepared for signing this treaty.”
The EAEU is a Free Trade Bloc that includes Armenia, Belarus, Kazakhstan, Krygyzstan, and Russia. It essentially extends from the borders of China to the borders of the European Union.
Connections between India and Russia are improving, although bilateral trade remains low. However, the International North-South Transportation Corridor connects India to Russia via Iran, which is in the process of concluding its own Free Trade Agreement with the EAEU.
Nevertheless, Russian-Indian bilateral trade is moving upwards. Notably, Indian companies in the jewelry sector have expressed interest in the Eurasian Diamond Exchange, which has just opened in Vladivostok. The KGK Group, India’s largest diamond merchants, are spending US$25 million on establishing a facility there. Further, Indian pharmaceutical companies should note that the EAEU has just regulated its common pharmaceutical market, which could have immense significance for Indian access to the EAEU – should the Free Trade Agreement (FTA) reach a conclusion.
Thus far, numerous countries, including China, have expressed interest in an EAEU FTA, while Vietnam has ratified such a deal. That has been a boom for both sides; Russia has invested some US$10 billion into Vietnamese projects and Russian exports to Vietnam have risen sharply since the FTA came into effect in early 2016.
“New Asian trade routes are being established throughout Eurasia”, says Chris Devonshire-Ellis of Dezan Shira & Associates “and India and Russia are no exception to this. The two countries are old friends and although bilateral trade is relatively low, this also means the growth potential is huge, and it is not a crowded market. Russian entrepreneurs should be looking at India and its huge consumer market and competitive manufacturing environment, while India’s entrepreneurs should be examining Russia, and especially trade, e-commerce, and logistics in using Russia as a stepping stone to the EU and China. There are plenty of opportunities in this newly opening trade corridor.”
Narendra Modi landed in Washington D.C. on Sunday, starting off a low-key three-day visit. This is the Indian prime minister’s fourth visit to the US, and first since President Trump’s inauguration.
At the top of Modi’s agenda are India’s concerns over the issuance of H1-B work visas, job creation and American investments, as well as securing and stabilizing a working relationship with the new American President.
Modi’s small-scale interaction with 600 members of the Indian community in Virginia on Sunday contrasted with his extravagant Madison Square Garden address during President Obama’s term – a move analysts are calling tactful, lest it impact more serious matters with President Trump, known for his crowd-size fixation.
Overall, the trip is to be a no-frill, business affair. Modi held a roundtable interaction with 20 CEOs of American MNCs (including Microsoft, Apple, Google, Cisco, and Amazon) on Sunday evening, before heading to the White House for bilateral talks with President Trump on Monday.
While speaking to the American business community, Modi was keen to emphasize that the government had implemented 7,000 reforms for ease of doing business, targeting “minimum government, maximum governance”.
Across industries, Indian companies have paid out lower salary hikes in the last 10 years, which plummeted from 15.1 percent in 2007 to 10.2 percent in 2016. While the sudden decline was a knee-jerk response to the 2008 recession, the last few years of relatively high economic growth has translated into very little in terms of salary benefits. The findings are part of a comprehensive study – India Salary Increase Survey – conducted by the consulting firm Aon Hewitt.
Breaking down these results, the salary increments in real pay are even more subdued when adjusted for inflation and subject to the tax surcharge for employees earning more than US$77,525 (Rs 50 lakh).
Currently, consumer products and life science industries are the market leaders in terms of salary increase in India, while the IT sector has seen a major drop despite being among the largest employers in the country.
The Chinese investment story in India has been a departure from its strategy in other countries, where it is more focused on large-scale infrastructure and energy projects.
Nevertheless, Chinese state-run firms like China Harbour Engineering Co. Ltd and China Datang Corp. (CDC) have now begun to show interest in the sector, looking to acquire Indian companies in the engineering, procurement, construction (EPC) and power generation segments. Yet another state-owned firm, China Southern Power Grid, is in negotiations with Essel Infraprojects Ltd. to be able to jointly bid for power transmission projects in the country.
On a different trajectory is Japan’s investment trends in India – bilateral economic ties have only deepened under the positive influence of business reforms and investor incentive programs.
In a recent interview, the Japanese ambassador to India, Kenji Hiramatsu, reflected upon the growing momentum in his country’s investments into India’s manufacturing sector. Besides their dynamic trade relations, Ambassador Hiramatsu pointed out that Japanese investments to India grew to a total of US$4.7 billion in 2016 – a big increase over US$2.6 billion in the year prior.
Illustrating this confidence is the fact that several Japanese companies have moved their operations or production bases to India. Japanese companies have also begun manufacturing here to export to foreign markets (Maruti Suzuki) or to avoid imports, such as by creating a local spare parts industry – taking advantage of the Make in India initiative.
By Bradley Dunseith, editor, India Briefing
Trade standards create and enforce specific criteria in products and services – quite literally setting the standard. These standards are applicable to both domestic and imported goods; understanding these standards makes exporting goods to India easier.
The Bureau of Indian Standards (BIS) Act, 2016 established the BIS as the nodal national agency for regulating domestic and foreign goods to Indian standards. Trade law in India was also bolstered with increased penalties for the misuse of the Indian Standards Institute (ISI mark) and the mandatory hallmark identification on gold and other precious metals.
The BIS is a legal corporate entity. It comprises of 25 members who represent both the federal and state governments, as well as industry, scientific and research institutions, consumer organizations, and professional bodies. Heading the body is the Union Minister of Consumer Affairs, Food and Public Distribution as its president and the Minister of State for Consumer Affairs, Food and Public Distribution as its vice president.
The BIS is the National World Trade Organization’s Technical Barriers to Trade’s (WTO-TBT) Enquiry Point: an official designation, which puts BIS in charge of responding to both foreign and domestic requests concerning Indian standards. It also notifies the WTO in case of any proposed changes to these standards.
The BIS is solely responsible for operating quality certification plans. Additionally, the Food Safety and Standards Authority of India (FSSAI) regulates the import of articles of food into India.
Under the Bureau of Indian Standards, 2016 Act, the BIS has the authority (pending final approval of the central government) to recognize the mark of any international body on par with the Indian Standard Mark for goods, articles, processes, systems, or services.
According to the BIS annual report for 2015-2016, there were 18,781 standards in effect as of March 2016. Of these, 5,119 Indian Standards have been harmonized with international standards.
The BIS has signed 21 Memorandums of Understanding (MoU) pertaining to the standardization and conformity assessment with their national counterparts in other countries as well as with the International Organization for Standardization (ISO). The BIS has also signed two Mutual Recognition Arrangements (MRA) with Pakistan and Sri Lanka.
Despite these committed efforts towards bilateral standardization, testing, certification, and training – standards in India can conflict with international norms in ways that the United States Trade Representative, along with other foreign governments and bodies, have argued creates barriers to trade.
Additionally, India has, on numerous occasions, failed to notify the WTO of changes to its trade standards in a timely manner or at all. Whether this may be the case or not, any changes or amended bills in India are published in the Gazette of India that can be accessed here.
The Legal Metrology (National Standards) Rules, 2011 – updated in 2013 – stipulate that all pre-packaged commodities are prohibited, unless they are in a standard quantity and carry all prescribed declarations. This sometimes creates problems for manufacturers who do not use metric units.
For example, mandatory package sizes are in metric units in India, whereas, US food products are trypically packaged in fluid ounces, pounds, and pints, as is the case for bottled and canned drinks, packaged biscuits, and bottled vegetable oils.
The Indian rules also state that all products must be labelled with dates of production, importation, and expiration. Further, they stipulate that at least 60 percent of a product’s shelf life must remain at the time of importation.
This stipulation has resulted in Indian custom officials rejecting, and even detaining, unprocessed agricultural products, such as apples and nuts imported into India.
Problems with testing, particularly electronic goods, have arisen for foreign products. In 2012, the Indian Department of Electronics and Information Technology (DEITY) mandated compulsory registration for 15 categories of imported electronic and IT goods.
These goods have to register with BIS laboratories, regardless of whether they already meet internationally recognized quality standards. Furthermore, BIS currently has only eight certified laboratories, risking huge delays for foreign exporters.
India’s trade standards are voluntary with the exception of 109 goods requiring mandatory certification before they are imported into India. Additionally, there are 31 types of electronics or IT goods, which are required to register under the ‘Compulsory Registration Scheme’ before being imported into India.
A complete list of these 109 products can be found here, and covers a range of items from food preservatives, types of cement, electrical appliances, to automobile accessories.
These 109 products must be tested and certified in India and by the BIS. However, a system also exists for foreign companies to receive certification in their home countries. This process involves bringing a BIS inspector to the manufacturer or exporter’s country (paid for by the exporter) and pre-certify the company and its production system. The inspector then authorizes subsequent monitoring by an independent inspector.
Foreign manufacturers and exporters are also required to either maintain a presence in India or else mandate a certified body to ensure standards on their behalf.
By Bradley Dunseith, editor, India Briefing
Between June and August 2016, Chinese firms invested US$2.3 billion into India. To put this in context, mainland China FDI into India totalled US$1.2 billion between April 2000 and September 2015. But Chinese FDI into India was proliferating even before this recent surge.
Chinese investors have been targeting India’s digital sector – a break from China’s FDI trajectories in other Asian markets. In most of Asia, China’s investment focuses on infrastructure, extractive, and manufacturing industries; in India, Chinese investors are strengthening India’s digital ecosystem.
What sparked China’s recent interest in India after over a decade of neglect?
From 2014 to 2015, mainland China FDI into India has grown either by 200 percent or 600 percent – depending on which of the two countries reported it. India’s Department of Industrial Policy and Promotion (DIPP) claimed Chinese per annum FDI rose from US$123.99 million in 2014 to US$494.75 million in 2015; Global Times, China’s state owned media outlet, said the figure rose from roughly US$145 million in 2014 to US$870 million in 2015.
Official records have not been able to keep up with China’s recent increase in investment. Likewise, Chinese firms have not always publicized their investments. However, recent highly publicized investments show China FDI in India is undergoing a sea change.
In the last two years, Chinese firms have invested hundreds of millions of dollars into Indian digital startups. These figures – not yet included into official Indian records – significantly increase the volume of Chinese FDI going into India. It also redirects Chinese investment into a new market.
China’s Indian investments have traditionally been concentrated in the automobile industry and focused in the state of Gujarat – Prime Minister Modi’s home state – among other locations.
But, in the last two years, Chinese firms have diversified their Indian investments into new industries while venturing into other states such as Maharashtra, Haryana, and Andhra Pradesh. Notably, the state governments in each of these states are aligned with the ruling Bharatiya Janata Party (BJP) federal government.
Compare Chinese investments into Indian digital startups with China’s investment history in India. A single investment now overshadows an entire sector.
Chinese investments into India’s digital sector represents a new take on the tried and tested China plus one model – shifting or expanding operations out of China to benefit from cheaper labor, new markets, and less domestic vulnerability.
In three major ways, however, Chinese companies are expanding on the China plus one model to enhance their ability to access Indian markets and deepen their presence in the burgeoning Indian digital sector.
Importing best practices to a similar market
China and India are culturally and politically very different, however, their markets have important similarities. Both countries, for example, have massive populations with many first time cell phone users.
China has already utilized its considerable experience providing smart phones to its own domestic market to win over India’s smart phone buyers. Indeed, Chinese brandsnow account for 51 percent of smart phone sales in India.
Chinese companies can provide Indian digital startups with best practices for meeting the needs of a large-scale, technologically illiterate population. Using their experience from domestic markets, Chinese companies can solidify their presence in India’s digital sector.
Bolstering India’s digital sector
India’s digital ecosystem is in its early stages; Chinese investors have great opportunities to become big players in this growing market. Small and medium enterprises (SMEs) in China will especially find more growth potential in India than in the Chinese digital sector, already controlled by large companies.
By investing in existing digital startups, Chinese companies can minimize the risk and operational costs of establishing an independent, competing presence. Furthermore, it is in China’s interests to see Indian digital startups flourish.
The rise of American e-giants like Amazon and Uber will reduce Chinese companies’ space for international growth and even threaten their strongholds on domestic markets back home. During the war between Didi and Uber in China, for instance, Didi invested an unpublicized amount (estimated at US$10 million) into Ola – an Indian ridesharing startup currently in its own battle with Uber.
Promoting competition in India may save Chinese digital firms long term.
Integrating Chinese knowledge with Indian resources
India has a robust IT industry that operates at cheaper costs than in China. By investing into promising digital startups in India, China is in a unique position to not only help India’s digital sector but to shape it. Chinese investors will then be able to utilize developments and innovations from India back into China’s own digital ecosystem, and vice versa.
For many of the apps Indian startups are trying to develop, a Chinese equivalent already exists. Not only will such knowledge allow Chinese businesses to shape this industry, Chinese companies can integrate innovations from India into their Chinese operations.
Despite the optimistic growth, China’s FDI into India still pales in comparison to Chinese investments throughout the rest of South Asia. Comparatively, China is Pakistan’s biggest foreign investor and has recently pledged a staggering US$55 billion to develop the China-Pakistan Economic Corridor. Bangladesh and Sri Lanka have also recieved significant investment from China.
The increase in Chinese investments into Indian startups, however, marks a change in how Chinese investors perceive opportunities in India. By investing millions of dollars into promising digital startups, Chinese companies are creating a long term presence in India’s burgeoning digital sector.
Chinese companies are using their own experiences in markets domestically and across Asia to penetrate India’s massive consumer market. Simultaneously, Chinese investors are strengthening India’s domestic players at a time they are competing with Western companies.
Following the success of recent investments, China could soon become one of India’s top foreign investors.
By Bradley Dunseith, editor, India Briefing
On June 26, India’s Prime Minister Narendra Modi made his first visit to the White House under Donald Trump’s presidency. The Indian government billed the visit as a “no frills” meeting between the two leaders tasked with forging a new relationship predicated on reaffirming economic ties and shared security concerns.
While Modi’s American visit may have lacked the fanfare of his previous trips under the Obama administration, it was well-timed to greet the new Trump administration and maintain the positive economic and political relations cultivated over the last twelve years.
More importantly, Modi’s visit sought to address key grievances that have emerged in the bilateral ties due to President Trump’s socioeconomic priorities, namely, creating jobs and asserting American interests when drafting trade and business deals.
Further, in meeting with the CEOs of leading American companies, Modi took the opportunity to invite American businesses to partake of India’s improving business landscape.
With Trump’s new ‘America first’ international outlook, foreign investors are looking more closely at Asian economies, including India, to take advantage of concessions and increasingly relaxed trade barriers. At the same time, India is keen on strengthening its economic and business ties with the US. Consequently, India can be expected to interact more directly with America’s private sector for the kind of support previously provided by the US government.
The United States’ engagement with India has warmed up tremendously since the Cold War. Previously, America’s skepticism over India’s ‘non-aligned’ foreign policy and close relations with the Soviet Union ensured strained relations between the two nations. However, in 2005, President Bush was able to achieve a breakthrough in bilateral relations with India, which the Obama administration further developed. This rapprochement was guided by the belief that a strong, prosperous India was strategically important for long-term American interests. Unfortunately, Trump’s foreign policy seems to have moved away from this trajectory.
The Trump plan to revise the H-1B visa program, for instance, has dealt a serious blow to India’s information technology (IT) industry. Trump has criticized the Indian government for maintaining an unfair trade imbalance – a US$24 billion deficit – with the US. Further, he has accused India of receiving “billions” of dollars in return for signing onto the Paris climate change agreement.
Tellingly, in their joint press release on Monday, Modi made no mention of the proposed changes to the American visa regulations. Trump did, however, state that India would work towards removing trade barriers, and added that the two nations would collaborate in balancing the trade deficit. The coming months will reveal if this cautious presentation translates into any major policy departures.
When it comes to matters of national security, Modi and Trump both share similar concerns. The two countries agreed to cooperate on stabilizing Afghanistan and fighting terrorism more broadly.
Increased cooperation in defense was also proposed, and will automatically boost economic ties – given America’s huge defense industrial complex and India’s own ambitions towards developing its defense manufacturing sector.
The US has currently agreed to sell India 22 unarmed drones for its navy to use while patrolling the Indian Ocean to secure maritime trade channels. This is the first purchase of its kind by a non-member of the North Atlantic Treaty Organization (NATO).
In their joint press statement, the two leaders also implied that both countries viewed China’s expanding presence in the Indo-Pacific region as a geopolitical threat.
Before Modi’s meeting with President Trump, the Indian Prime Minister facilitated a roundtable of American CEOs, including Jeff Bezos (Amazon), Tim Cook (Apple), and Sundar Pichai (Google) on Sunday evening.
Modi impressed upon the business leaders that India has liberalized its foreign direct investment (FDI) regulations, streamlined labor laws, improved intellectual property laws, and is about to roll-out a major indirect tax reform in the goods and services tax (GST).
Nonetheless, for many business observers, Modi has yet to live up to the image of the economic reformer he campaigned on. American businesses still experience frustration when entering the Indian market. Conversely, new restrictions on foreign visas have created new obstacles for Indian businesses operating in the US, who currently generate roughly 90,000 jobs for Americans.
In both countries, the rise of right-wing politics has hampered the confidence in globalization – whether through isolationist policies in the US or in the religiously-motivated regulations in India that are antithetical to the expectations of foreign investors.
These changing political conditions present foreign investors and businesses in both India and the US with new challenges and opportunities.
For their part, American businesses and investors can wield more influence by encouraging the Indian government to continue with its economic reforms even as the US government focuses more inward.
In return, American investors and businesses can breathe new life into the Indian government’s array of economic initiatives, such as Make in India, Digital India, Startup India, and the Smart Cities Project.
Similarly, Indian and American businesses can create stronger partnerships – utilizing shared capital and entrepreneurial experience to maintain a hold in both markets. Ivanka Trump – President Trump’s daughter and key advisor – accepted Modi’s invitation to lead the American delegation to the Global Entrepreneurship Summit hosted in India this year. The move demonstrates both governments’ encouragement for private players to foster sustained cooperation, create new jobs, and ensure continued engagement beyond political borders.
Modi’s first US visit under the new Trump administration has finished without any controversy or spectacle.
Both leaders praised one another publicly as well as on social media – a key diplomatic manoeuvre in itself as they both hold a keen online presence.
Modi highlighted both countries’ shared concerns over combatting terrorism and contesting China’s growing political overreach. Importantly, India and the US reaffirmed their defensive cooperation at a time when America is reconsidering many of its own strategic partnerships.
Nevertheless, under the Trump administration, foreign investors will see the US continue to exert pressure on India over its trade barriers. While India may not act as boldly in asserting its geopolitical and economic agenda, cooperation between the Indian government and America’s private sector may speed up otherwise tabled economic reforms and lead to renewed collaboration.