X Chapter 1
India and the World
Go YamadaPrincipal Economist, Japan Center for Economic Research
Shujiro Urata
Professor, Waseda University, Graduate School of Asia-Pacific Studies
Research Fellow, Japan Center for Economic Research
Makoto Kojima
Professor, Takushoku University, Faculty of International Studies

General Overview
1. Omnidirectional diplomacy emphasizing the economy and practical benefit
After independence in 1947, India has upheld national unity, the promotion of development, andthe like while adopting an extremely inward-facing industrial policy including raised tariffs andvarious import bans as a result of a backlash against the many years of colonial domination and apolitical agenda of protecting domestic industry.

In foreign policy, Jawaharlal Nehru, India’s first

Prime Minister, met with Chinese Premier Zhou Enlai in 1954, and announced the historic “Five
Principles of Peaceful Co-Existence.”

The following year, the Asian–African (AA) Conference of

29 emerging countries was held in Bandung, Indonesia, and India began exerting a large presence asa part of the Third World during the Cold War.
China.

However, in 1962, armed conflict broke out with

Against the closer relations between the US, China, and Pakistan within the Cold War

entering the 1970s, India grew closer to the Soviet Union.

The Indo–Soviet Treaty of Friendship

and Cooperation was concluded in August 1971, and the close relationship with the Soviet Union
would continue for a long period thereafter.

In October 1990, with suspicions over Pakistani

nuclear development, the George H. W. Bush administration in the US halted aid to Pakistan.

This

triggered India’s approach towards the US and the West, a trend that became decisive the following
year as a result of the disruption and collapse of the Soviet Union, which had been friendly to India.
Meanwhile, as a result of opening the manufacturing industry to foreign capital through theeconomic reforms that started in 1991, manufacturers from Japan, the US, and Europe ramped up
business in India, such as with the re-entrance into India after a hiatus of about 40 years of America’s
General Motors in 1994 and Ford in 1997.

Thereafter, relations with the West deteriorated once

again due to India pushing forward with nuclear tests in 1998, and economic sanctions such as
limitations on trade and investment as well as the cessation of aid were imposed by the West andJapan.

However, after 9/11, by cooperating on all fronts with the War on Terror led by the US in

Chapter 1│India and the World1

locations such as Afghanistan, India was able to have the economic sanctions lifted after only three
years.
Afterwards, under the Bharatiya Janata Party (BJP) administration, Prime Minister Atal Bihari
Vajpayee visited China and also achieved the restarting of comprehensive talks as part of the
India–Pakistan peace process, taking a big step towards improving relations with China and Pakistan,which could be referred to as former bitter enemies of India.

Furthermore, India contributed to therebuilding of the South Asian Association for Regional Cooperation (SAARC), which had been
dysfunctional, and strove to found a regional development fund and to realize the concept of a South
Asian University.
The major characteristics of Indian diplomacy from the year 2000 were a departure from thehostility and opposition of ideology and border disputes, and the revealing of a realistic course
pursuing the practical benefits necessary for economic development.

Relations with theUS—which had once taken the lead in imposing economic sanctions on India—improved anddeveloped at a surprising pace, and India even realized the historic US–India Civil Nuclear
Agreement despite being an outlaw from the Nuclear Non-Proliferation Treaty system.

Table 1.1: The state of India’s omnidirectional diplomacy
Japan
USA

AfricaEuropeRussiaGulf Arab States

South Asian Countries(Pakistan, Sri Lanka,
Bangladesh, etc.)
ASEAN (Thailand,
Indonesia, Singapore,
Malaysia, etc.)
China

South Korea

Economic relations are finally becoming full-fledged through the launch of an EPA.
There are great hopes for contributions in infrastructure and the like.
The largest partner in nuclear power, the military, science and technology, and the like.
The Indian government is also giving relations to the US the most importance, there arehopes for high-tech cooperation in supercomputers and the like, and US banks are aiming
at India’s financial market.
A frontier for Indian corporations that holds promise as a supplier of oil and mineral
resources. Relations are being strengthened in competition with China.
There has been about a 100-year relationship with firms from the UK, France, Germany,and the like. EPA negotiations are running into difficulties at the end stage.
Traditional friend. In recent years, cooperation is accelerating in the field of energy, suchas nuclear power and oil.
Remittances by 4 million migrant Indian workers are valuable foreign currency. Also,
the single largest supplier of oil and gas. Recently, investment by Indian corporations is
expanding. There is also the Indian community from the era of the British Empire.
The activities of intra-regional cooperation organization SAARC are finally being
implemented. Signs of thawing relations with Pakistan.
The core of India’s Look East policy. An India–ASEAN FTA was launched in January
2010.
Resolving the border dispute was deferred, and practical diplomacy was deployed centeredon the economy. Bilateral trade exceeds $60 billion. Recently, investment is also
gaining momentum.
Has a large presence in household electronics, automobiles, and the like. Launched an
India–Korea EPA in January 2010 ahead of that with Japan.

Japan Center for Economic Research “Asia Research” Report2In particular, having been overcome by the People’s Liberation Army during the armed conflict in
1962, a national trauma to the Indian people, the Indian government first agreed on a framework forresolving border problems with respect to relations with China, and chose to defer conflict resolution
in favor of the practical benefits resulting from trade and investment.

Also, the opaque andexclusionary treatment of proposals to invest in India by Chinese corporations, which had been a
diplomatic issue, has been largely resolved over the past few years. The value of Indian–Chinese
trade passed 60 billion dollars in fiscal year 2010, and the movement of Chinese corporations
towards foraying into/expanding their base in India, being commissioned for projects, and the like isexpanding, as if to attempt to catch up with investment in China by Indian corporations, which had ahead start.
This kind of diplomatic strategy emphasizing the economy has also appeared in India’s Free Trade
Agreement (FTA) and Economic Partnership Agreement (EPA) strategy.

In 2010, EPAs with South

Korea and the Association of Southeast Asian Nations (ASEAN) came into effect, and an EPA withJapan came into effect in August 2011. Currently, FTA negotiations are progressing with theEuropean Union (EU) as well as the Gulf Cooperation Council (GCC), which comprises six Araboil-producing countries, and signing an FTA with Australia is also being considered.
In a speech in October, US Secretary of State Clinton spoke of India’s economically-focusedpractical diplomacy, stating that “India and Brazil put economics at the center of their foreign
policies,” and that the US should learn from this.

It can be understood that India has beentranscending the barriers of ideology and differences of opinion, choosing/implementing the bestforeign policy for economic growth and developing the results into an “omnidirectional” diplomacy.
This itself can be considered a new thinking in foreign policy that India has finally reached.

2. The major countries pay attention to India
With a population of over 1.2 billion, and with the high likelihood of developing a middle class ofover 400 million people by 2020, India has been garnering global attention.

This is not only due tobeing an enormous promising market, but also for being an export base towards Africa, the Middle
East, and Europe, taking advantage of the manufacturing foundation, in addition to being a researchand development base that takes advantage of the excellent scientific human resources.

Along with

China, India quickly emerged from the global economic downturn caused by the Lehman Shock, andhas once again recovered to a trajectory of high growth.
Against this backdrop, the leaders of the major countries have been visiting India one after anothersince 2010. In July 2010, British Prime Minister Cameron visited India along with executives fromover 50 UK companies, and succeeded in receiving a large order for military aircraft and the like.
The following November, US President Obama visited India along with about 200 top personnel

Chapter 1│India and the World3

from powerful corporations such as General Electric and PepsiCo.

They stayed in India for fourdays, and agreed on business deals totaling 10 billion dollars.

It was highly unusual for a US

president to visit India during the first half of his term in office.

Next, in December, French

President Sarkozy, Russian President Medvedev, and Chinese Prime Minister Wen Jiabao visited
India, followed by Indonesian President Yudhoyono in January 2011.

This once again made an

impression of popularity and strong influence.
Indian Prime Minister Singh, who is nearly 80 years old, has tirelessly travelled abroad, visiting
the US and Brazil in April 2010, speaking with the leaders of the BRICs at the latter.

He visited

Europe in December, and attended the BRICs summit held on Hainan Island in China in April 2011.
The details will be discussed in Chapter 4, but Prime Minister Singh attended the Second
India–Africa Forum Summit in May in Ethiopia, and clarified a stance of placing importance on
Africa, such as by unveiling an aid package to the tune of six billion dollars.

3. The importance of India
The Indian government is engaging in easing restrictions on foreign investment and supporting
exports and production, and has begun to be serious about introducing more foreign capital from theEuropean governments than before.

Looking at the private sector, active movements continue to be

seen not only in manufacturing, but also the service industry, in which new services are beingcommercialized one after another, and the energy/infrastructure sector, such as building power plants
and maintaining roads and harbors.

There is no debate that in order to survive, Japan and Japanesebusinesses must incorporate India’s growth potential through trade, investment, and technicalcooperation. What is important here is that India’s diplomatic strategy is currently placing more
importance on economic growth than on international political power games or ideologies, andIndia’s policies for diplomacy with Japan are also determined based on a comprehensive judgment of
the relationship with the US, Europe, and the Asian countries such as China from the point of viewof the national interest.

On this point, multifacetedly analyzing/verifying India’s current and future

diplomatic strategy will become all the more important for the creation of an Indo-centric overseas
strategy by Japanese businesses, as well as for policymaking in support of this.

4. India’s full-fledged entrance on the international economic stage
Since WWII, India has long been a participant in international agreements and bodies such as theGeneral Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), theInternational Monetary Fund (IMF), and the World Bank, but has mostly been uninvolved in thecreation and operation of these organizations and institutions.

Japan Center for Economic Research “Asia Research” Report
4

Also, since the 1970s, many summit

meetings have been organized, such as the G7 summit meeting of industrialized nations, and India
has come to participate in meetings such as the G8+5, the East Asia Summit, and the BRICS Summit.
Among these summits, India’s participation in the G20 summit, which began in 2008, has beengarnering the most attention.

In the backdrop to India participating and drawing attention in theseinternational frameworks of course lies India’s steady economic growth of recent years.

India hasbeen increasing its presence in the global economy by maintaining a high level of growth, and has
begun to take the position of generally representing the emerging countries.

5. India representing the developing countries in the WTO
5.1

India’s assertions in the WTO

India’s basic standpoint in the WTO is to obtain special and differential treatment (S&D) for thedeveloping countries.

S&D refers to granting the right for developing countries to implement

measures that favor developing countries, and granting the right for developing countries to receive
such treatment from the advanced countries.
problems is being watched.

Also, opposition with the US over agriculturalth

The 5 WTO Ministerial Conference was held in Cancun, Mexico in

September 2003 with the aim of furthering the Doha Development Agenda (DDA)1, a multilateral
trade negotiation under the WTO that began in 2001. There, India formed the Group of 20
developing nations (G-20)2 along with Brazil, and from the US and Europe, requested theliberalization of the agricultural markets and the abolishment of agricultural support policies of theadvanced countries. This request was not fulfilled and the DDA stalled.

Also, at the WTO

Ministerial Conference held in Geneva in July 2008 with the aim of restarting the stalled WTO
negotiations, India and the US were opposed on the conditions for triggering the Special Safeguard
Mechanism that can be used only by developing nations when imports of agricultural products surge,
and so DDA negotiations were not able to be restarted.

5.2 The role desired of India and an expansion of its voice
A number of factors can be considered to lie in the background to the expansion of India’s voice in
the WTO.

One factor that can be cited is that India itself came to be actively involved in WTO

negotiations.

Initially, India did not actively participate in negotiations, but it learned that avoiding

WTO involvement was disadvantageous.

Also, there were cases where exports from India wererefused due to strict sanitation/environmental standards and anti-dumping measures.

Due to thisexperience, India realized that active participation in WTO negotiations and discussions was
1
2

Also called the Doha Round negotiations.
The G-20 in the WTO differs from the previously mentioned G20, and constitutes the following 21 countries:
Egypt, Nigeria, South Africa, Tanzania, Zimbabwe, China, India, Indonesia, Pakistan, the Philippines, Thailand,
Argentina, Bolivia, Brazil, Chile, Cuba, Guatemala, Mexico, Paraguay, Uruguay, and Venezuela.
Chapter 1│India and the World5

necessary in order to protect its policy freedom.3

Other factors that can be cited include thatdeveloping countries began to actively state their opinions regarding development issues and that the
number of developing countries among the WTO participants has increased.
The presence of the Indian economy—as it has been sustaining a high level of growth in recent
years—in the global economy has been rapidly expanding. Goldman Sachs (2007) predicted that in
2050, India will be the third largest economy in the world after China and the US. It is hoped thatIndia, which will become an economic power, will promote market liberalization andcreate/administer rules in the WTO, and in terms of international finance, that it will contribute to
the building, maintenance, and operation of an international economic environment in which theglobal economy can continue to grow steadily, such as by supplying funds andcreating/administering rules.

There are also hopes for India’s strict compliance with theadministration of institutions and its intellectual contribution towards the rebuilding of institutions inforums for debate such as the G20 Summit, the East Asia Summit, and the BRICS Summit.

6. Trade policy
6.1

Trade policy

The open door for trade and foreign investment caused the Indian economy to directly face thecurrents of globalization, and has played an important role in orienting it towards being more of amarket economy.

After independence, India was consistent for a long time in its protectionism thatshielded domestic industry from competition from imported goods, but trade liberalization has
steadily progressed, triggered by the 18-19% devaluation of the currency exchange rate in July 1991
and the large decrease in export subsidies.

The import tariff rate (weighted average) was 77.2% in

fiscal year 1991, but had been cut back to 26.8% by 1997.

Although the tariff rate temporarily rose

again thereafter, it has declined to 7.0% by fiscal year 2010. However, India’s tariff rates remain at
a high level compared with the ASEAN countries.
Also, due to the abolishment of quotas, imports have surged.
4

implementation of antidumping measures by India.

A result was an increase in

Incidentally, there were 613 cases where India

applied antidumping measures from 1995-2010, exceeding the 442 cases by the US to stand as thecountry that has invoked antidumping measures the most often in the world.

The dual exchange

rate system was abolished in March 1993, achieving convertibility of the rupee on trade account, andIndia became compliant with IMF Article 8.
Along with the introduction of trade liberalization, there were hopes in India for an expansion ofexports, but it was only after entering the 21st century that this effect materialized. After
3
4

See Cox (2010).
Krueger (2008).

Japan Center for Economic Research “Asia Research” Report6independence, India adopted a closed foreign policy under a mixed economic system, andfurthermore, as it was thorough in protecting domestic industry, prioritizing the securing of
employment, its international competitiveness fell precipitously, resulting in effects that lingered
even after the economic reforms.

6.2

Trade achievements and outlook

Since 1991, amidst India’s deployment of outwardly oriented policies, its exports have come to
exhibit relatively satisfactory growth.

India’s exports have exhibited a yearly average growth rateof 10.6% during the period from fiscal year 1991 to 2000, and furthermore have exhibited a rate of
22.0% during the period from fiscal year 2001 to 2010.

Exports in fiscal year 2010 grew 22.5%

year-over-year, reaching $245 billion, exceeding the target of $200 billion.
imports reached $380 billion, leading to a trade deficit of $135 billion.

On the other hand,

Incidentally, the trade

deficit with China, India’s largest source of imports, reached a level exceeding $200 billion.
trade deficit is offset by “invisible trade.”

This“Invisible trade” consists of service trade, inward

remittances, and investment income, and marked a $86.2 billion surplus in fiscal year 2010.
As the Indian economy has become more externally oriented, its export dependence (commodity
exports/GDP) has also followed a consistently rising path.

Export dependence rose from 6.4% in

fiscal year 1990 to 10.7% in 2001, and 15.6% in 2010 (see figure 1.1).

Also, India’s share of global

exports rose from a mere 0.5% in 1990 to 0.7% in 2000 and 1.3% in 2009.

Figure 1.1: India’s Export Trend(Billions of dollars)

Source: Ministry of Finance, Economic Survey (various issues)

Chapter 1│India and the World
7

India is a country characterized by diversity in all manner of fields, and this diversity can also beseen in the makeup of exported goods and the makeup of trade partners.

Looking at India’s main

export goods, there is a trend towards various industrial goods such as steel/steel products,
automobiles, and automobile parts rising as commodity exports, reflecting the progress ofindustrialization (see table 1.2). However, the only items having a share exceeding 10% of overall
exports are oil and petroleum products as well as precious stones and jewelry, so overall there is adiversity of exports.

Although there are 12 items such as precious stones and jewelry, silk, carpets,

cotton, artificial fibers, coffee/tea/spices, and slag for which India has at least a 5% share of global
exports, the value of exports for each category excepting precious stones and jewelry is small, andthese items are products for which there are not particularly great expectations for future growth.5
In fact, it is hard to say that the diversification of export goods from India has strongly reflected the
trajectory of global demand.
The diversification of trade has also been reflected in the makeup of India’s trade partners.
Conventionally, India’s largest trade partner was the US, but in recent years, the United ArabEmirates (UAE) and China have rapidly grown in importance, and the current top three trade
partners are the UAE, China, and the US.

The top 10 trade partners are not biased to a particularregion, instead being scattered across East Asia, North America, ASEAN, East Asia, and Europe(see table 1.3).

Table 1.2: India’s Main Export Items (FY 2010)
Value

Component
Ratio

Growth Rate

(millions ofdollars)(%)(%)

Oil and Petroleum Products

42,491

16.9

46.3

Precious Stones and Jewelry

40,05816.0

37.2

Steel and Steel Products

17,112

6.8

200.2

Apparel-related articles

14,247

5.7

16.9

Automobiles and Automobile parts

11,301

4.5

83.2

Electronic Equipment

10,8394.3

49.9

Machinery and Equipment

8,966

3.6

24.7

Organic Chemistry Products

9,139

3.6

22.6

Copper and Copper Products

8,111

3.2

350.0

Pharmaceuticals

6,543

2.6

26.1

Total (including other items)

251,136100

40.5

Top 10 Items

Source: Ministry of Commerce and Industry, Export and Import Data Bnak
5

Ministry of Finance (2011).

Japan Center for Economic Research “Asia Research” Report8India has posted a large deficit of around $100 billion every year in recent years in terms ofcommodity trade, but inward remittance and trade in services has been taking on the role ofoffsetting this.

Service exports marked a 38% increase year-over-year to $132 billion in fiscal year

2010, even reaching a scale corresponding to fully half of commodity exports.

Service exports

consist of tourism, transportation, IT services (software services), business services, and financial
services.

Among these, IT services makes up over half of overall service exports, constituting thenucleus of service-led growth since the 1990s.

In the expansion of IT service exports, the Software

Technology Parks (STPs) established across India have played a large role.

7. FTA／EPA strategy
7.1

Look East policy

The Indian government has been setting a goal of expanding commodity exports to $600 billion in
fiscal year 2014, aiming to be an important player in the global economy.

There are a host of tasks,

such as dealing with the undeveloped infrastructure, including railways, roads, and ports, therevision of rigid labor regulations, and the reform of the bureaucracy.

Nonetheless, thecompetitiveness of Indian industry has been gradually strengthening under economic liberalization,and there is a trend of further promoting economic globalization.

Amidst these circumstances,

India has been strategically emphasizing the strengthening of relations with East Asia.

Since

introducing economic reforms in 1991, the Look East policy has come to be advocated in India, andthis has been reflected in reality in the form of the FTA/EPA strategy. Under its omnidirectional
diplomacy, India is widely involved in FTA/EPA negotiations with many countries and regions, but
the ones which have thus far been concluded and implemented are with countries/regions including
Sri Lanka, Singapore, ASEAN, SAARC, South Korea, Japan, and Malaysia.
India’s first FTA can into force in the year 2000 with Sri Lanka.

The reduction in tariffs for thetarget products is already complete, and negotiations are currently underway regarding aComprehensive Economic Cooperation Agreement (CECA), which includes services and investment.
The South Asian Free Trade Area (SAFTA), which comprises the seven SAARC countries, started in
2004, and the intra-regional tariff rate will be decreased to no greater than 5% by the end of 2012 forIndia and Pakistan, and by the end of 2013 for Sri Lanka.

Chapter 1│India and the World
9

Table 1.3: India’s main trade partners and export/import ratio
Share of Overall Trade

Export/Import Ratio

FY2008FY2009FY2010FY2008FY2009FY2010

１．UAE

9.9

9.3

10.1

1.0

1.2

1.0

２．China

8.6

9.1

10.1

0.3

0.4

0.5

３．USA

8.1

7.8

7.3

1.1

1.2

1.3

４．Saudi Arabia

5.1

4.5

4.1

0.2

0.3

0.4

５．Switzerland

2.6

3.3

4.1

0.1

0.0

0.0

６．Hong Kong

2.7

2.7

3.2

1.0

1.7

1.1

７．Germany

3.8

3.4

3.0

0.5

0.5

0.6

８．Singapore

3,3

3.0

2.8

1.1

1.2

1.4

９．Indonesia

1.9

2.5

2.6

0.4

0.4

0.6

10．South Korea

2.6

2.6

2.4

0.5

0.4

0.4

Total

100.0

100.0

0.6

0.6

0.7

Source: Ministry of Finance, Economic Survey 2010-11; Ministry of Commerce and Industry, Export and Import
Data Bank.

A CECA was established with Singapore in 2005, containing a bilateral investment agreement, adouble taxation avoidance agreement, an air services agreement, the movement of people, and themutual authentication and qualifications, far exceeding the scope of an ordinary FTA.

A

Framework Agreement on Comprehensive Economic Cooperation was signed with ASEAN in 2003,
and an FTA came into force in January 2010 based on it.

As a result, India’s basic tariff rate forindustrial products from ASEAN, including finished products and components, was lowered from
7.5% in January 2010 to 5% in January 2011.

Also, it is expected that tariffs on items making up

80% of the value of two-way trade will be abolished. However, agricultural products, automobiles,
sertain automobile parts, and the like are considered exceptions and are not included.
An EPA came into force in January 2010 with South Korea, with which the economic relationshipis rapidly expanding.

This includes products, services, and trade facilitation measures.

As a result,India will reduce/abolish tariffs on items making up 85% of the value of imports from South Korea,
and South Korea will reduce/abolish tariffs on items making up 93% of the value of imports from
India.
Furthermore, a comprehensive EPA came into effect with Japan in August 2011.

Over the next

10 years, Japan will eliminate tariffs on approximately 97% of the value of imports from India, andIndia will abolish tariffs on approximately 90% of the value of imports from Japan. The items ofIndia’s concessions include automobile parts, steel products, electric/electronic components, andJapan Center for Economic Research “Asia Research” Report10general machinery.

For steel products in particular, the elimination of tariffs will be within 5 years,

and there are hopes for the effect that this will bring about.

The Japan-India EPA covers many

areas, such as trade in services and the movement of people, but the treatment of generic drugs isparticularly noteworthy. Conventionally, the import of generic drugs from India was difficult inpractice, but as the agreement provides national treatment to requests for registration/approval for
generic drugs, there are hopes for the possibility of a future expansion in these being imported from
India.
Also related to the Look East policy is the launch of a CECA with Malaysia in July 2011.
Furthermore, an FTA framework agreement with Thailand targeting 82 items as an early harvest
scheme was implemented starting in 2004, and negotiations aiming for a comprehensive FTA are
currently underway.

7.2

Discussions towards signing an FTA with Indonesia have also already begun.

A new direction

Outside of Asia, India is in the midst of FTA negotiations with the EU, the Gulf Cooperation
Council (GCC), and the Southern African Customs Union (SACU).
newly begun with Australia.

Also, FTA negotiations have

Already, a Preferential Trade Agreement (PTA), which aims to

reduce/eliminate tariffs on a subset of goods, has come into effect with Mercosur (Common
Southern Market) and Chile.

Although the Look East policy has its own momentum, on the other

hand, the simultaneous deployment of the omnidirectional diplomacy on a global scale is part of thedepth of India’s foreign policy.

Additionally, FTA negotiations with the EU began in 2007, anddiscussions are continuing regarding a broad range of fields including commodity trade, service
trade, the movement of people, intellectual property, and defense.

As of February 2012, there is adifference of opinion regarding intellectual property rights for agricultural products and genericdrugs, import tariffs on completed vehicles, immigration of professionals, global warming
countermeasures, child labor, and the like; the debate is encountering difficulties, but India is
optimistic of a settlement within 2012.
Another notable point is the movement towards better relations with neighboring countries such as
Pakistan and Bangladesh.

South Asia’s share of India’s overall trade has been extremely small to

begin with, at 5% of overall exports and a mere 0.6% of overall imports.

For example, bilateral

trade with the major neighboring country of Pakistan in fiscal year 2010 was $2.3 billion in exports
to Pakistan and only $0.3 billion in exports from Pakistan to India.

India had already granted Most

Favored Nation status to Pakistan in 1996, and although Pakistan revealed the position that it would
grant India Most Favored Nation status at the end of 2011, the implementation appears as though it
will take some time due to domestic affairs.

However, if SAFTA starts functioning in a healthymanner, it will likely have a positive effect on the entire South Asian economy.

Chapter 1│India and the World11

8. Foreign capital policy
8.1

Inward investment policy

After independence, India held to a cautious stance towards inflows of foreign capital, butcurrently 100% foreign direct investment (FDI) through automatic approval rules is recognized in a
majority of areas.

FDI is prohibited in the retail business of “multiple brand” products, nuclear

energy, the gambling industry, housing/real estate (excluding construction for urban development),
plantations, and the like, and in a number of industries such as insurance and communications, there
is an upper limit set for the foreign capital contribution ratio.
In India, unlike in China, foreign capital is not extended super-national treatment that gives
preferential treatment above that of domestic corporations, but ultimately stops at granting national
treatment.

Since the Manmohan Singh administration launched in 2004, no large developments

were seen in India’s foreign capital policy, but recently, a number of notable movements have cometo be seen that further promote liberalization of foreign capital.

In March 2011, stock conversion ofimported capital goods was recognized, and existing partnership agreement regulations (NOC =No
Objection Certificate rules) were eased. As a result, contributions in kind of foreign capital wererecognized, and prior authorization when altering capital/technology partners within the same
industry became unnecessary.
In November 2011, the Indian government issued a cabinet resolution recognizing the introductionof up to 51% foreign capital in retail industries involved in multiple brands (so-called supermarkets
and department stores).

As of February 2012, this has been shelved due to intense hostility fromthe opposition parties, but the government has not changed its forward-facing stance towards
liberalization.
Through the 1990s, when India embarked on liberalization of foreign capital, the inflow of foreign
capital was not particularly active, and India played second fiddle to the East Asian countries. Thiswas because although India has an abundant labor force, it lacked the merit of being able to be used
as an export base.

Rigid labor regulations remained that caused difficulty in corporations

withdrawing or adjusting employment, which was a factor causing corporations to hesitate to foray
into India.

Also, in the Special Economic Zones (SEZ), which support foreign companies, there

were problems being faced of site acquisition and undeveloped infrastructure, and the situation wasthat they could not be thoroughly functional as export bases.
However, with India’s sustained high level of growth and the expansion of each industrial sector,
its importance as an enormous market and as a production base has suddenly come to draw attention.
FDI, which had been trending at a scale of an annual average of $4.0 billion dollars in the first halfof the 2000s, jumped to $15.7 billion in fiscal year 2006.

Portfolio investments also reached $11.4

billion in fiscal year 2003, and with some fluctuation, have continued an expansion trend .

Japan Center for Economic Research “Asia Research” Report
12

8.2

Outward investment

Since the dawn of the 21st century, outward FDI by Indian corporations also exhibited a marked
expansion as if to keep pace with the expansion in inward FDI.

The expansion of Indian outward

FDI is closely linked to the regulatory easing of outward investment policy.

Together with theeconomic reforms introduced in 1991, the liberalization of outward FDI was discussed, and overseas
transfers based on automatic approval rules were recognized in 1992.

In 2002, the upper limit forinvestment was raised to $100 million, and de facto liberalization measures were introduced in 2003.
In other words, the upper limit for investment based on automatic approval rules was set at 100% of
net assets, and this was further raised to 400% in 2008.

Figure 1.2: Indian inward/outward investment(millions of dollars)

Source: RBI, Department of Commerce(fiscal year)

A further characteristic of Indian outward FDI is that the destination of investment is not limited
to developing countries, but extends widely to the advanced countries, also including the result ofmergers and acquisitions to a large extent.

An exemplar can be seen in the active and resoluteactions by the Tata Group, which has been leading Indian outward FDI.

Starting with Tata Tea’s

acquisition of England’s Tetley tea company in the year 2000, outward FDI has been developingwith many mergers and acquisitions including Tata Steel’s acquisition of Europe’s number two steel
company, Corus, in 2007, as well as Tata Motors’ acquisition of global luxury auto brands Jaguar
and Land Rover in 2008. FDI based on M&A can acquire a sales network, technology, and abrand—the wellspring of competitiveness—as a package.

The fact that Indian corporations are

acquiring companies in advanced countries signifies that the mindset that it is possible tosuccessfully run acquired companies having different cultural backgrounds is spreading.

It can be

Chapter 1│India and the World13

said that the experience and achievements during the period in the past of import substituting
industrialization as well as the understanding and tolerance towards other cultures fostered in thediversity of Indian society have had a positive effect on the formation of this mindset.6

9. Initiatives regarding energy resources and climate change
9.1

Energy resource diplomacy

India is not able to meet its demand for oil, natural gas, or coal with domestic production, andseeks places from which to import energy resources around the globe. Oil imports are facing being
80% of domestic supply, and the Middle East makes up 2/3 of import sources. The government isencouraging the state-run oil companies to actively acquire drilling rights for oil and gas abroad, andto date, the outward investment by state-run oil companies has exceeded $13 billion.

Among thesecompanies, ONGC Videsh Limited (OVL), a subsidiary in charge of overseas affairs of the Oil andNatural Gas Corporation (ONGC), has been deploying the most energetic activities.

OVL isalready involved in 40 projects in 15 countries overseas, including Sudan, Vietnam, Venezuela,
Russia, the Philippines, Colombia, and Brazil.

The production from OVL’s overseas assets hasreached 8.87 MMTOE (million metric ton oil equivalent) in fiscal year 2010.

Of the state-run oil

companies aside from OVL, Indian Oil Corporation Limited (IOC) is involved in nine projects in six
countries, Oil India Limited (OIL) is involved in 12 projects in eight countries, Bharat Petroleum
Corporation Limited (BPCL) is involved in 12 projects in seven countries, and Hindustan Petroleum
Corporation Limited (HPCL) is involved in two projects in two countries.

9.2

Initiatives for climate change

Conventionally, the position in India was to advocate for the rights of the weak in the world withrespect to global policy problems.

India’s mantra has been that even though it ranks in the top fiveemitters of global warming gases, its per capita emissions rate is far below that of the advanced
countries.
Although there will continue to be many unclear areas in the road ahead for climate change
negotiations as well as India’s role in them, the fact is that India is strengthening its engagement inclimate change more than it traditionally has.

It is widely agreed that there is the high likelihoodthat India will experience a tremendous effect as a result of climate change in the future.

It isenvisioned that the impact will extend to all manner of areas including coastal regions, water
resources, forests, agriculture, and health.

Furthermore, there is a significant effect on river flow by

the amount of rain and the melting of glaciers, and the majority of rivers that flow in North India inparticular rely on snowmelt and glacial melt from the Himalayas.
6

Kumar (2008).

Japan Center for Economic Research “Asia Research” Report14

As a result, there are concernsthat climate change will have a severe effect on agriculture and human survival through affecting theamount of river water.
India is putting importance on reducing the amount of carbon dioxide emissions per unit of GDP
by increasing energy efficiency as a climate change initiative.

The government is aiming toincrease energy efficiency by 20% by 2016, and has set a goal of reducing the quantity of emissions
per unit of GDP by 20-25% compared with the 2005 level by 2020.

In pursuit of these objectives,

India is furthering the diversification of energy sources, particularly the expansion of renewableenergy such as solar generation, while also engaging in “cleaner” coal generation, which willcontinue to be the base.

10. The network of overseas Indians
10.1

Overseas Indians

Currently, there are 27 million overseas Indians in 110 countries around the world, forming thenext largest such community behind the overseas Chinese.7

The overseas Indians comprise

non-resident Indians (NRI), who have Indian citizenship, and Persons of Indian Origin (PIO), who
do not have Indian citizenship.

These overseas Indians have a rising economic and social profile ineach region of the world, and their production is estimated to be $400 billion, equivalent to a third ofIndia’s GDP.

Currently, the US has the greatest number of overseas Indians.

In recent years,

countries having at least a million overseas Indian residents include the US (2.25 million), Malaysia(2.05 million), Saudi Arabia (1.79 million), the UAE (1.70 million), Sri Lanka (1.60 million), theUK (1.50 million), and South Africa (1.22 million), and the overseas Indians are also active incountries including Mauritius (0.88 million), Kuwait (0.58 million), Oman (0.56 million), Qatar(0.50 million), and Bahrain (0.35 million).8
Regardless of being in an advanced country or an emerging country, the community of overseas
Indians has a high academic level, is recognized as a successful group, contributes to the economic
development of the countries of residence through activities in intellectual and innovative spheres,and plays the role of a bridge that is important in providing knowledge, skills, capital, and a market
to the mother country, India.

The overseas Indians are a presence that cannot be understood simply

in terms of remittances to and investment in India.

Behind the negotiations for the US–India Civil

Nuclear Agreement lay the energetic lobbying activities by Indian-Americans.

The network ofoverseas Indians that spreads across the globe is itself a presence that greatly contributes to thedevelopment of the Indian economy.

7
8

Ministry of Overseas Indian Affairs (2011).
Ministry of Overseas Indian Affairs (undated).
Chapter 1│India and the World
15

10.2

Overseas migrant workers and inward remittances

Among the overseas Indians scattered across the globe, there are roughly five million migrant
workers, of whom over 90% are working in the gulf region (including West Asia and North Africa)and Southeast Asia as construction workers, shopkeepers, drivers, and the like.

Meanwhile, in thegulf Arab countries, 20-30% of the people work as various professionals and white collar workers(doctors, engineers, architects, accountants, bankers, and the like). The overseas migrant workers
are the source of considerable inward remittances, and India is the largest recipient of inward
remittances in the world at a scale rivaling IT-BPO exports, which are roughly half of service exports.
Roughly 40% of inward remittances come from the gulf countries and Malaysia.

Since fiscal year

2009, despite fewer migrant workers leaving India, inward remittances have continued along thepath of expansion.

The value of inward remittances expanded from $25 billion in 2005 to $53.9

billion in 2009, rivaling IT-BPO exports, and is participating in the increase in national income, andby extension, the expansion of the Indian domestic market.
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