FDI in India: Prospects for Pakistan

Abstract

As India has liberalized its FDI regime for investment from Pakistan, new opportunities have opened up for investment between the two countries. This chapter aims to highlight Pakistan-specific investment opportunities in India. A sectoral approach is employed in this chapter whereby consultations are held with the business community in Pakistan already engaged in outward investments in sectors such as leather, sports, surgical, engineering, auto, education, textiles, and steel about their willingness to invest in India.

This chapter estimates total annual potential of Pakistan investment in India at US$1.6 billion. This is the maximum potential that can be realized if investment is allowed through both government and automatic routes. The textile sector heads the list with potential annual direct investment of US$760 million. The methodology used is twofold. Secondary data analysis is substantiated by in-depth interviews of investors based in Pakistan. This chapter also identifies sector-specific barriers to investment.

Policy recommendations are proposed with an emphasis on its implementation. For effectiveness of SAARC, this chapter also derives lessons that can be learned from ASEAN.

The authors are at the Sustainable Development Policy Institute. We would like to express our gratitude to the Indian Council for Research on International Economic Relations (ICRIER) for their collaboration. We received valuable comments on an earlier version of this chapter at the (a) Annual Conference on “Normalizing India-Pakistan Trade,” organized by ICRIER March 14–15, 2013, and (b) Conference on Regional Trade hosted by the World Bank (Pakistan) with the participation of Pakistan’s Ministry of Commerce and the Pakistan Business Council.

Appendices

Annex I: Select Areas of FDI in India

7.1.1 Automobile

One of the major sectors of India’s economy is the automobile industry, which contributes 22 % of the country’s manufacturing GDP. Among all the FDI inflows into India, the automobile sector contributes 4 %. Data from DIPP shows that FDI inflow in the automobile sector during 2011–2012 was US$923 million. The government of India has allowed 100 % FDI in the automobile sector under the automatic route (except from Pakistan). The automobile industry is fully de-licensed and investors are also allowed free imports of automotive components. Further, there are no minimum investment criteria for investment in this sector.¹³

7.1.2 Biotechnology

India is among the top 12 biotech destinations in the world and ranks second in Asia, after China. DIPP data shows that between April 2011 and January 2012, FDI inflow in the drugs and pharmaceuticals sector was around US$3 billion. FDI up to 100 % is allowed in this sector only through the automatic route (except for Pakistan) in the manufacture of drugs and pharmaceuticals. Given the importance of this sector, India aims to offer grants and tax incentives and is formulating sector-specific investment-friendly regulations.

7.1.3 Cement

After China, India is the second largest cement manufacturer in the world. The demand for cement in India originates from four segments: housing 67 %, infrastructure 13 %, commercial construction 11 %, and the industrial sector 9 %. The government of India is promoting this sector to attract more FDI, and in the budget 2012–2013, the government has exempted customs duty on noncoking coal (earlier it was at 5 %). Given the increasing demand for cement in India and abroad, foreign investors are establishing and expanding their plants in India. The world’s top 10 cement companies have investments in India, and these companies have almost 50 % of the total market size.

7.1.4 Chemicals

In terms of volume of chemical production, India is the 3rd largest producer in Asia after China and Japan. This sector produces about 5 % of India’s total GDP. Between April 2000 and April 2011, India received inflows of US$3 billion. For this sector, 100 % FDI is allowed without license of production. This liberal policy applies to organic, inorganic, dyestuff, and pesticides. Foreign investors are making substantial investments that, in turn, have resulted in making the chemical sector’s contribution to Indian exports a little over 13 %.

7.1.5 Civil Aviation

This sector, while retaining its strategic importance for India, has led to substantial job creation. India has become the fastest growing aviation market and expects to become the 4th largest by 2020. This sector is open and 100 % FDI is allowed under the automatic route, but those who want to make investments beyond 74 % in the existing airports are required to get approval from the Foreign Investment Promotion Board (FIPB). There are 136 airports in India, and the government is encouraging private investments in airlines and airport infrastructure.

7.1.6 Education

The 2011 census shows that the literacy rate in India is 74 %. The male literacy rate is 82.14 % and female literacy rate is 65.46 %. About 546 million people are under 25 years of age, which offers huge potential in the education sector for foreign investors.

There are two segments of education in India: core and noncore. Primary, secondary, and higher education are in the core segment, whereas preschools, coaching institutes, and vocational training come under the noncore segment. In 2010, the education sector’s total worth was around US$25 billion. A report by Grant Thornton entitled “Education in India: Securing the Demographic Dividend” finds that the vocational segment is emerging as a substantial market and it grew rapidly to US$3.6 billion in 2012.

Currently, the percentage of students who go in for higher education is 12.4 %. The Ministry of Education aims to increase this ratio to 30 % by 2020. By reaching this goal, according to the Ministry of Education, India will need 800 more universities and 35,000 colleges. This requires an investment of US$150 billion during the next 10 years in the higher education sector. DIPP data shows that the total FDI inflows into the education sector from April 2000 to April 2011 remained at US$410 million. The current policy allows 100 % FDI in the education sector, and the government is promoting public-private partnership for maximum enrolment of students and the provision of quality education.

7.1.7 Food Processing

The food processing industry in India contributes 32 % of value added in India’s total food sector. Being one of the largest industries of India, it is worth US$121 billion with an annual growth of 10 % and is expected to reach US$194 billion by 2015. It also contributes about 14 % of the manufacturing sector’s GDP, 13 % of India’s exports, and 6 % of industrial investment. India’s potential in food processing also originates from its natural endowments. The country is the largest producer of wheat and rice and also contributes about 10 % of global fruit production. Further, 17 % of the country’s total expenditure on food goes to milk and milk-related products. For producing agriproducts, meat products, marine, and milk and milk products, 100 % FDI is allowed under the automatic route. There is no import duty on capital goods and raw material for 100 % export-oriented units. The earnings from these exports are exempt from corporate tax, and also 100 % tax exemption for 5 years is allowed. The government has allowed mega food parks to be set up across the country. Numerous foreign investors already have investments in India, either directly or in partnership with Indian businessmen.

7.1.8 Gems and Jewelry

India is the largest consumer of gold and currently consumes more than 20 % of world’s total gold. It is also the world’s largest polishing and cutting center for diamonds. In 2011, the market size of the gems and jewelry sector was US$30 billion (as noted by the Gems and Jewellery Export Promotion Department) and is expected to reach US$45 billion by 2015. Currently, the sector provides employment to 1.8 million people and aims to increase jobs to a further 1.1 million people in the next 5 years. The total FDI inflows in this sector between April 2000 and April 2011, as per data from the DIPP, remained at US$302 million. For the promotion of investment in this sector, Gems and Jewellery Special Economic Zones (SEZs) have been set up.

7.1.9 Healthcare

Indian health sector consists of subsectors, including hospitals, medical infrastructure, medical devices, health insurance, clinical trials, telemedicine, outsourcing, and medical equipment. In 2010, the healthcare industry was worth US$40 billion and is expected to grow to US$100 billion by 2015 and to US$276 billion by 2020. DIPP data shows that between April 2000 and April 2011, total FDI inflows in this sector were US$1 billion. The government is facilitating foreign investors by reducing import duties on medical equipment to 7.5 % and introducing a number of other tax incentives. The government has also reduced the customs duty to 5 % from 25 % on life-saving medical equipment.¹⁴

7.1.10 Information Technology

India is one of the biggest destinations for global IT and ITeS outsourcing and contributes about 55 % of the global sourcing market. India is the preferred destination for companies that are seeking to offshore IT and back-office functions. India is also known for its successful export-led software industry. The IT sector is the biggest employment generation sector in the country. Between April 2000 and March 2011, the IT sector inclusive of computer hardware and software received total FDI of US$10.7 billion. The government has created Special Economic Zones (SEZs) and Software Technology Parks (STPs). Numerous benefits have been provided to these STPs, including exemptions from excise duty, service tax, and rebate for payment of Central Sales Tax (CST).

7.1.11 Media and Entertainment

India has one of the largest media and entertainment sectors, which comprises the film industry, print, music, and radio. In terms of volume, India is the biggest film producer in the world, as it produces more than 1,000 films in all languages every year. Currently, a large part of investment is desired to upgrade the equipment being used in various subsectors. Investment is also required in capacity building of the support staff working in the media and entertainment industry.

7.1.12 Mining

The mining and quarrying sector contributes about 2.5 % of India’s GDP. India produces 87 minerals and the total value of mineral production was estimated at US$41.8 billion during 2010–2011. Major investments in this sector have come from Canada and the USA, followed by Australia, the UK, and South Africa. Given the growth in the construction sector, it is expected that mining activity will expand.

7.1.13 Pharmaceuticals

The pharmaceutical industry of India, which is technologically strong and self-reliant, is the 3rd largest in the world. The industry is growing at about 10–11 % per year. DIPP data shows that this sector attracted FDI worth US$1.9 billion between April 2000 and March 2011. The government is encouraging greater investment toward research and development in pharmaceuticals. Further, more capital injection is required for testing laboratories.

7.1.14 Telecommunications

The telecommunications sector is the second highest recipient of FDI and attracted 8.5 % of the total inflows into India between April 2000 and July 2011 (with an amount of US$12.3 billion). Currently, 74 % to 100 % FDI is allowed for various telecommunications services. With this, up to 100 % FDI is allowed under the automatic route for the manufacture of telecommunication equipment. With a young population, India is yet to have complete access to telecommunications across the length and breadth of India.

7.1.15 Textiles

The textile sector at present contributes almost 14 % to industrial production, 4 % to GDP, and 17 % to the exports of India. After agriculture, the textile sector of India is the second largest employment generation sector, providing direct employment to more than 35 million people. From April 2000 to April 2011, the total FDI inflow into this sector was US$959 million. A dedicated Ministry of Textiles has been set up, and the FDI cell at the Economic Division of India also attaches importance to this sector through supplementary policies.

Annex II: Sectors and Origin of FDI in India

Table 7.3 FDI sectors in India (April 2000 to March 2013)

Table 7.4 Top 20 countries’ FDI in India (April 2000 to March 2013)