This report was principally prepared by:

Project Leader

Laura Bloodgood

laura.bloodgood@usitc.gov

Office of Industries

Jeffrey Clark, Nicholas Corrado, Keith Diener, Vincent Honnold, Joseph Kowalski,

Katherine Linton, Brendan Lynch, Deborah McNay, Erick Oh, and Laura Polly

With special assistance from

Sharon Greenfield, Monica Reed, and Wanda Tolson

i

Abstract

Net foreign direct investment (FDI) flows into India reached $15.7 billion in India’s

2006–07 fiscal year, more than triple the $4.7 billion recorded during 2005–06, with the

largest share of FDI flows from Mauritius, followed by the United States and the United

Kingdom. This study examines FDI in India, in the context of the Indian economic and

regulatory environment. We present FDI trends in India, by country and by industry, using

official government data from India, the United States, and international organizations. To

supplement the official data, the study also discusses specific investment activities of

multinational companies in India, representing a wide range of countries and industries. To

illustrate the driving forces behind these trends, the study also discusses the investment

climate in India, Indian government incentives to foreign investors, particularly Special

Economic Zones, the Indian regulatory environment as it affects investment, and the effect

of India’s global, regional, and bilateral trade agreements on investment from the United

States and other countries. Finally, the study presents two case studies. The first examines

global FDI in India’s automobile industry. The second analyzes the effects of India’s 2005

Patent Law on FDI in the pharmaceutical industry.

iii

CONTENTS

Page

Abstract ............................................................... i

Executive Summary ............................................... ix

Chapter 1. Introduction ......................................... 1-1

Purpose and scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1

Overview of FDI in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

Chapter 2. FDI in India ........................................ 2-1

Overview of FDI flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1

Mergers and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3

Greenfield FDI in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6

Distribution of FDI within India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6

FDI flows to India by source country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-11

Mauritius . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-13

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-14

European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-18

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-19

United Arab Emirates (U.A.E.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-21

FDI flows to India by industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-22

Chapter 3. India’s FDI Environment ........................ 3-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1

Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

Strong economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-3

Labor issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4

Low wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4

Rigidity in the labor market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5

Rising salaries and high turnover in some industries . . . . . . . . . . . . . . . . . . . . . . . . . 3-5

Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-6

Antiquated infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-6

Increased opportunities for private sector participation in infrastructure projects . . . 3-7

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8

Educated work force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8
iv

CONTENTS–Continued

Page

Chapter 3. India’s FDI Environment–Continued

Weaknesses in the educational system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-9

Access to capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10

Bureaucracy and corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-12

Chapter 4. Special Economic Zones ......................... 4-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1

Incentives to invest in SEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1

Establishment and licensing of SEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-3

Other FDI incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-7

Chapter 5. FDI Regulation and Dispute Settlement .... 5-1

FDI procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1

FDI regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-2

Labor regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3

Intellectual property rights regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-5

Trademark protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-5

Copyright protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6

Patent protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6

Other regulatory issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7

Implications of recent FDI policy changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-8

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-8

Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-8

Retailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9

Litigation and alternative dispute resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9

Litigation in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9

Alternative dispute resolution in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-11

ADR in action: The Enron dispute and the Dubhol power plant . . . . . . . . . . . . . . . . 5-13

Chapter 6. India’s Investment-Related International

Agreements ..................................................... 6-1

World Trade Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1

Agreement on trade related investment measures . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1

General agreement on trade in services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2

South Asia Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-4

Bilateral investment treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-5

Double tax avoidance agreements and CECA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-5

Other agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
v

CONTENTS–Continued

Page

Chapter 7. Automotive Investment in India ............. 7-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-1

Background on the domestic Indian automotive industry . . . . . . . . . . . . . . . . . . . . . . . 7-1

India as an automotive FDI destination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-4

The Indian domestic market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-4

Indian government policies affecting automotive FDI . . . . . . . . . . . . . . . . . . . . . . 7-6

Auto policy of 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-6

Automotive mission plan 2006–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-7

Foreign investment in the Indian auto industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9

U.S.-based passenger vehicle investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-10

European-based passenger vehicle investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-11

Asia-Pacific-based passenger vehicle investment . . . . . . . . . . . . . . . . . . . . . . . . . 7-12

Component industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-13

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-16

Chapter 8. Case Study 2: Pharmaceutical FDI

in India ......................................................... 8-1

The evolution of India’s patent laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1

The Patent laws under British rule (1856–1947) . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1

The Post-Independence patent laws (1947–1995) . . . . . . . . . . . . . . . . . . . . . . . . . 8-2

The post-TRIPS patent laws (1995–present) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-2

Ongoing patent law controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-3

The evolution of the pharmaceutical industry in India . . . . . . . . . . . . . . . . . . . . . . . . . 8-6

The domestic pharmaceutical industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-6

Foreign direct investment in the drug and pharmaceutical sector . . . . . . . . . . . . . 8-7

Greenfield projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-10

Strategic alliances in R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-11

Strategic alliances in manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-13

Pharmaceutical M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-14

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-16

Bibliography ....................................................... Biblio-1

Appendices

A. Sector-specific guidelines for FDI in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

B. Web site addresses of State and Unin Territory (UT) Governments and their

investment promotion agencies in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1

C. Bilateral international agreements that affect investment in India . . . . . . . . . . . . . . . C-1
vi

CONTENTS–Continued

Page

Boxes

3-1. Foreign investors attracted by strong Indian economy . . . . . . . . . . . . . . . . . . . . . . . . 3-3

3-2. Hindustan Lever Ltd. succeeds in the Indian market . . . . . . . . . . . . . . . . . . . . . . . . . 3-4

3-3. Large U.S. firms tap educated Indian work force . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-9

5-1. Forms of ADR: Mediation, Arbitration, and Concilation . . . . . . . . . . . . . . . . . . . . . . 5-12

7-1. Key recommended interventions in the AMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8

8-1. The Novartis challenge to India’s patent law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-5

Tables

2-1. Top 10 acquisitions in India, by value, 2002–06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5

2-2. Largest 15 greenfield FDI projects in India in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 2-7

2-3. FDI equity inflows, January 2000–December 2006, by region . . . . . . . . . . . . . . . . . 2-9

2-4. Top country investors in India, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-11

2-5. India, M&A deals by acquiror country and industry of the target company,

2000–06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-12

2-6. Selected data for U.S. majority-owned affiliates in India, 2004 . . . . . . . . . . . . . . . . . 2-17

2-7. India, FDI by sector, selected years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-22

3-1. Inward FDI flows for selected countries, 2002–05 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

4-1. India: Types of special economic zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-5

5-1. Selected Indian labor laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-4

6-1. India, GATS schedule of commitments: covered investment service sectors . . . . . . . 6-3

7-1. Indian passenger vehicle production, in units, FY 2001–02 through FY2005–06 . . . 7-2

7-2. Indian automotive parts production: FY2001–02 through FY2005–06 . . . . . . . . . . . 7-3

7-3. Indian passenger vehicle exports, in units, FY2001–02 through FY2005–06 . . . . . . 7-3

7-4. Indian exports of automotive parts: FY2001–02 through FY2005–06 . . . . . . . . . . . . 7-4

7-5. Indian passenger vehicle sales, in units, FY2001–02 through FY2005–06 . . . . . . . . 7-4

7-6. U.S. automakers with assembly operations in India . . . . . . . . . . . . . . . . . . . . . . . . . . 7-11

7-7. EU automakers with assembly operations in India . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-12

7-8. Asia-Pacific automakers with assembly operations in India . . . . . . . . . . . . . . . . . . . . 7-14

7-9. Examples of global automotive parts suppliers manufacturing in India . . . . . . . . . . . 7-15

8-1. Greenfield FDI in the pharmaceutical and health biotechnology sectors by source

region and activity, 2002–06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-11

8-2. Select contract manufacturing deals in pharmaceuticals in India . . . . . . . . . . . . . . . . 8-13

Figures

2-1. FDI inflows to India, 1990–2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2

2-2. FDI inflows to developing countries, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2

2-3. M&A in India, by number of projects and value, 2000–06 . . . . . . . . . . . . . . . . . . . . 2-4

2-4. Map of India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-8
vii

CONTENTS–Continued

Page

Figures—Continued

2-5. M&A in India, number of deals with known value, 2000–06 . . . . . . . . . . . . . . . . . . 2-12

2-6. Total reported greenfield FDI by selected countries, 2002–06 . . . . . . . . . . . . . . . . . . 2-13

2-7. Share of top investing countries, FDI equity flows . . . . . . . . . . . . . . . . . . . . . . . . . . 2-14

2-8. U.S. reported greenfield FDI projects in India, by cluster, 2002–06 . . . . . . . . . . . . . 2-16

2-9. Employment, MOFAs, India, 2000–04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-17

2-10. MOFA Assets, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-18

2-11. EU share of FDI stock in India, 1991–2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-19

2-12. FDI inflows, selected countries, 2000–06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-20

2-13. Cluster shares of total projects, annually, 2002–06 . . . . . . . . . . . . . . . . . . . . . . . . . . 2-24

2-14. Cluster shares of reported greenfield FDI in India, 2002 and 2006 . . . . . . . . . . . . . . 2-25

4-1. Application process for firms establishing a business unit within SEZ . . . . . . . . . . . 4-5

7-1. Indian car and light truck production, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-2

7-2. Indian car and light truck market share, by company, 2005 . . . . . . . . . . . . . . . . . . . . 7-5

8-1. India’s top ten pharmaceutical firms by operating revenue, 2005 . . . . . . . . . . . . . . . 8-8

8-2. India’s FDI inflows, drugs and pharmaceuticals, 1994–2006 . . . . . . . . . . . . . . . . . . . 8-9

8-3. Drugs and pharmaceutical FDI by country, 2002–06 . . . . . . . . . . . . . . . . . . . . . . . . . 8-9

8-4. Greenfield FDI in India’s pharmaceutical industry by year, 2002–06 . . . . . . . . . . . . 8-10

8-5. Pharmaceutical M&A activity, 2002–06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-15

ix

Executive Summary

India’s recent liberalization of its foreign investment regulations has generated strong

interest by foreign investors, turning India into one of the fastest growing destinations for

global foreign direct investment (FDI) inflows. Foreign firms are setting up joint ventures

and wholly owned enterprises in services such as computer software, telecommunications,

financial services, and tourism, and manufactured goods including transportation equipment,

chemicals, pharmaceuticals, and food processing. This study examines FDI flows into India,

by country and by industry, supplemented by a discussion of major foreign acquisitions of

Indian companies, and greenfield FDI by foreign firms. The study also examines India’s

investment environment, special economic zones, investment-related regulations and

international agreements. Two chapters present case studies of FDI in India’s automotive

industry, and the effect of the 2005 Patent Law changes on FDI in the pharmaceutical

industry. Principal findings regarding FDI in India include:

• Net FDI in India was valued at $4.7 billion in the 2005–06 Indian fiscal year, and

more than tripled, to $15.7 billion, in the 2006–07 fiscal year. Almost one-half of

all FDI is invested in the Mumbai and New Delhi regions.

• By country, the largest investors in India are Mauritius, the United States, and the

United Kingdom. Investors based in many countries have taken advantage of the

India-Mauritius bilateral tax treaty to set up holding companies in Mauritius which

subsequently invest in India, thus reducing their tax obligations. By industry, the

largest destinations for FDI are electrical equipment (including computer software

and electronics), services, telecommunications, and transportation.

• India offers both positive and negative incentives for foreign investors. Positives

include strong economic growth leading to increased buying power by the middle

class, low wages compared to OECD countries, and an educated work force.

Negatives include inadequate infrastructure, rising salaries for key jobs, and

bureaucratic delays in obtaining necessary permits and licenses. 

• India’s Special Economic Zones (SEZs) attract foreign investment by providing tax

incentives, assistance with bureaucratic and administrative problems, and access to

reliable infrastructure. Investment-related regulations outside the SEZs have been

increasingly liberalized since 1991, with important improvements in intellectual

property regulation.

• U.S., European, and Japanese automakers and auto component manufacturers all

have significant investments in India. Most FDI in the automotive industry has been

focused on sales to the domestic market, but more foreign investors are now

producing autos and components in India for export.

• India’s 2005 changes to its Patent Law have motivated substantial new FDI in the

pharmaceutical industry, but global pharmaceutical firms are waiting to see how the

new law is interpreted before further expanding product patenting and

commercialization activities in India.

 1

 Most official Indian statistics are presented on a fiscal year basis. India’s fiscal year runs from April 1st

through March 31st. According to the standard IMF definitions, FDI is defined as investment equal to or

greater than a 10 percent equity share in a single firm. By contrast, portfolio investment (the remaining

$12.5 billion) is defined as acquisition of an equity stake of less than 10 percent. FDI data represent inflows

net of outflows.

 2

 Government of India, Ministry of Commerce & Industry, Economic Survey 2006–2007, 127–28; and

Financial Times, “FDI in India Expected to Double.”

 3

 Government of India, Ministry of Commerce & Industry, “Fact Sheet on Foreign Direct Investment.”

1-1

CHAPTER 1

Introduction

Purpose and Scope

India is the second largest country in the world, with a population of over 1 billion people.

As a developing country, India’s economy is characterized by wage rates that are

significantly lower than those in most developed countries. These two traits combine to make

India a natural destination for foreign direct investment (FDI). Until recently, however, India

has attracted only a small share of global FDI, primarily due to government restrictions on

foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since

2000, India has liberalized its investment regulations and actively encouraged new foreign

investment, a sharp reversal from decades of discouraging economic integration with the

global economy.

Global investors have responded with enthusiasm. Total net foreign investment inflows were

$17.2 billion in 2005–06, of which net FDI was valued at $4.7 billion in 2005–06.1

 Net FDI

inflows for the 2006–07 fiscal year weremore than tripled to $15.7 billion.2

 India received

cumulative net FDI inflows of $48.2 billion between August 1991 and December 2006.3

The remainder of this chapter gives an overview of FDI activity in India, particularly in the

service sector (the largest target for FDI in India to date), and discusses the data used in the

study. The study then closely examines trends related to FDI in India, including the principal

country sources and industry destinations of this capital, and the regional destinations of FDI

within the country. We also look at major multinational corporations invested in India today,

and the role of U.S. investors. The study goes on to examine India’s economic climate for

FDI, its regulatory environment, the incentives available to foreign investors through Special

Economic Zones (SEZs), and the effect of India’s international economic agreements on

inbound FDI trends. We present two case studies of industries that hold special interest for

foreign investors. The first examines FDI in India’s passenger vehicle and components

industry, illustrating global investors’ active involvement in India’s manufacturing sector.

The second analyzes the effects of India’s 2005 Patent Law on FDI in the Indian

pharmaceuticals industry.
 4

 Under the treaty, foreign investors are able to invest in holding companies in Mauritius which then sell

shares in India, but pay taxes in Mauritius. Since Mauritius has no capital gains tax, the companies have no

capital gains tax obligations. EIU, “Country Report India.” (See chapter 6).

 5

 Government of India, Ministry of Commerce & Industry, “Fact Sheet on Foreign Direct Investment from

August 1991 to December 2006.”

 6

 FDI approvals data measure the intentions of foreign firms to invest in India. However, many firms

never actually proceed with investment projects that have received approval, so approvals data do not

indicate actual FDI trends. 

 7

 The sectors are defined by India’s Ministry of Commerce & Industry, and do not match U.S.

Government statistical classifications. Government of India, Ministry of Commerce & Industry, Department

of Commerce, Annual Report 2005–2006, 88.

 8

 U.S. Department of State, “Congress Passes U.S.-India Civilian Nuclear Cooperation Bill”; and U.S.

Department of State, “President Bush Signs U.S.-India Civil Nuclear Agreement.”

 9

 Gutierrez and Sampson, Remarks at the 5th Summit.

1-2

Overview of FDI Activity in India

Country Sources of FDI

Foreign investors have begun to take a more active role in the Indian economy in recent

years. By country, the largest direct investor in India is Mauritius, largely because of the

India-Mauritius double-taxation treaty.4

 Firms based in Mauritius invested $16.0 billion in

India between 1991 and 2006, equal to 39 percent of total FDI inflows. The second largest

investor in India is the United States, with total capital flows of $5.6 billion during the

1991–2006 period, followed by the United Kingdom, the Netherlands, and Japan.5

 Between

1991 and 2005, the United States ranked first in terms of total FDI approvals, which

amounted to $67.8 billion (24 percent of total FDI approvals).6

 The largest shares of U.S.

investment are directed to the fuels, telecommunications, electrical equipment, food

processing, and services sectors.7

The warming of the political and economic relationship between the United States and India

is likely to further encourage U.S. investment there. An important example of the closer

relationship is the U.S.-India Civil Nuclear Cooperation Initiative, passed into U.S. law in

December 2006.8

 The United States has also reduced the use of export controls on exports

to India. As of February 2007, only 1 percent of U.S. exports to India required a license,

down from 24 percent in 1999 and 90 percent in previous years. In recognition of the

improved relationship, the U.S. Department of Commerce is in the process of establishing

its new “Trusted Customer” program, set to begin in 2007 with India as the first partner

country. The program is expected to encourage repeat exports of U.S. goods to India.9

 This

will promote additional FDI by U.S. firms in India, as the Trusted Customer program will

make it easier for U.S.-based multinational corporations (MNCs) to ship goods to their

affiliates in India for manufacturing or additional processing.

FDI in India’s Service Sector

The service sector has been the primary destination of FDI in India since 1991. As identified

by India’s Ministry of Commerce & Industry, the service sector accounted for 17 percent of

total FDI inflows to India between August 1991 and December 2006. Another 17 percent of

FDI inflows is invested in the telecommunications and transportation industries, which
 10 An additional 17 percent of FDI is invested in electrical equipment, including computer software and

electronics. It is not clear whether some offshore services FDI is included in the electrical equipment sector.

Government of India, Ministry of Commerce & Industry, “Fact Sheet on Foreign Direct Investment.”

 11 Offshoring refers to the process whereby a company based in one country outsources certain functions

to an affiliate or domestic company in another country. BPO includes information technology-enabled

services such as insurance claims processing, and other types of back office processing. 

 12 McKinsey & Co., McKinsey Global Institute, New Horizons, 499.

 13 See, e.g., PriceWaterhouseCoopers, “Offshoring in the Financial Services Industry.” 

 14 McKinsey & Co., McKinsey Global Institute, New Horizons, 501.

 15 Barnes, Remarks at the 5th Summit; and Bonasia,“Indian Outsourcers Scramble to Meet Need.”

 16 Bonasia,“Indian Outsourcers Scramble to Meet Need.”

 17 Government of India, Ministry of Commerce & Industry, “Fact Sheet on Foreign Direct Investment.”

 18 Bureau van Dijk, Zephyr Mergers and Acquisitions database.

1-3

generally involve both equipment and services.10 From the mid-1990s, India has been an

important destination for investment in offshoring services such as software, call centers, and

other business process outsourcing (BPO).11 According to one recent estimate, India’s

information technology (IT) offshoring market will be valued in excess of $200 billion by

2008, with more than one-fourth of the world IT offshoring market centered in India.

Revenue from offshore services is predicted to equal 7 percent of India’s GDP by 2008, and

account for one-third of foreign exchange flows into the country.12 This flow of capital relies

on India’s well-educated, English-speaking, and relatively low-paid workers.13 India has

offered substantial incentives to attract FDI in IT and BPO-related services offshoring, up

to an estimated $6,000 per full-time equivalent worker (FTE) in the IT services area, and

$2,000 per FTE in the BPO area.14

According to some reports, however, increasing competition is making it more difficult for

Indian firms to attract and keep BPO employees with the necessary skills, leading to

increasing wages. IBM, for example, increased its Indian staff by 36 percent in 2006, to

53,000 workers, and has plans to invest a further $6 billion in India over the next 3 years,

for an expected total of 120,000 employees in the country by 2008.15 Hiring difficulties are

among the factors that have encouraged some India-based BPO firms to engage in outbound

FDI by establishing facilities outside of India. Infosys Technologies, for instance, reportedly

has plans to employ 6,000 workers in China, and Satyam Computer Services has 500 people

based in China, with more to come, along with 2,500 workers each in Malaysia, Egypt, and

Saudi Arabia.16

Most Indian industries have been fully opened to FDI, with foreigners permitted to own up

to 100 percent of equity in Indian companies. However, India continues to limit FDI in a

number of industries by enforcing overall caps on total foreign-owned equity shares, with

the caps changing as India’s liberalization process continues. Permitted equity limits for

foreign investors vary for different industries. The level of FDI activity following each

change in regulations testifies to foreign investors’ interest in the Indian market, particularly

in key service sectors. Equity limits for foreign investment in most types of

telecommunications companies were raised from 49 percent to 74 percent in November

2005, resulting in a wave of new FDI primarily focused on India’s cellular

telecommunications industry. Cumulative FDI inflows in telecommunications from August

1991 to December 2006 were $3.9 billion, and annual inflows jumped from $588 million in

2004–05 to $3.0 billion in 2005–06.17 The value of reported mergers and acquisitions

(M&A) in telecommunications rose from $105 million in 2003 to $1.2 billion in 2004,

$4.1 billion in 2006, and $11.4 billion in just the first 3 months of 2007, primarily on the

strength of Vodafone Group’s $11.1 billion acquisition of Hutchison Essar Telecom, which

was approved in April 2007.18
 19 Press Trust of India, “Morgan Stanley, Citigroup, Actis Pick Up 6 pc Stake in NSE.”

 20 Government of India, Ministry of Commerce & Industry, Economic Survey 2006–2007, 154; and EIU,

“Country Commerce India - Main report: November 20, 2006.”

 21 Business Monitor Food & Drink Insight, “Bharti Confirms Wal-Mart Plans.”

 22 Major international insurance firms investing in the Indian market include Chubb, New York Life, AIG,

Metlife (all based in the United States); Old Mutual, Standard Life, and Royal & Sun Alliance (United

Kingdom); ING (Netherlands); Allianz (Germany); Tokio General and Mitsui Sumitomo (Japan); and AMP

(Australia). Indian Insurance Regulatory and Development Authority Web site.

 23 The list includes ICICI Prudential Life, AMP Sanmar Life, Metlife India, IFFCO-Tokio General,

Cholmandalam General, and Tata AIG Life. Bureau van Dijk, Zephyr Mergers and Acquisitions database.

 24 Most countries, including the United States, report FDI data on a calendar year basis. India reports FDI

data on a fiscal year basis, with the fiscal year beginning April 1st.

1-4

India’s stock exchanges have also been recently opened to foreign investment, with a

26 percent foreign equity cap, limited to 5 percent for any single foreign investor. Foreign

investors reached the 26 percent cap in the National Stock Exchange of India in March 2007.

As of the same date, the Singapore Exchange and Deutsche Borse each controlled 5 percent

of the Bombay Stock Exchange.19

Other industries which maintain significant barriers to FDI include the insurance sector and

newspaper publishing, where foreign equity is limited to 26 percent, and the retail sector,

where foreign firms are permitted to invest up to 51 percent equity, but only in single-brand

distribution outlets.20 Foreign investors have also expressed interest in investing in these

sectors, as India’s government debates whether to lift the limits. In the retail sector, WalMart announced a joint venture with India-based Bharti in November 2006, under which

Bharti would invest $2.5 billion in a new chain of retail stores that would be 100 percent

owned by the Indian firm. Wal-Mart would provide logistics and wholesale supply services

through a 50:50 joint venture with Bharti. The deal is widely seen as a way for Wal-Mart to

enter the growing Indian retail market despite the FDI restrictions.21

In the insurance industry, foreign investment was first permitted in 2000, with the lifting of

the Indian state-owned insurance company’s monopoly, allowing competition from both

domestic and foreign-owned private firms. During the 2000–01 fiscal year, 16 privately

owned firms entered the Indian market, most as 26 percent joint ventures between globally

competitive foreign insurers and Indian firms.22 Amid expectations that the government

would raise the foreign equity limit to 49 percent, at least six insurance joint ventures

concluded agreements that would allow the foreign partner to raise its share to that level once

government regulations have changed, but as of April 2007, the equity limit for foreign

insurance investors remains at 26 percent.23

Data

The data for this study were drawn from a variety of sources. Data for FDI stocks and flows

into India come primarily from official Indian government sources, and reflect actual FDI

from cross-border equity flows, where available. These data are supplemented by U.S. data

where additional detail on U.S.-India FDI flows is required. Official data are compiled on

a balance of payments (BOP) basis, and reflects the amount of capital that crosses borders

during a given calendar or fiscal year.24 These data are the most comprehensive available,

but they specifically exclude details on individual company transactions to safeguard the

confidentiality of the reporting companies. Unless otherwise specified, data are presented

for the 5 year time period from 2002 through 2006. 
 25 The databases are Zephyr, a mergers and acquisitions (M&A) database published by Bureau van Dijk,

and LocoMonitor, a greenfield FDI database published by OCO Consulting Ltd.

1-5

To supplement the official equity flows data, the study uses information from separate

commercial databases reflecting M&A and greenfield FDI,25 and occasionally uses Indian

government data on FDI approvals. These data lend additional insight into the industry and

country sources of FDI into India. The databases are compiled from press reports. Thus,

while they cover the majority of M&A or greenfield FDI transactions, it is not possible to

be sure that data on all transactions have been included, or that transactions have not been

included more than once. In particular, many reported transactions do not include data for

the value of the transaction. In addition, data compiled from the databases are not directly

comparable to the official FDI data. Reported transaction values in the databases do not

account for how much of the capital is transferred in a given calendar year or fiscal year, or

for noncash transactions such as equity swaps that may not appear in official BOP statistics.

For these reasons, data compiled from these databases should be considered illustrative,

rather than comprehensive. Similarly, FDI approvals are only an indicator of companies’

intentions. Many approved projects are never realized, or are significantly modified between

approval and implementation.

Information is also drawn from publicly available reports from international financial

institutions, country governments, commercial sources, press reports, and interviews with

industry representatives.

 1 The Statesman (India), “India attracts $15b FDI During 2006–07.

 2

 UNCTAD, World Investment Report 2006. UNCTAD data are based on official Indian government

statistics, but are adjusted to provide calendar year totals and prepared according to international practices,

which makes the data comparable to international FDI statistics. The majority of data in this chapter is taken

from Government of India statistical publications, which report on a fiscal year basis, and are not prepared

according to international practices (see fn. 4). India’s fiscal year runs from April 1 to March 31.

 3

 Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and

Promotion. Fact sheet on Foreign Direct Investment.

 4

 Includes new equity capital flows only. According to international standards, FDI flows include new

equity capital flows, reinvested earnings, and intra-company loans. Most Indian FDI statistics reflect equity

capital flows only. According to Kamal Nath, India’s Minister of Commerce and Industry, FDI inflows

including reinvested earnings totaled $18 billion during the 2006–07 fiscal year. The Statesman (India),

“India attracts $15b FDI During 2006–07.”

 5

 Government of India, Fact Sheet on Foreign Direct Investment (FDI) from August 1991 to March 2007.

 6

 UNCTAD, “Foreign Direct Investment Rose by 34% in 2006.”

2-1

CHAPTER 2

FDI in India

Overview of FDI Flows

Foreign direct investment (FDI) capital flows into India have increased dramatically since

1991, when India’s opened it economy to FDI, and inflows have accelerated since 2000. FDI

inflows to India reached $11.1 billion in calendar year 2006 (figure 2-1), almost double the

2005 figure, and are expected to continue increasing in 2007. The Indian government has

announced a target of $25 billion in new FDI inflows for the 2007–08 fiscal year.1

 Global

FDI has experienced a corresponding resurgence since 2004, recording year-on-year

increases of 29 percent in 2005 and 27 percent in 2004, after declining for several years in

the early 2000s.2

 Consistent with the global pattern, FDI inflows into India declined between

2001 and 2003, before experiencing a resurgence that surpassed average global growth, with

year-on-year increases of 45 and 72 percent, respectively, in fiscal years 2004–05 and

2005–06.3

Preliminary data for inward FDI4

 for the 2006–07 fiscal year show FDI inflows of $15.7

billion, representing an increase of 184 percent, in rupee terms, over the preceding fiscal

year.5

 While the percentage increase is large compared to the global average, the value of

inward FDI flows to India relative to all developing countries remains small (figure 2-2).

However, FDI inflows to India surpassed inflows to South Korea in 2006, making India the

fourth largest destination for FDI in Asia, behind China, Hong Kong,and Singapore.6

New equity capital flows take one of two forms: M&A and greenfield investment. In a

merger or acquisition, one firm acquires an equity stake in an existing foreign firm.

Greenfield FDI takes place as the establishment of a new overseas affiliate by a parent

company. India does not provide FDI statistics that break out M&A vs. greenfield FDI. For

most developing countries, however, the greenfield route is more prominent, as there are

fewer existing companies available to acquire, as compared with developed countries. As

noted in chapter 1, this study uses private databases to illustrate the trends related to FDI
2-2

0

2,000

4,000

6,000

8,000

10,000

12,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

million dollars

Figure 2-1 FDI inflows to India, 1990–2006

Source: UNCTAD, Country Fact Sheet, UNCTAD online database and Government of India, 

Ministry of Commerce & Industry, Department of Industrial Policy and Promotion, FDI Statistics 

2006. 

China

22%

India

2%

Other developing 

countries

76%

Figure 2-2 FDI inflows to developing countries, 2005

Source: UNCTAD, Country Fact Sheet.

Total = $334.3 billion
 7

 OCO Consulting Ltd., LocoMonitor FDI database; and Bureau van Dijk, Zephyr Mergers and

Aquisitions database.

 8

 Excludes deals that have been announced but not completed, or deals that are awaiting regulatory

approval as of March 2007.

 9

 Approximately one-half of transactions do not have reported values.

2-3

through both routes, but data obtained from those databases is not consistent with official

FDI inflows data. In fact, the figures reported for total investment through greenfield FDI

and M&A investment are considerably larger than the values for total FDI inflows reported

by the government of India for FDI through the two routes combined. For greenfield FDI,

OCO Consulting reports a total of $55.5 billion invested in India in 2006, while Bureau van

Dijk reports M&A transactions of $2.8 billion.7

 Together, these are far above India’s total

reported FDI inflows of $11.1 billion.

There are several possible reasons for the disparities in these data. First, the greenfield

projects listed are approved or announced by companies, but some of them are never

realized. Second, many greenfield and M&A projects take more than one year to complete.

Official FDI statistics include only the actual amount of capital invested in each year, rather

than the project total. Finally, many of the projects listed in the commercial databases are not

fully funded by the overseas investor. For joint ventures between Indian and foreign firms,

for example, the databases list the entire value of the project, even if a share of the capital

comes from an Indian entity and would thus not be included as FDI inflows. The official FDI

figures contain only the amount of capital invested from abroad, while the greenfield and

M&A data include the total value of the project.

Mergers and Acquisitions

Figure 2-3 shows the trend of known completed M&A deals and their value, between 2002

and 2006. The bars on the figure indicate a sharp increase in the number of acquisitions

completed in recent years.8

 The data illustrate that overall deal value increased through 2005,

and fell more sharply than the number of deals in 2006.9

 The top 15 acquisitions by foreign

firms in India during the same time period, by value, are presented in table 2-1. They are

split almost evenly between services and manufacturing, with 8 service sector transactions,

6 manufacturing deals, and 1 utility acquisition. U.S. firms were the acquirers in 8 of the

deals, with the remainder split among a number of countries. 
2-4

0

20

40

60

80

100

120

140

2002 2003 2004 2005 2006

Number of deals

0

1,000

2,000

3,000

4,000

5,000

6,000

Million dollars

No. deals Total value

Figure 2-3 M&A in India, by number of projects and value, 2000–06

Source: Bureau van Dijk, Zephyr Mergers and Acquistions database .
2-5

TABLE 2-1 Top 15 acquisitions in India, by value, 2002–06

Acquirer Target

Deal value

(million

dollars) Industry of target

Date of

completion Acquirer country

Aegis Group plc Percept Out Of

Home

1000.0 Advertising 1/11/05 United Kingdom

Holcim Ltd Ambuja Cement

India

604.1 Cement manufacturing 4/7/05 Switzerland

CLP Power

International Ltd

Gujarat Powergen

Energy Corp. 

594.0 Utilities 2/21/02 British Virgin

Islands

Oracle Corp. I-Flex Solutions 563.0 Computer software

services

11/24/05 United States

Mylan Laboratories Matrix

Laboratories

548.2 Pharmaceuticals 1/8/07 United States

Merrill Lynch DSP Merrill Lynch 499.3 Investment banking

services

3/23/06 United States

Holderind Investments

Ltd

Gujarat Ambuja

Cements Ltd

476.4 Cement manufacturing 1/30/06 Mauritius

Electronic Data

Systems Corp.

Mphasis BFL Ltd 368.9 Business process

outsourcing services

6/9/06 United States

ADC

Telecommunications

Krone

Communications

Ltd

350.0 Electronics

manufacturing

5/22/04 United States

Hewlett-Packard Co. Digital GlobalSoft 325.0 Computer software

services

4/1/04 United States

Prudential plc ICICI Prudential

Life Insurance

Company

280.1 Insurance 11/24/04 United Kingdom

WM Wrigley Jr Co. Joyco India Pvt

Ltd

264.5 Food processing 4/1/04 United States

Flextronics

International

Hughes Software

(India)

226.5 Computer software

services

10/19/04 United States

Holcim Ltd Ambuja Cement

India Ltd

204.7 Cement manufacturing 4/7/2005 Switzerland

P&O Steam Navigation

Co.

Mundra

International

Container

Terminal

195.0 Port Services 6/5/03 United Kingdom

Source: Bureau van Dijk, Zephyr Mergers and Acquisitions database.
 10 OCO Consulting Ltd., LocoMonitor FDI database. 

 11 Industry designations for greenfield FDI data are determined by OCO Consulting, and do not

necessarily reflect the industry classifications used either by the U.S. or the Indian governments. Heavy

industry includes energy, manufacturing of machinery and industrial goods, metals, and mining.

 12 Includes hotels, restaurants, and real estate.

 13 Includes business machines and equipment, consumer electronics, electronic components, and

semiconductors.

 14 LocoMonitor data by country do not match official Indian government statistics, which show almost 40

percent of incoming FDI originating in Mauritius. Government of India, Ministry of Commerce & Industry,

Department of Industrial Policy & Promotion, Foreign Direct Investment Statistics. Although the funding for

many FDI projects may come through offshore holding companies in Mauritius in order to maximize tax

benefits, an analysis based on the investing company’s home office is likely more revealing.

 15 OCO Consulting Ltd., LocoMonitor FDI database. 

 16 India is divided into 28 states, six union territories (UTs) and 1 national capital territory. States have

their own government, whereas UTs are administered by the central government. However, Puducherry, a

UT, has its own elected government. The National Capital Territory of Delhi is a special region that has its

own elected government and retains a status that is a hybrid between a state and a union territory.

2-6

Greenfield FDI in India

India has also become a more attractive destination for greenfield FDI in recent years.

Available data show that the number of greenfield FDI projects in India rose from 247 to 980

between 2002 and 2006, increasing at an average annual rate of 41 percent. Although these

data do not capture the value of all greenfield projects (numerous projects are reported

without the accompanying investment value), reported greenfield project values increased

from $4.2 billion in 2002 to $55.5 billion in 2006.10

Between 2002 and 2006, 15 of the 300 projects that reported investment values were worth

at least $1 billion each (table 2-2). These projects were concentrated in heavy industry;11

property, tourism, and leisure;12 and electronics,13 from a diverse range of source countries.14

All but one of these projects are new facilities. By business function, the projects are spread

among manufacturing, construction, resource extraction, and R&D.

The bulk of greenfield FDI in India is destined for new facilities rather than expansions of

existing ones. The share of expansion projects has been declining steadily over the period

from 22 percent of reported projects in 2002 to 11 percent in 2006. Expansion projects

accounted for 16 percent of total greenfield FDI during the period, with almost one-half of

projects in the information and communication technology (ICT) sector.15

Distribution of FDI within India

FDI inflows within India are heavily concentrated around two major cities, Mumbai and

New Delhi, with Chennai, Bangalore, Hyderabad and Ahmedabad also drawing significant

shares of FDI inflows (figure 2-4). For statistical purposes, India’s Department of Industrial

Policy and Promotion (DIPP) divides the country into 16 regional offices. As illustrated in

table 2-3, the top 6 regions account for two-thirds of all FDI inflows to India between 2000

and 2006, with the Mumbai and New Delhi regions together accounting for just under onehalf of the total.16 This is consistent with greenfield FDI data, which shows that the 5 Indian

states that received the largest number of greenfield FDI projects in 2006, based on the total

number of projects reported, were Maharashtra (20 percent, includes the city of Mumbai),
2-7

TABLE 2-2 Largest 15 greenfield FDI projects in India, 2002–06

Source

country Investing Company

Destination

state

Capital

(million

dollars) Technology/Product

Key business

function

Canada Royal Indian Rag

International 

Karnataka 9,000 Residential development Construction

Luxembourg Arcelor-Mittal Bihar 8,940 Steel Products Manufacturing

Netherlands Ispat Industries Maharashtra 4,458 Steel Cold Rolling/Forming Manufacturing

Singapore Flextronics Andhra

Pradesh

3,000 Wafers Manufacturing

USA Advanced Micro

Devices (AMD)

Andhra

Pradesh

3,000 Microprocessor Manufacturing

South Korea Pohang Iron & Steel

(POSCO)

Orissa 3,000 Steel products Manufacturing

Netherlands European Aeronautic

Defence and Space 

Karnataka 2,600 Aircraft R & D

UK Vedanta Resources Orissa 2,100 Aluminum Products Manufacturing

Netherlands Ispat Industries Karnataka 2,000 Steel products Manufacturing

Canada Niko Resources Andhra

Pradesh

2,000 Natural gas exploration Extraction

Venezuela Petroleos de

Venezuela

Rajasthan 2,000 Petroleum exploration Extraction

Japan Nissan Orissa 1,500 Passenger Cars Manufacturing

UAE Emaar Properties Haryana 1,500 Property developer/

management

Construction

USA AES India Chattisgarh 1,200 Electricity/gas utilities Electricity

Germany SAP Haryana 1,000 Enterprise application software R&D

Source: LocoMonitor FDI database; and The Financial Express, “EADS to Open Technology Centre in

Bangalore.”
2-8

Figure 2-4 Map of India

Source: Copyright 2006 Map Resources
 17 Indian brand Equity Foundation (IBEF). Indian States, Business and Economy. Maharashtra.

 18 Bureau van Dijk, Orbis Companies database.

 19 Ibid.

 20 IBEF. Indian States, Business and Economy. Delhi.

 21 Kripalani, “IBM’s India Pep Rally.”

 22 Goodyear India, “History by Year.”

 23 The Hindu Business Line. “Goodyear India Changes Retailing Strategy.”

2-9

TABLE 2-3 FDI Equity Inflows, January 2000–December 2006, by region

Rank

RBI - Regional

Office State/UT*

FDI Inflows -

millions USD

Share of Total

(%)

1 Mumbai Maharashtra, Dadra & Haveli, Daman & Diu* 7,486.6 24.9

2 New Delhi Delhi, Uttar Pradesh, Haryana 7,045.0 23.4

3 Chennai Tamil Nadu, Puducherry 2,295.1 7.6

4 Bangalore Karnataka 2,052.4 6.8

5 Hyderabad Andra Pradesh 1,572.2 3.9

6 Ahmedabad Gujarat 970.3 3.7

All Other 8,999.6 30.1

Total 32,152.2

Source: Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion, FDI

Statistics 2006.

Note: Because of rounding, figures may not add up to the totals shown.

Karnataka (15 percent, includes the city of Bangalore), Tamil Nadu (13 percent, includes the

city of Chennai), Delhi (9 percent, includes the city of New Delhi), and Andhra Pradesh (8

percent, includes the city of Hyderabad). 

The key industries attracting FDI to the Maharashtra region are energy, transportation,

services, telecommunications, and electrical equipment.17 Maharashtra’s transportation

industry holds a particular concentration of MNC affiliates in auto components

manufacturing. Prominent examples include INR Spicer India, owned by U.S.-based Dana

Corp.; Kalyani Lemmerz Ltd., owned by U.S.-based Hayes Lemmerz International; Schrader

Duncan, an affiliate of British-based Tomkins plc; and Fiat India, an auto parts subsidiary

of the Italian auto manufacturer.18 In the services area, leading firms include Standard

Chartered Bank, an affiliate of the British-based bank; I-Flex Solutions, owned by U.S.-

based Oracle Corp.; Citicorp Finance and E-Serve International, both affiliates of U.S.-based

Citigroup; and South East Asia Marine Engineering and Construction, owned by Technip

Offshore International, based in France.19

The key sectors attracting FDI inflows to Delhi are similar: telecommunications,

transportation, electrical equipment (including software), and services.20 Delhi ranks second

in total FDI inflows behind Maharashtra. U.S.-owned IBM is not only the largest computer

services company in India, but is also the MNC with the largest number of employees in

India (approximately 53,000), second only to IBM’s work force in the United States.21 In

addition to Delhi, IBM also has facilities in Bangalore, Chennai, Kolkata, Pune, Gurgaon,

and Hyderabad. Goodyear, one of the largest global tire manufacturers, has built two

manufacturing facilities near Delhi, entering into a joint venture with Indian company Ceat

Ltd. and acquiring India-based South Asia Tyres.22 Goodyear has made an initial investment

of $12.3 million to redesign 300 retail outlets to better adapt to Indian consumer

preferences.23
 24 IBEF. Indian States, Business and Economy. Uttar Pradesh.

 25 Ibid., Haryana.

 26 See chapter 7 for a discussion of FDI in the passenger cars and automotive components industry.

 27 IBEF. Indian States, Economy and Business. Tamil Nadu.

 28 OCO Consulting Ltd., LocoMonitor FDI database; and Agence France-Presse English Wire, “India's

Steel Production Set to Triple by 2015 As Demand Booms.” 

 29 Press Trust of India, “Orissa to Pursue POSCO Project with 'Humane' Face”; and Press Trust of India,

“VP Writes to PM on POSCO Issue.

 30 OCO Consulting Ltd., LocoMonitor FDI database.

 31 Representative of Arcelor-Mittal, telephone interview by Commission staff, April 20, 2007.

2-10

The states of Uttar Pradesh and Haryana are also contained in the New Delhi region, as

identified by India’s statistical agencies. The geographic proximity of both states to New

Delhi helps them to attract FDI. Due to its abundance of natural resources, Uttar Pradesh

attracts FDI in chemicals, pharmaceuticals, and mining and minerals.24 Haryana attracts FDI

in the electrical equipment, transportation, and food processing sectors.25 Japan-based Honda

Motor Co. has a large presence throughout India, including Honda’s joint venture with Hero

Cycles, which has grown into the world’s largest motorcycle company since its inception in

1984. The company’s presence in Haryana includes an R&D center that supports two

manufacturing facilities which together produce over 3 million motorcycles annually. U.Sbased Dow Corning and U.K.-based GlaxoSmithKline have invested in the state’s chemical

and pharmaceutical industries, respectively.

Automotive and auto components are the largest sectors attracting FDI into Tamil Nadu.

Ford, Hyundai, and Mitsubushi all have multi-million dollar investments in Tamil Nadu. The

state capital, Chennai, is sometimes called the “Detroit of India.”26 Other sectors attracting

FDI include port infrastructure, ICT, and electronics.27 The bulk of projects in Andhra

Pradesh, which includes the city of Hyderabad, are associated with software and, to a lesser

extent, hardware for computers and telecommunications. The same is true of projects in

Karnataka, where Bangalore is located; Karnataka also has a large number of projects in the

automotive sector (34).

India’s more rural areas have attracted a smaller number of high-value projects. Large

greenfield FDI projects in Orissa include bauxite mining and associated aluminum smelting

operations as well as steel and automotive facilities. Pohang Iron and Steel Co.’s (POSCO -

Korea) planned steel mill in Orissa is expected to be the largest FDI project in India, and will

ultimately involve $12 billion in total FDI on 4000 acres, with an annual steel making

capacity of 12 million tons by 2020.28 As of May 2007, however, the POSCO project was

generating intense local opposition by farmers worried about the loss of thier land, and its

future was uncertain. Luxembourg-based Arcelor-Mittal, the world’s largest steel maker, has

also signed a memorandum of understanding with the Orissa state goverment to build an $8.7

billion steel mill, but faces similar opposition to its plans.29 Other companies investing in

greenfield metals production and auto projects in Orissa include Russian Aluminum,

Vedanta Resources (United Kingdom), Dubai Aluminum, and Nissan (Japan).30 The state of

Orissa accounted for 15 and 30 percent, respectively, of the total value of greenfield FDI

reported in 2004 and 2005. As of April 2007, Arcelor-Mittal was also considering investing

in a second large steel mill in India, in the state of Jharkhand.31
2-11

FDI Flows to India by Source Country

Mauritius is the largest country investor in India, followed by the United States and the

United Kingdom. Table 2-4 shows the top 10 country sources of FDI flows to India between

1991 and 2006. 

TABLE 2-4 Top Country Investors in India, 2006

Country

FDI Inflows, 

April–December,

2006-07

FDI Inflows, August

1991–December 2006

Share of FDI

inflows, 

August 1991–

December 2006 

(Million dollars) (percent)

Mauritius 4,215 16,000 33

United States 607 5,645 12

United

Kingdom

1,682 3,662 8

Netherlands 488 2,482 5

Japan 52 2,176 5

Singapore 533 1,583 3

Germany 70 1,652 3

France 80 858 2

South Korea 62 814 2

Switzerland 47 683 1

All other 1,434 12,617 26

Total 9,270 48,172

Source: Government of India, Ministry of Commerce & Industry, Department of

Industrial Policy and Promotion, Fact Sheet on Foreign Direct Investment.

Note: Share of total inflows may not sum to 100 due to rounding. Shares are

calculated in U.S. dollars and may not match shares calculated in Indian rupees.

The United States and the European Union are the largest acquirers of Indian companies,

measured by both value and number of deals (figure 2-5). For the number of M&A deals

with a reported value, the U.S. and the EU together accounted for over $8 billion, or roughly

67 percent of the total value in the Indian M&A market between 2000 and 2006. Indian

government statistics do not present information on the industry distribution of FDI inflows

from each source country. However, an analysis of M&A and greenfield FDI project data

sheds light on the industry destinations for the major countries (table 2-5).

Manufacturing is the leading industry destination, followed by information (including

telecommunications services) and professional, scientific, and technical services (including

business services such as data processing and telephone call centers). Figure 2-6 shows the

leading countries in terms of greenfield FDI from 2002 through 2006.
2-12

TABLE 2-5 India, M&A deals by acquirer country and industry of the target company, 2000–06

Acquirer Countries Manufacturing Information

Financial

Services

Professional,

Scientific, and

Technical

Services Other Total

United States 39 55 13 56 43 206

European Union 93 22 12 33 18 178 

Singapore 11 10 0 11 5 37

Japan 12 2 3 4 6 27

Mauritius 10 1 3 3 5 22

Australia 2 5 1 6 4 18

Switzerland 9 0 0 0 0 9

Korea 4 2 0 2 0 8

Rest of World 35 11 7 14 15 82

Total 215 108 39 129 66 557

Source: Compiled from Bureau van Dijk, Zephyr Mergers and Acquisitions database.

Notes: Due to rounding and multiple target company industry classifications, numbers may not add

to total. Industry groups reflect the North American Industry Classification System (NAICS) also

used in official U.S. Government statistics. 

0

1,000

2,000

3,000

4,000

5,000

6,000

US EU Rest of World

Millions USD

0

20

40

60

80

100

120

Number of deals

Total deal value (millions USD) No of deals with known values

Figure 2-5 India M&A number of deals with known value, 2000–06

Source: Compiled from Bureau van Dijk, Zephyr Mergers and Acquisitions datebase .
 Department of Industrial Policy and Promotion. Fact Sheet on Foreign Direct Investment.

32

 The projects were small, with a combined value of $31 million. Two of the projects were in software

33

development, one was in financial services, and the last was in gold mining.

 Round-tripping is a process whereby a company operating in India registers a subsidiary in Mauritius, 34

and then routes profits through the subsidiary in order to avoid paying capital gains taxes on its profits in

India.

2-13

Mauritius

According to Indian government statistics, Mauritius accounts for the largest share of

cumulative FDI inflows to India from 1991 to 2006, nearly 40 percent (figure 2-7). It is

32

unlikely, given the small size of the Mauritian economy, that much of the capital destined

for India originated in Mauritius. According to LocoMonitor data, only four greenfield FDI

projects (all from 2002) list Mauritius as the source country. Many companies based 33

outside of India utilize Mauritian holding companies to take advantage of the IndiaMauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign

firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid

paying certain taxes through a process known as “round tripping.”34
 35 Sikarwar, “Mauritius Overhauls DTAA Agreement.”

 36 FDI inflows are allocated to the countries which have direct transactions with India, not to the ultimate

source of the capital. For a corporation based in the Netherlands with a holding company in Mauritius, for

example, the direct transaction takes place between Mauritius and India, even though the capital may

ultimately have originated in the Netherlands.

 37 Fuel includes power and oil refineries; telecommunications includes radio paging, cellular mobile and

basic telephone services; electrical equipment includes computer software and electronics; services includes

financial and non-financial services. Embassy of India. “U.S. Investments in India.”

2-14

The extent of round tripping by Indian companies through Mauritius is unknown. However,

the Indian government is concerned enough about this problem to have asked the

government of Mauritius to set up a joint monitoring mechanism to study these investment

flows.35 The potential loss of tax revenue is of particular concern to the Indian government.

The existence of the treaty makes it difficult to clearly understand the pattern of FDI flows,36

and likely leads to reduced tax revenues collected by the Indian government. Chapter 5

presents a more complete discussion of the DTAA. 

United States

The United States is the second largest source of FDI in India (13 percent of the total),

valued at $5.6 billion in cumulative inflows between August 1991 and December 2006.

According to the Indian government, the top sectors attracting FDI from the United States

to India during 1991–2004 (latest available) are fuel (36 percent), telecommunications

(11 percent), electrical equipment (10 percent), food processing (9 percent), and services

(8 percent).37

According to the available M&A data, the two top sectors attracting FDI inflows from the

United States are computer systems design and programming and manufacturing. These

EU

25%

Mauritius

39%

Other

18%

Japan

5%

United States

13%

Figure 2-7 Share of top investing countries, cumulative FDI equity inflows, 

August 1991–December 2006

Source: Compiled from Department of Industrial Policy and Promotion, Fact Sheet on Foreign 

Direct Investment.

Note: Shares are calculated in Indian rupees, and may not match shares calculated in U.S. 

Total = $48.2 billion 
 38 Bureau van Dijk, Zephyr Mergers &Acquisitions database.

 39 iTWire, “Google Likely to Set Up $1 Billion Datacenter in India.”

 40 OCO Consulting Ltd., LocoMonitor FDI database.

 41 Intel, “Intel Outlines $1 Billion Multi-Year Investment Plans.”

2-15

data roughly correspond to the overall FDI sectoral breakdown with the exception of fuel

(including power generation and oil refineries). Given India’s general lack of existing

power infrastructure, operations involved with power generation and oil refineries may be

better suited to greenfield investments. U.S. companies that are actively pursuing or have

recently completed M&A deals in the Indian telecommunications, electrical equipment,

and service sectors include Oracle, Intel, IBM, HP, and Electronic Data Systems (EDS).

Ford, Parker-Hannifin, Sara Lee, SC Johnson, and Caterpillar have been actively

investing in the manufacturing sector.38

According to Indian government statistics, FDI inflows from the United States accounted for

13 percent of total FDI inflows between August 1991 and December 2006. According to

LocoMonitor data for 2002–06, U.S. greenfield investment has averaged 44 percent of the

total number of projects listed and 18 percent of the total reported value for projects. The

industry receiving the largest share of U.S. greenfield FDI has been followed by electronics

and business services (figure 2-8). Among the announced ICT projects that have value data

reported, Google’s $1 billion investment in internet infrastructure in Andhra Pradesh is the

largest. The internet search engine company intends to open a “server farm” (a collection of

computer servers) to enhance its internet and data storage services in Asia.39 Most of the

other U.S.-funded ICT projects are for software development.40

Reported greenfield FDI projects by U.S. companies have been generally smaller by value

(about one-third the size, on average) than projects financed by non-U.S. companies. Some

of this disparity in size may be explained by the much greater emphasis on R&D activities,

including software development, by U.S. firms than by non-U.S. firms investing in India.

Over one-half of all listed R&D projects were funded by U.S. companies, and research

facilities tend to require considerably less capital than manufacturing facilities. Since 2002,

many of the major U.S. software and computer brands, such as Microsoft, Honeywell, Cisco

Systems, Adobe Systems, McAfee, and Intel have established R&D operations in India,

primarily in Hyderabad or Bangalore. 

The majority of U.S. electronics companies that have announced greenfield projects in India

are concentrated in the semiconductor sector. By far the largest such project is AMD’s chip

manufacturing facility in Hyderabad, Andhra Pradesh. This $3 billion site will produce about

30,000 wafers per month, with each wafer containing between 100 and 1,000 chips. Intel

plans to invest close to $1 billion in India, primarily expanding the company’s R&D center

in Bangalore, over a multi-year period.41

Official data on FDI flows and stocks is compiled on a balance of payments (BOP) basis, and

reflects the total capital that crosses borders. These data are one indicator of the level of FDI

in a given country, and generally the indicator that is most widely available. An alternate

indicator of FDI activity is the extent of operations by foreign-owned affiliates in a given

economy. These data are not available for all countries. For the United States, however, there

is a substantial amount of available information, including data on sales and assets of U.S.-

owned affiliates in India, employment by those affiliates, and R&D performed by U.S.-

owned firms in India.
 According to U.S. government statistical standards, consistent with IMF standards, an affiliate is any 42

firm with an equity share of 10-percent or more. The U.S. Department of Commerce compiles statistics on

both U.S.-owned affiliates and majority-owned affiliates (MOFAs), with greater detail available for MOFAs.

USDOC, BEA. International Economic Accounts, “Operation of Multinational Companies.”

2-16

assets of U.S.-owned affiliates in India, employment by those affiliates, and R&D performed

by U.S.-owned firms in India.

In 2004 (latest available), there were 577 affiliates of U.S. firms in India, of which 198 were

majority-owned by U.S. firms (table 2-6). U.S. majority-owned affiliates (MOFAs) 42

employed a total of 165,600 workers in India. The largest share (36 percent) was found in

the manufacturing sector, most prominently in the machinery, chemicals, and transportation

equipment manufacturing segments. Other important categories of employment are

professional, scientific, and technical services; and wholesale trade, with 29 percent and

18 percent of U.S. affiliate employment, respectively. While manufacturing remains the

largest sector for U.S. employment, the latter two sectors have accounted for an increasing

share of employment by U.S.-owned affiliates in recent years (figure 2-9). U.S.-owned

manufacturing affiliates also reported larger assets than affiliates in other sectors in 2004,

followed by finance and insurance, and utilities affiliates (figure 2-10).
 According to U.S. government statistical standards, consistent with IMF standards, an affiliate is any 42

firm with an equity share of 10-percent or more. The U.S. Department of Commerce compiles statistics on

both U.S.-owned affiliates and majority-owned affiliates (MOFAs), with greater detail available for MOFAs.

USDOC, BEA. International Economic Accounts, “Operation of Multinational Companies.”

2-16

assets of U.S.-owned affiliates in India, employment by those affiliates, and R&D performed

by U.S.-owned firms in India.

In 2004 (latest available), there were 577 affiliates of U.S. firms in India, of which 198 were

majority-owned by U.S. firms (table 2-6). U.S. majority-owned affiliates (MOFAs) 42

employed a total of 165,600 workers in India. The largest share (36 percent) was found in

the manufacturing sector, most prominently in the machinery, chemicals, and transportation

equipment manufacturing segments. Other important categories of employment are

professional, scientific, and technical services; and wholesale trade, with 29 percent and

18 percent of U.S. affiliate employment, respectively. While manufacturing remains the

largest sector for U.S. employment, the latter two sectors have accounted for an increasing

share of employment by U.S.-owned affiliates in recent years (figure 2-9). U.S.-owned

manufacturing affiliates also reported larger assets than affiliates in other sectors in 2004,

followed by finance and insurance, and utilities affiliates (figure 2-10).
2-17

TABLE 2-6 Selected data for U.S. majority-owned affiliates in India, 2004

All industries Manufacturing

Wholesale

trade

Professional,

scientific, and

technical services Information

Financial

services

Number of

affiliates (units) 198 N/A N/A N/A N/A N/A

Employment

(thousands) 166 60 30 48 11 3

Million dollars

Assets 20,188 6,453 2,146 1,520 2,277 3,344

Sales 13,100 6,569 3,620 1,293 745 243

Value-added 3,937 1,689 931 812 346 30

Net income 637 235 158 171 89 11

Source: USDOC, BEA International Economic Accounts, “Operations of Multinational Companies”.

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004

Thousand

Mfg - total Prof; sci; and tech svcs Wholesale Trade 

Source: Bureau van Dijk, Zephyr Mergers and Acquisitions database .

Figure 2-9 Employment, MOFAs, India, 2000–04
 43 The U.S. Department of Commerce does not provide a breakdown of the information category, but

there is a significant amount of U.S. FDI in India’s telecommunications industry. The information category

also includes publishing, motion picture and sound recording, broadcasting, and data processing services.

 44 The R&D figure for professional, scientific, and technical services was suppressed to avoid disclosing

individual company information. 

 45 EC. “Bilateral Trade Relations - India.”

2-18

The top four sectors in terms of value-added by U.S.-owned affiliates in India were,

respectively, manufacturing; wholesale trade; professional, scientific, and technical services;

and information services (primarily telecommunications, most likely).43 Within the

manufacturing sector, the largest industries were chemicals and machinery manufacturing.

In 2003, U.S. MOFAs reported R&D-related expenditures of $81 million in India. Of this

total, 43 percent was in the manufacturing sector, with most of the remainder likely in the

area of professional, scientific, and technical services.44 Given the sharp increase in overall

FDI in India since 2003, and the individual projects noted above, R&D-related expenditures

by U.S. MOFAs have also likely increased.

European Union

Within the European Union, the largest country investors were the United Kingdom and the

Netherlands, with $3.7 billion and $2.5 billion, respectively, of cumulative FDI inflows

between 1991 and 2006. The United Kingdom, the Netherlands, and Germany together

accounted for almost 75 percent of all FDI flows from the EU to India (figure 2-11). All EU

countries together accounted for approximately 25 percent of all FDI inflows to India

between August 1991 and December 2006. FDI from the EU to India is primarily

concentrated in the power/energy, telecommunications, and transportation sectors.45

Other Industries

7%

Mining 

2%

Utilities

13%

Finance and 

insurance

17%

Mfg - total

31%

Information

11%

Wholesale Trade 

11%

Prof; sci; and tech 

svcs

8%

Figure 2-10 MOFA Assets, 2004

Source: USDOC, BEA, International Economic Accounts, "Operations of Multinational 

Companies".
 46 OCO Consulting Ltd., LocoMonitor FDI database.

 47 Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and

Promotion. Fact Sheet on Foreign Direct Investment.

2-19

The available M&A data shows that the top sectors attracting FDI from the European Union

are similar to FDI from the United States. Manufacturing; information services; and

professional, scientific, and technical services have attracted the largest shares of FDI

inflows from the EU to India since 2000. Unilever, Reuters Group, P&O Ports Ltd,

Vodafone, and Barclays are examples of EU companies investing in India by means of

mergers and acquisitions.

European companies accounted for 31 percent of the total number and 43 percent of the total

value for all reported greenfield FDI projects. The number of EU greenfield projects was

distributed among four major clusters: ICT (17 percent), heavy industry (16 percent),

business and financial services (15 percent), and transport (11 percent). However, the heavy

industry cluster accounted for the majority (68 percent) of the total value of these projects.46

Japan

Japan was the fourth largest source of cumulative FDI inflows in India between 1991 and

2006, but the recent trend of FDI inflows from Japan differs from those of other source

countries. FDI inflows to India from most other principal source countries have steadily

increased since 2000, but inflows from Japan to India have decreased during this time period

(figure 2-12).47 There does not appear to be a single factor that explains the recent decline

in FDI inflows from Japan to India. India is, however, one of the largest recipients of

Japanese Official Development Assistance (ODA), through which Japan has assisted India

in building infrastructure, including electricity generation, transportation, and water supply.

It is possible that this Japanese government assistance may crowd out some private sector

Japanese investment. 

UK

33%

Netherlands

25%

Germany

17%

Rest of EU

25%

Figure 2-11 EU share of FDI stock in India, 1991–2006

Source: Compiled from Department of Industrial Policy and Promotion, FDI Statistics 2006 .

Total = $10.0 billion
 48 Department of Industrial Policy and Promotion. “FDI Synopsis on Japan.”

 49 “Upbeat India Scales Up FDI Projections by 25 Percent,” Khaleej Times.

 50 OCO Consulting Ltd., LocoMonitor FDI database.

 51 Ibid.

2-20

The top sectors attracting FDI inflows from Japan to India (January 2000 to November 2006)

are transportation (54 percent), electrical equipment (7 percent), telecommunications, and

services (3 percent).48 The available M&A data corresponds with the overall FDI trends in

sectors attracting inflows from Japan to India. Companies dealing in the transportation

industry, specifically automobiles, and the auto component/peripheral industries dominate

M&A activity from Japan to India, including Yamaha Motors, Toyota, Kirloskar Auto Parts

Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies have also invested in an

estimated 148 greenfield FDI projects valued at least at $3.7 billion between 2002 and

2006.49

Japanese companies accounted for a relatively small share of greenfield FDI in India:

5 percent of the projects and 4 percent of the value. The transport equipment cluster received

the largest share (34 percent) of Japanese greenfield FDI projects and 79 percent of Japanese

greenfield FDI value. The largest project in the cluster is Nissan’s $1.5 billion, exportoriented passenger car plant in Manesar, Orissa.50 The ICT and electronics clusters each

garnered 17 percent of the projects, but only small amounts of value. The only other cluster

to receive more than a 10 percent share of Japanese capital was the chemical, plastics, and

rubber industry. In one prominent example, Mitsubishi Chemical is investing $368 million

to expand its existing basic organic chemicals production in Haldia, West Bengal.51

In April 2007, Japanese and Indian officials announced a major new collaboration between

the two countries to build a new Delhi-Mumbai industrial corridor, to be funded through a

public-private partnership and private-sector FDI, primarily from Japanese companies. The

project is expected to begin in January 2008 with initial investment of $2 billion from the

two countries. The corridor will cross 6 states and extend for 1,483 km, in an area inhabited

0

100

200

300

400

500

600

700

800

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

UK United States Japan

Figure 2-12 FDI inflows, selected countries, 2000–06

Source: Compiled from Government of India, Ministry of Commerce & Industry, Department of 

Industrial Policy and Promotion, FDI Statistics.

Note: Data for 2006-07 reflect April through December only.
 52 BusinessStandard.com, “Industrial Corridor to Get $50 Billion Investment”; Indian Express, “Work on

Delhi-Mumbai Corridor from January”; and Gulf News.com, “Japan to Help India Build $50 Billion Industry

Corridor.”

 53 Jha, “UAE, India to Expand Ties.”

 54 Khaleej Times, “Upbeat India Scales Up FDI Projections by 25 Percent.”

 55 OCO Consulting Ltd., LocoMonitor FDI database.

 56 Khaleej Times, “DP World’s India Foray Runs into Murkier Waters.”

 57 Ibid., “Gulf Arab Investors Target Asia as US Ties Wane.”

2-21

by 180 million people. At completion in 2015, the corridor is expected to include total FDI

of $45–50 billion. A large share of that total is destined for infrastructure, including a 4,000

MW power plant, 3 ports, and 6 airports, along with additional connections to existing ports.

Private investment is expected to fund 10-12 new industrial zones, upgrade 5–6 existing

airports, and set up 10 logistics parks. The Indian government expects that by 2020, the

industrial corridor will contribute to employment growth of 15 percent in the region,

28 percent growth in industrial output, and 38 percent growth in exports.52

United Arab Emirates (UAE)

The UAE ranked fourteenth in FDI stock in India in 2006, but the two countries are in the

process of signing several economic and political cooperation agreements which will likely

lead to increased UAE investment in India. The March 2007 visit to India by officials from

Dubai has already produced commitments for cross border investments of over $30 billion

over the next two years.53

Sectors attracting interest from the UAE include ports, infrastructure, and hotel construction.

One notable recent agreement involves a 50:50 joint venture between Dubai-based Nakheel

and Indian real estate developer DLF. The company plans to develop 40,000 acres for

housing with an initial investment of $10 billion. Greenfield FDI projects in India from

UAE-based investors are valued at more than $2 billion in each of the last two years, many

of which are aimed at infrastructure and real estate development.54

The three clusters with the largest number of UAE-funded greenfield FDI projects during

2002–06 are light industry; property, tourism, and leisure; and logistics. The light industry

projects, concentrated in textiles and building materials, are typically less capital intensive.

Conversely, heavy industry had only one UAE-funded greenfield FDI project, but it was

valued at $1.1 billion: Dubai Aluminum is setting up a mine, refinery, and smelter in

Orissa.55 Dubai Ports World has been the most active UAE investor in India’s logistics

cluster, with plans to establish container port operations in numerous Indian ports. The

extensive network is, in fact, leading to questions about whether the company is gaining too

large a share of the market with its control of 50 percent of India’s container shipping

traffic.56

UAE investors claim that one reason for their increased interest in India is related to the U.S.

response to the September 11, 2001 terrorist attacks on the United States. The U.S. market

is perceived to be less welcoming to foreign ownership, particularly from the Gulf states, so

investors are looking for other markets to absorb their investment dollars.57
 58 Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and

Promotion, FDI Statistics 2006

 59 The definition of industry sectors in the Zephyr database follows the North American Industry

Classification System (NAICS) followed by U.S. government statistical agencies. 

 60 Flextronics International Ltd., “SemIndia Announces Flextronics as a Strategic Partner.”

 61 The Economic Times, “Hindustan Semiconductor to Chip In $4 B for Indian Fabs.”

2-22

FDI Flows to India by Industry

The sectors receiving the largest shares of total FDI inflows between August 1991 and

December 2006 were the electrical equipment sector and the services sector, each accounting

for 17 percent. These were followed by the telecommunications, transportation, fuels, and

chemicals sectors (table 2-7).58 The top sectors attracting FDI into India via M&A activity

were manufacturing; information; and professional, scientific, and technical services.59 These

sectors correspond closely with the sectors identified by the Indian government as attracting

the largest shares of FDI inflows overall. 

TABLE 2-7 India, FDI by sector, selected years

Sector

2006–07

(April–December)

Cumulative Inflows 

(August 1991–December 2006) Share of total inflows

(Million dollars) (percent)

Electrical equipment 1,429 6,923 17.0

Services 3,820 6,911 17.0

Telecommunications 490 3,861 9.3

Transportation 368 3,548 8.4

Fuels (power and oil refinery) 192 2,773 6.7

Chemicals 147 2,290 5.2

Pharmaceuticals 157 1,165 2.8

Food processing 49 1,227 2.8

Cement and gypsum 210 956 2.4

Metallurgical industries 148 803 2.0

Source: Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion, FDI

Statistics 2006.

ICT and electronics have been the largest industry recipients of greenfield FDI into India in

recent years, but have seen the number of new greenfield projects plateau since 2004. These

data do not signify that greenfield investment in these sectors has stagnated. Rather, the size

of the projects in these industries has increased substantially. For example, global

semiconductor manufacturers Advanced Micro Devices (AMD - United States) and

Flextronics (Singapore) have entered into separate joint ventures with SemIndia to build

semiconductor manufacturing facilities in Hyderabad. The $3 billion AMD-SemIndia

joint venture will produce semiconductor chips which can then be used to manufacture

electronic products in the Flextronics-SemIndia $3 billion joint venture. The chip fabrication

facility will manufacture chips for cell phones, set-top boxes, personal computers, and

similar products.60 SemIndia is attempting to capitalize on India’s domestic demand for

semiconductors, predicted to grow from $3.3 billion in 2006 to $40 billion in 2016.61
 62 OCO Consulting Ltd., LocoMonitor FDI database.

 63 Ibid.

 64 Business India Intelligence, “Hotels.”

 65 Royal Indian Raj International Corp., “Royal Indian Raj International Corporation.”

2-23

The heavy industry and transport equipment sectors together attracted over $30 billion in

greenfield FDI projects in 2006. The cluster with the highest reported value during 2002–06

is heavy industry. Projects in this sector tend to be highly capital intensive, with single

projects frequently requiring upwards of $6 billion in startup investment costs. The largest

recent examples include the POSCO and Arcelor-Mittal Steel projects noted above, and

Vedanta Resources’ (United Kingdom) aluminum smelter project, all planned for the state

of Orissa.62 Reported greenfield FDI in the transport equipment sector exceeded $11 billion

in 2006.63

Another major recipient sector was property, tourism and leisure, with over $6.1 billion in

2006. This level of investment was well above the annual average for this sector, although

still below the high of $9.2 billion in 2004. The Asian tsunami on December 26, 2004, may

have dampened enthusiasm for such investment, as investment plunged to just over

$100 million in 2005 before rebounding to $6.1 billion in 2006. The industry is expected to

continue to attract substantial FDI. At least 50 non-Indian hotel chains planned to enter the

market as of April 2007, targeting India’s low level of hotel penetration around the country.64

In particular, Royal Indian Raj International Corp. has signed a contract with Choice Hotels

to build 15,000 hotel rooms around the country, with an estimated FDI value of $6 billion.65

Figure 2-13 shows that greenfield FDI projects have become more widely distributed across

industries over time. In 2002, FDI projects were concentrated in the ICT industry, followed

by business and financial services; and electronics. By 2006, the distribution of the projects

among the clusters was more uniform, although the ICT cluster still was the largest. Figure

2-14 shows how greenfield FDI capital has been distributed among the various sectors. Note

that the two “pies” are not the same size–the total amount invested in 2006 ($55.5 billion)

is more than 13 times the total in 2002 ($4.2 billion). Even if an industry’s share of the total

pie decreased between 2002 and 2006, that industry may still have significantly increased

its total greenfield FDI. The ICT sector is a case in point, down 12 percent by relative share

from 2002 to 2006, but recording increased FDI of more than $4.1 billion.
2-24
2-25

 1

 The Global Competitiveness Index, developed by the World Economic Forum from responses to an

executive opinion survey, ranks a country’s competitiveness based upon nine factors: institutions,

infrastructure, macroeconomy, health and primary education, higher education and training, market

efficiency, technological readiness, business sophistication, and innovation. These nine factors each consist

of a number of items relevant to that particular factor. For example, institutions include such things as

property rights, judicial independence, and the strength of auditing and accounting standards. Innovation

includes such things as the availability of scientists and engineers and the quality of scientific research

institutions, and macroeconomy includes government surplus/deficit, national savings rate, and inflation.

Lopez-Claros, et al., The Global Competitiveness Report, xiv, xvi, xvii, 242–43. 

 2

 A.T. Kearney’s annual Foreign Direct Investment Confidence Index is based upon survey responses

received from top executives of the world’s largest 1,000 firms concerning their FDI plans and their opinions

of the economic and business environment in 68 countries which account for virtually all worldwide FDI. In

the 2004 survey, India ranked third, behind China and the United States. A.T. Kearney, Inc., “FDI

Confidence Index,” 1–2.

 3

 The Doing Business Report 2007, an annual report developed by the World Bank and the IFC, ranks 175

countries on the ease of doing business and the pace of reforms. Ten factors are considered in the rankings,

including starting a business, employing workers, registering property, getting credit, protecting investors,

enforcing contracts, and closing a business. World Bank, “Doing Business Report 2007.” 

3-1

CHAPTER 3

India’s FDI Environment

Introduction

In recent years, India has emerged as a desirable location for FDI by investors from the

United States and many other countries. Its rapidly growing economy, low wages, and

educated work force have attracted FDI in the services and manufacturing sectors to serve

both the Indian market and third country markets. Foreign investors’ enthusiasm for India,

however, has been tempered by widespread poverty, rigidity in the labor market, rising

salaries and high employee turnover in some industries, an antiquated infrastructure,

weaknesses in the overall educational system, and excessive bureaucracy and corruption. 

Surveys of international competitiveness and investor confidence support this mixed picture

with respect to India’s attractions for FDI. In the Global Competitiveness Index for 2006,

India ranked 43 out of 125 countries, ahead of China, Indonesia, Mexico, and Brazil, but

behind Taiwan, Korea, and Malaysia. India ranked relatively higher in several attributes,

including institutions, market efficiency, business sophistication, and innovation, but

relatively lower in infrastructure, macroeconomy, health and primary education, higher

education and training, and technological readiness.1

 In A.T. Kearney’s Foreign Direct

Investment Confidence Index for 2005, India trailed only China as the most desirable

location for FDI.2

 The World Bank’s Doing Business Report 2007, however, ranked India

only 134 out of 175 countries, a slight improvement over its 2005 ranking of 138 out of 175.

By comparison, China ranked 93 out of 175 in 2006. Other rankings on the same survey

included Brazil (121), Korea (23), Malaysia (25), Mexico (43), and Taiwan (47).3

Actual FDI into India in the past 4 years reflects these mixed perceptions with respect to the

business climate in India relative to other countries. Although FDI into India increased

irregularly between 2002 and 2005, from $5.6 billion to $6.6 billion, it was orders of

magnitude smaller than that into China, Brazil, and Mexico (table 3-1). During the past 4

years, FDI into China, its most comparable competitor in terms of population, has been ten
 4

 FDI regulations in India, another significant factor in determining a country’s overall FDI attractiveness,

are addressed in chap. 5 of this study.

 5

 CIA, “India.”

 6

 Purchasing power parity is the number of foreign currency units required to buy goods and services in a

foreign country equivalent to what can be bought with one dollar in the United States. U.S. Department of

Labor, A Chartbook of International Labor Comparisons.

 7

 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India.

 8

 Inflation as measured by the Indian GDP deflator. World Bank, World Development Indicators

database. 

 9

 GTIS, World Trade Atlas database.

3-2

TABLE 3-1 Inward FDI flows for selected countries,

2002–05, (millions of U.S. dollars)

Country 2002 2003 2004 2005

India 5,627 4,585 5,474 6,598

Brazil 16,590 10,144 18,146 15,066

China 52,743 53,505 60,630 72,406

Hungary 2,994 2,137 4,654 6,699

Malaysia 3,203 2,473 4,624 3,967

Mexico 18,275 14,184 18,674 18,055

Poland 4,131 4,589 12,873 7,724

Russia 3,461 7,958 15,444 14,600

Source: United Nations Conference on Trade and

Development, World Investment Report 2006.

times that of investment into India. FDI into Brazil and Mexico during the period has been

roughly three times that of India. FDI into Poland in the past 2 years surpassed that into

India. A closer examination of the factors that influence FDI, such as economic growth,

wage levels, infrastructure, and educational level of the work force, suggests that India is a

country with vast potential that has yet to be fully realized.4

Economy

Strong Economic Growth

Few countries have experienced the economic dynamism that India has enjoyed during the

past decade. This positive economic environment has attracted FDI by firms anxious to take

advantage of higher Indian living standards and increased demand for goods. The Indian

economy has grown, on average, more than 7 percent annually since 1994,5

 and is forecast

to grow at a comparable rate in 2006. By 2004, India had become the tenth largest economy

in the world and the fourth largest in purchasing-power parity terms.6

 With per capita income

having more than doubled since the mid-1980s, the Indian middle class has expanded and

its purchasing power has increased significantly (box 3-1).7

 Economic growth has not been

accompanied by high inflation—annual inflation in India has remained close to 4 percent

since 2000.8

 Increased FDI has stimulated both imports and exports, contributing to rising

levels of international trade. India’s imports almost tripled between 2001 and 2005, from

$50.1 billion to $138.4 billion, while exports more than doubled, from $43.3 billion to

$99.7 billion.9

 
 10 CIA, “India.”

 11 World Bank, World Development Indicators database.

 12 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India.

3-3

Poverty

Even with its strong economic growth in recent years, India remains a developing country,

with many of its people enjoying little benefit from the country’s economic growth. An

estimated 25 percent of the population lives below the poverty line,10 and the GNP per capita

was only $620 in 2004.11 Seventy percent of the Indian population lives in rural areas, which

are often difficult to access because of poor roads.12 This poverty and poor infrastructure

make it harder for foreign firms to establish and expand their presence in much of the Indian

market (box 3-2). 

Box 3-1 Foreign Investors Attracted by Strong Indian Economy

Foreign investors have noted the favorable conditions in the Indian economy and the importance of India

to their global operations. Nokia, a Finnish producer of cell phones, in an announcement concerning its

choice of Chennai, India as a new global network solutions center site, noted the robust nature of the

Indian market and its importance to the firm’s global expansion.a

 Samsung Electronics Co., Ltd., a Korean

producer of cell phones and telecom systems, in an announcement involving the start-up of a mobile

phone plant in Haryana State, India, stated that the Indian economy is growing by more than 7 percent

a year and the cell phone market growth potential is unlimited.b

 Caterpillar Inc., a large U.S.-based

producer of construction and mining equipment, recently increased its investment in India to serve

growing Indian demand for its products as well as increased demand from other Asian countries.c

a

Nokia, “Nokia Taps Chennai as New Nokia Global Networks Solutions Center Site.”

b

Samsung Electronics Co., Ltd., “Samsung Dedicates a Mobile Phone Plant in India.” 

c

Caterpillar Inc., “Caterpillar Completes Purchase of Former Joint Venture Engine Business in

India.”
 13 Government of India, Labour Bureau, Annual Survey of Industries Scheme. Average wages per day,

reported by the Labour Bureau, converted to annual salaries by multiplying daily wages by 250 (5 days per

week, 50 weeks in a work year).

 14 Kanellos, “India’s Tech Renaissance—U.S.-Style Labor Pains.”

 15 Kaushik and Sasi, “Indian Wages Cheaper Than Chinese.” 

3-4

Labor Issues

Low Wages

Foreign investors have been drawn to India not only by economic growth but also by low

labor costs. Indian salaries are considerably lower than those in the United States and other

industrialized countries. The average annual salary for all Indian employees in the

manufacturing sector was approximately $1,080 in 2000–01; by 2003–04 (latest data

available), the average annual salary had risen to approximately $1,270.13 Annual salaries

for skilled workers in India are much higher than these averages, but still substantially below

salaries in the United States and other developed countries. Starting salaries offered by large

Indian firms for new engineering graduates range from $4,300 to $8,000 a year. Annual

salaries for managers range from $30,000 to $51,000 and division heads earn up to

$76,000.14 Annual salaries for other occupations in India include human resource managers

($15,100), project managers ($10,000), financial analysts ($8,400), and customer service

assistants ($1,600).15

Box 3-2 Hindustan Lever Ltd. Succeeds in the Indian Market

Despite the difficulties presented by the Indian market, some foreign companies have succeeded there. Hindustan

Lever Ltd. (HLL), a subsidiary of Unilever, is a large Indian producer of consumer products such as foods (primarily

tea, coffee, and ice cream) and home and personal care products (soaps, deodorants, detergents, shampoos, and

toothpaste). Formed from a merger of three Indian subsidiaries of Unilever in 1956, HLL has successfully penetrated

the Indian market by establishing an extensive manufacturing, distribution, and R&D presence in India. HLL

manufactures its products in approximately 80 factories located throughout India and has large R&D centers to

develop new products for the Indian market. HLL’s distribution network consists of about 7,000 redistribution stockists,

which cover all major urban areas in India as well as approximately 250 million rural consumers. HLL has developed

numerous brand names for its products, which are well recognized by urban and rural Indian consumers.

HLL has expanded its presence in India through a variety of methods. Hindustan Lever Network, the direct selling arm

of HLL, consists of 350,000 sales consultants, located in 1,500 towns, selling HLL products out of their homes. These

sales consultants cover 80 percent of India’s urban population. Hindustan Lever Network plans to increase the number

of its sales consultants to 1 million by 2008. To increase brand awareness and sales in rural areas, HLL (1) sells

affordable value packs of its products, accompanied by educational brochures and audio-visual demonstrations, to

millions of Indians in thousands of villages; (2) advertises via wall paintings and cinema vans; (3) advertises and gives

product demonstrations at weekly markets and festivals, which draw large numbers of Indians from many isolated

areas; (4) utilizes a vast distribution network (involving trucks, autos, cycles, scooters, and bullock carts) developed

over the years encompassing 50,000 villages and 250 million people; and (5) is developing a home-based selling

program for its products in rural areas, similar to that in urban areas, which provides poor women in small villages an

opportunity to increase their income. Currently, the program involves thousands of women in 50,000 villages in 12

states.a

a

Hindustan Lever Limited Web site.
 16 World Bank, World Development Indicators database.

 17 The formal sector consists of establishments using electric power and employing 10 or more workers,

and establishments not using electric power and employing 20 or more workers. This sector accounts for

about 40 percent of Indian output. Two-thirds of the employees in the formal sector work in the public

sector. Asian Development Bank, “Key Indicators 2005: Labor Markets in Asia,” 46.

 18 In a recent survey, 17 percent of Indian managers stated that labor regulations were a major business

constraint. World Bank, World Development Indicators database.

 19 Asian Development Bank, “Key Indicators 2005: Labor Markets in Asia,” 46–51; and Basu, “Why

India’s Labour Laws Are a Problem.” 

 20 Wakhlu, Remarks.

 21 Kanellos, “India’s Tech Renaissance—U.S.-Style Labor Pains.”

3-5

Rigidity in the Labor Market

India’s labor market is immense. The labor force totaled 427 million in 2004, an increase of

31 million since 2000, with women accounting for 28 percent of the labor force.16 The

organized, or formal, sector of the work force, however, accounts for less than 10 percent

of the total.17 Despite India’s strong economic growth in recent years, the increase in

employment in the organized sector of the economy has not kept pace with the growth of the

labor force. This has generated national concern that the benefits of India’s economic

development have not been spread widely enough. 

The inability of the Indian economy to generate sufficient jobs in the organized sector is due,

at least in part, to cumbersome and bureaucratic labor policies at the federal and state

levels.18 Both the Indian federal and state governments have the authority to make and

enforce labor laws. There are numerous federal and state laws covering labor issues, leading

to administrative overlap and excessive bureaucracy. Federal and state labor agencies also

generally focus their enforcement activities on the organized sector, even though this sector

accounts for only a small percentage of the total Indian work force.

One of the biggest difficulties for employers in India is their inability to lay off workers. The

Industrial Disputes Act of 1947 and subsequent amendments govern the layoffs of workers

and the closure of plants. Firms with 100 or more employees must obtain approval from the

government to shut down plants and lay off workers. Approval is typically difficult to obtain,

although firms on occasion are able to reduce the number of employees by offering voluntary

severance and retirement packages. Nonetheless, in the past few years, as the Indian

economy has experienced greater trade liberalization, the Indian federal and state

governments appear to have reduced their enforcement of the Industrial Disputes Act with

respect to layoffs and plant closures, apparently in an attempt to increase the flexibility and

competitiveness of Indian firms.19 For example, one leading Indian executive has noted his

firm’s ability to lay off workers as long as proper procedures are followed.20

Rising Salaries and High Turnover in Some Industries

Strong demand for skilled workers in India has led to rising salaries and high turnover. To

expand their operations in India, large multinational computer firms, automotive firms, and

electronics firms have offered to double or triple the salaries of workers employed by Indian

firms and have aggressively recruited graduates from top Indian universities and technical

schools.21 Scientists and engineers in Indian government research laboratories have left to

pursue opportunities and higher salaries in the private sector. Indian companies have also

experienced rapid turnover as their skilled workers leave and go to work for other employers.

In the software services industry, one of the cornerstones of FDI in India, turnover recently
 22 Kanellos, “India’s Tech Renaissance—U.S.-Style Labor Pains.”

 23 Kaushik and Sasi, “Indian Wages Cheaper Than Chinese.”

 24 Indo-Asian News Service, “India Woos Foreign Equity in Infrastructure.” 

 25 Power generation in India is principally a central government and state government function, although

private energy producers play an increasingly important role.

 26 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India.

 27 World Bank, “Enterprise Surveys, What Businesses Say.” 

 28 World Bank, World Development Indicators database.

 29 World Bank, “India, Inclusive Growth and Service Delivery.”

 30 World Bank, “India Transport Sector.”

3-6

has been between 15 and 30 percent annually.22 Nevertheless, a recent survey of salaries of

skilled workers in 42 occupations in India and China found that salaries in India remain

below those in China. The salary differentials tended to be greater in those occupations

paying higher salaries.23

Infrastructure

Antiquated Infrastructure

The poor condition of India’s infrastructure reduces both enthusiam for FDI on the part of

foreign investors and India’s overall economic growth. Insufficient power, rudimentary

roads, antiquated ports, and an overburdened rail system make it difficult for many firms to

produce and deliver goods and services in a timely and efficient fashion. India’s national and

state governments have achieved some success in expanding and modernizing infrastructure

but a significantly higher level of investment will be necessary to maintain an infrastructure

commensurate with the size of the Indian economy. The Indian government estimates that

the infrastructure sector will need approximately $320 billion in investment during the next

5 years.24

India’s capacity to produce electricity has fallen behind demand in recent years,25 and

electricity demand currently exceeds supply by 30 percent, causing frequent shortages and

blackouts.26 Numerous surveys of companies in India attest to the difficulties and added costs

to production caused by an unreliable power sector. In one survey of Indian firms,

respondents noted that it took 68 days to obtain an electrical connection and indicated that

electrical outages caused production downtime equivalent to 8 percent of their annual sales.27

In another survey of Indian firms, 29 percent of the managers ranked electricity as a major

business constraint.28 In a survey of private investors in India, respondents indicated that the

average business in India experiences a power outage almost every other day. In response,

most businesses have purchased generators to supply emergency electrical power.29

India’s transport system has also lagged behind the country’s rapid growth. Most Indian

roads are narrow, congested, and poorly maintained. Only 41 percent of them are paved, and

of these, only 34 percent are 2-lane roads and 1 percent are 4-lane roads. Forty percent of the

rural population does not have access to all-weather roads and thus is isolated during periods

of bad weather, particularly the monsoon season. Urban areas suffer from severe congestion,

with rapid growth in automobile ownership compounding the problem of inadequate roads.

Insufficient funds for road maintenance leads to further deterioration of the roads.30
 31 Ibid.

 32 World Bank, “India, Inclusive Growth and Service Delivery.”

 33 World Bank, “India Transport Sector.” 

3-7

The capacity of the railway system, particularly in the highly-traveled urban areas, has also

lagged the growth in demand for its services. Indian seaports have experienced dramatic

increases in container cargo but have not expanded cargo handling capacity commensurately.

A similar situation has occurred at Indian airports, particularly at the major international

airports, where annual growth in air traffic of more than 15 percent in recent years has led

to congestion and delays.31

 

Insufficient infrastructure may continue to plague the Indian economy in the years ahead.

It has been estimated that India needs to invest at least 8 percent of its gross domestic

product annually (approximately $62 billion) in infrastructure to maintain its high rate of

economic growth. Actual investment in infrastructure, though, probably has been only

3–4 percent of gross domestic product during the past decade. In addition, infrastructure

projects are frequently plagued by long delays and large cost overruns. Projects are often

started but not completed, or completed and not sufficiently maintained in the ensuing years.

As infrastructure lags the economy, the effects are felt throughout the country, particularly

in the manufacturing sector, where flexibility in production, low costs, and speed to market

are particularly hampered by clogged roads and ports and power outages.32 

Increased Opportunities for Private Sector Participation in

Infrastructure Projects

To help alleviate the strains on the infrastructure, large government projects have been

initiated, including (1) a National Highway Development Program to modernize roads

connecting India’s four largest cities, Delhi, Mumbai, Chennai, and Kolkata (the Golden

Quadrilateral); (2) a rural roads program to better integrate rural areas into India’s

transportation network; (3) a National Railway Development Program to expand rail

capacity between major cities and provide better connectivity to Indian seaports; (4) a

National Maritime Development Program to expand freight handling capacity in India’s

large seaports; and (5) a program to increase capacity at the New Delhi and Mumbai airports,

which handle about 50 percent of the country’s air traffic.33 Indian federal and state

governments have also allowed more private sector participation in infrastructure projects,

which has provided opportunities for foreign firms to benefit from Indian economic activity.

Traditionally, Indian federal and state governments have financed and built most

infrastructure projects in India. In recent years, however, the Indian government has turned

to the private sector, both domestic and foreign, for funding, expertise, and faster completion

of projects in management, design, and construction. To attract FDI in the construction,

maintenance, and operation of roads, the government has provided a number of incentives

to private firms, including (1) government financing of project feasibility studies, land

purchases, movement of utilities, and clearing of the land; (2) government approval of up to

100 percent foreign investment in a project; (3) government subsidies of up to 40 percent of

the cost; (4) 100 percent tax exemption for 10 years out of 20 years after the start of the

project; and (5) duty-free importation of road construction equipment. Private firms can

recoup their investment in these road projects by charging tolls or by receiving an annual

annuity from the government. Numerous foreign engineering and construction firms (and

private Indian firms) have taken advantage of these road project opportunities. To date, 34
 34 Government of India, Ministry of Shippping, Road Transport and Highways, Department of Road

Transport and Highways, “Opportunities for Private Sector Participation,” and “Status of BOT Projects

Awarded.” 

 35 Government of Goa Web site.

 36 U.S. Department of Commerce, U.S. Commercial Service, India: 

Architecture/Construction/Engineering Services.

 37 Government of India, Ministry of Civil Aviation, “Policy on Airport Infrastructure.” 

 38 U.S. Department of Commerce, U.S. Commercial Service, India: Electric Power Equipment.

 39 Colleges generally fall under the purview of state governments; universities/institutes generally fall

under the purview of the central government.

 40 Government of India, Ministry of Human Resource Development.

 41 Altbach, “Higher Education in India.” 

3-8

road projects have been completed by private firms, and another 34 projects are ongoing.34

Indian state governments have also invited foreign engineering and construction firms to

participate in road projects, patterning such private sector involvement after that of the

national government.35

Opportunities for FDI in other areas of Indian infrastructure, including seaports and airports,

have also increased. The Indian Ministry of Surface Transport, which operates India’s

seaports, would like to attract private investment of $1.9 billion to increase port capacity.

India’s Ministry of Civil Aviation, which operates India’s airports, would like to attract

$164 million in private sector investment to expand airport capacity.36 Investment in airports

is accorded favorable tax treatment—profits are exempt from taxation for the first 5 years

after the start of the project; for the next 5 years, 30 percent of profits are exempt from

taxation.37 With respect to the power sector, the government of India is working with Indian

state governments to reform their utilities by moving away from direct operational control,

reducing subsidies, pushing for greater financial viability, and allowing greater private sector

involvement in power distribution.38

Education

Educated Work Force

India’s educational system is vast, educates millions, and turns out thousands of well-trained

and skilled workers. India has an extensive system of schools, including primary and upper

primary schools, high schools, colleges for general education, colleges for professional

education (engineering, technology, medical, and teacher education), and

universities/institutes.39 In 2003–04, there were approximately 9,400 colleges for general

education, 2,750 colleges for professional education, and 300 universities/institutes.40 India

has the third largest number of students in higher education in the world, trailing only the

United States and China. English is the primary language of instruction in these schools,

which means that most educated Indian workers speak at least some English.41 In India, there

are more than 200,000 engineering graduates annually, more than 300,000 post graduates

from non-engineering colleges, 2.1 million other graduates, and about 9,000 PhDs.

Many foreign investors have established R&D centers in India and have made it an important

location for software development. Indeed, 20 percent of the Fortune 500 companies have
 42 Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and

Promotion, Secretariat for Industrial Assistance, “Destination India.” 

3-9

R&D facilities in India, drawn in large part by this vast pool of scientific and technical

expertise (box 3-3).42

Weaknesses in the Educational System

For all the strengths of the Indian educational system, it is also plagued by a number of

problems. Only 60 percent of the adult population is literate, so a large portion of the

population lacks the skills increasingly necessary to prosper in the Indian economy. The

percentage of young Indians in higher education (10 percent) is much less than that of

industrialized countries (more than 50 percent) and of China (15 percent). India has many

colleges and universities, but only a few are world class in terms of research and quality of

teacher instruction. For the most part, funding for classrooms, libraries, laboratories, and

information technology in Indian colleges and universities is inadequate. There are severe

faculty shortages, teacher morale is low, bureaucracy hampers teacher accountability, and

decision making is often influenced by politics. In addition, many Indian technology

graduates pursue graduate study abroad and generally do not return to India. The majority

of those who travel abroad for undergraduate study do not return to India after graduation.

All of these deficiencies raise real questions as to the ability of the Indian educational system

Box 3-3 Large U.S. Firms Tap Educated Indian Work Force

Three major U.S. companies are among the many to set up R&D facilities in India. Motorola, a U.S. provider of mobile

telecommunications devices, has rapidly expanded its presence in India in recent years to take advantage of Indian

engineers and software writers. In 1991, Motorola established its first R&D center in India. The firm now has six R&D

centers engaged in research involving telecom switching technologies, embedded computing, converged networks,

autonomic networking, and enterprise applications. India has also become a major source for software development

and software solutions for Motorola, including much of the software used in Motorola cell phones sold worldwide. The

firm’s investment in technology and R&D in India increased from $50 million in 2002 to $85 million in 2005. Investment

is projected to grow by 10-15 percent each year into the future. Employing over 2,800 Indian engineers, Motorola

considers India to be an important hub for R&D and software development, as well as a center for designing and

manufacturing products for regional markets.a

Microsoft has also turned to India for its technical expertise. Begun in 1998 with 20 employees, the Microsoft India

Development Center has expanded to more than 900 employees and become the second largest Microsoft

Development Center outside of corporate headquarters in Richmond, Washington. The Center works on software

development for more than 35 products.b

 

Attracted by India’s engineering knowledge and skills, General Electric opened the John F. Welch Technology Centre

in Bangalore, India, in September 2000. This center, along with GE’s three other R&D facilities in Schenectady, New

York, Munich, Germany, and Shanghai, China, comprises GE’s Global Research team, which conducts R&D and

engineering activities for all GE businesses. The center in Bangalore conducts R&D in a number of areas, including

mechanical engineering, electronic and electrical system technology, ceramics and metallurgy, chemical engineering,

and polymer science and synthetic materials.c

a

Motorola.

b

Microsoft.

c

General Electric. 
 43 Altbach, “Higher Education in India”; and Kapur, Remarks.

 44 World Bank, “India, Inclusive Growth and Service Delivery.”

 45 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India.

 46 Ibid.

 47 Chakrabarti, The Financial Sector in India Emerging Issues, 176; Deutsche Bank Web site; HSBC Web

site; and Iloveindia Web site. 

 48 Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and

Promotion, Secretariat for Industrial Assistance, “Destination India”; U.S. Department of Commerce, U.S.

Commercial Service, Doing Business in India; Bombay Stock Exchange Web site; and National Stock

Exchange Web site.

3-10

to continue to turn out sufficient numbers of well-trained graduates to enable India to

maintain its competitiveness in the global economy.43 

Access to Capital

The Indian financial sector has experienced significant reforms in recent years. Government

control and regulation have been reduced, interest rates have been allowed to fluctuate with

the market, restrictions on capital inflows have been loosened, and private firms have been

encouraged to participate.44 Although the Indian government is still the dominant actor in the

financial sector, foreign firms in India can access capital through bank loans, equity markets,

and international financial institutions.

India has a large banking system comprised of state-owned banks, private (Indian-owned)

banks, and foreign-owned banks. The state-owned banks account for more than 70 percent

of all deposits and loans. The respective percentages for private and foreign banks are

17 percent and 13 percent. The presence of foreign banks and private (Indian-owned) banks

has led to increased competition in the banking sector. By providing better customer service

through more bank branches, ATM machines, electronic and telephone banking, and longer

hours, these banks have taken market share from the state-owned banks and forced them to

become more responsive to customer needs. Some of the state-owned banks have

restructured and government ownership has been reduced.45

State-owned banks and private (Indian-owned) banks concentrate on lending to the rural and

agricultural sectors of the Indian economy and to Indian-owned companies.46 Several dozen

large foreign banks have established operations in India in recent years, including Citibank,

HSBC, Deutsche Bank, Mizuho Financial Group, Abu Dhabi Commercial Bank Ltd., and

American Express Bank Ltd. Among other activities, the foreign banks typically offer a full

range of banking services, including loans, to the Indian operations of foreign firms.47

India has 23 stock exchanges with approximately 9,000 listed companies. Only two of these

stock exchanges, however, the National Stock Exchange and the Bombay Stock Exchange,

are true national exchanges, and they account for virtually all of the stock trading that occurs

in the country. Foreign firms doing substantial business in India can raise equity capital in

the Indian capital markets through the issuance of Indian Depository Receipts. A number of

foreign firms are listed on the National Stock Exchange and/or the Bombay Stock Exchange,

including Gillette Ind., Glaxosmith, Nestle Ltd., Novartis Ind., Siemens Ltd., and SKF India.

Unlike the active equity markets, the Indian debt market is small, with very little trading of

notes and bonds, effectively precluding debt instruments as a way to raise capital.48

The lending activities of non-Indian government agencies and international financial

institutions provide another source of capital for foreign firms in the Indian market. The U.S.
 49 OPIC, Annual Reports for 2004, 2005, and 2006.

 50 Asian Development Bank Web site.

 51 As part of India’s National Highway Development Program, 29 road projects are currently being funded

by the ADB. Nineteen of these projects involve Indian and foreign firms, eight projects involve only foreign

firms, and two projects involve only Indian firms. Foreign firms include firms from South Korea, China,

Denmark, Switzerland, Malaysia, and the United States. Government of India, Ministry of Shipping, Road

Transport and Highways, Department of Road Transport and Highways, “Externally Aided Projects.”

 52 World Bank Web site.

 53 As part of India’s National Highway Development Program, 27 road projects are currently being funded

by the World Bank. Seventeen of these projects involve Indian and foreign firms, one project involves only

foreign firms, and nine projects involve only Indian firms. Foreign firms from France, the United Kingdom,

Malaysia, Russia, Singapore, Canada and Thailand are represented. Government of India, Department of

Road Transport and Highways, “Externally Aided Projects.”

3-11

Overseas Private Investment Corporation (OPIC) assists U.S. companies investing in

developing countries by providing loans, guarantees, and political risk insurance. OPIC

chooses projects that can strengthen a country’s economy and enhance its long-term

economic growth. In the past several years, OPIC has been involved in three projects in

India. In 2004, it provided $360,000 in political risk insurance for modular home

manufacturing; in 2005, OPIC provided $4.8 million in financing to expand a food

manufacturing plant in India; and in 2006, OPIC provided $2.8 million in financing for the

purchase of equipment and for marketing and distribution activities.49

The Asian Development Bank (ADB) assists developing countries by providing loans,

technical assistance, grants, guarantees, and equity investments. In a typical year, the ADB

lends about $6 billion to countries in the Asia-Pacific region and gives $180 million in

technical assistance. India is one of the largest recipients of ADB assistance. In 2005, the

ADB approved more than $1 billion in loans for India, $106 million in grants and technical

assistance, and $21 million in equity investments and guarantees. ADB assistance for India

has been concentrated in infrastructure, with loans and technical assistance for projects

involving water supply, sanitation, waste management, roads, agriculture and natural

resources, energy, and finance.50 Such assistance from the ADB has generated opportunities

for foreign investment by private firms. For example, many of the road projects involved

both foreign and Indian engineering and construction firms.51

Two of the World Bank’s agencies, the International Bank for Reconstruction and

Development (IBRD) and the International Development Association (IDA), assist economic

development in developing countries by providing low interest loans, interest free loans, and

grants for projects involving infrastructure, education, health, energy, and other related

purposes. India is the largest recipient of assistance from the World Bank. A sizeable part

of this assistance involves the transport sector in India. The World Bank has made a number

of loans totaling nearly $5 billion to expand the capacity of the rail system, assist in the

construction and maintenance of national and state highways and rural roads, and to improve

the system of public transportation in Mumbai.52 These loans have provided opportunities

for investment; foreign engineering and construction firms are participating in many of the

road projects.53 

The International Finance Corporation (IFC), another World Bank agency, promotes

economic growth in developing countries by assisting private companies through loans,

equity investments, guarantees, and technical and financial advice. The IFC has been active

in India since 1956. India is the third largest recipient of IFC assistance; as of July 2006, the

IFC’s current assistance totaled $1.3 billion. IFC activities in India are focused on helping

manufacturing firms improve their international competitiveness, increasing private sector
 54 IFC financial support was provided to a United Kingdom oil and gas company to expand its production

capacity in India, a U.S. engineering and environmental consulting firm to construct small hydroelectric

generation facilities in India, and a Chinese carbon black producer to upgrade and expand the capacity of its

carbon black plant in India. International Finance Corporation Web site.

 55 U.S. Department of Commerce, U.S. Commercial Service, India: 

Architecture/Construction/Engineering Services.

 56 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India.

 57 Reuters, “World Bank Halts India Health Funds on Fraud Claim.”

 58 Inadequate supply of infrastructure and restrictive labor regulations were the first and third most

problematic factors, respectively, for doing business in India, as reported by the survey respondents. For

purposes of the survey, respondents were asked to choose the five most problematic factors for doing

business in India from a list of 14 factors. Some of the other factors included tax regulations, tax rates, crime

and theft, government instability/coups, inadequately educated workforce, and policy instability. This survey

of business executives, assessing the business climate in 125 countries, is conducted annually by the World

Economic Forum. Lopez-Claros, et al., The Global Competitiveness Report, 140, 242.

3-12

involvement in infrastructure development, and supporting private firms in the areas of

financial services, information technology, and oil and gas exploration and production.

Although IFC’s assistance in many instances has been directed toward Indian companies,

foreign firms with operations in India have also benefitted from IFC financial aid.54

Bureaucracy and Corruption

Excessive bureaucracy and corruption discourage FDI by distorting the efficient allocation

of resources, increasing the cost of doing business, and breeding mistrust of government

officials. Although India has taken steps in recent years to open up more sectors of its

economy to FDI and to streamline the investment process, FDI into the country remains

hindered by government bureaucracy and corruption. Foreign businesses report instances

where investment decisions and approval by Indian government ministries drag on for

lengthy periods of time for no apparent reason.55 The Indian government procurement system

for certain areas of business has been plagued by instances of corruption; a number of

government officials have been convicted under Indian anti-corruption laws in the past

several years.56 Recently, the World bank suspended funding for some health care projects

in India due to allegations of fraud and corruption in the procurement of medicines.57

In a survey of business executives, respondents indicated that inefficient government

bureaucracy and corruption were the second and fourth most problematic factors,

respectively, for doing business in India.58 See chapter 5 for a discussion of bureaucratic

concerns related to the Indian court system.
 1

 Government of India, Ministry of Commerce & Industry, “SEZs Future Vehicle of Economic Activity.”

 2

 Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India—About.”

 3

 Confederation of Indian Industry, Northern Region, “Special Economic Zones—Engines for Growth,” 4.

4-1

CHAPTER 4 

Special Economic Zones

 

Introduction

India, like many countries, offers incentives to attract foreign investors, many of which are

concentrated into special economic zones (SEZs). These zones allow the Indian government

to package a number of incentives in a simplified manner and in a centralized location. SEZs

offer privileged trading terms and other inducements to foreign investment. As of November

2006, 41 SEZs were operational in India, and approvals for more than 237 had been granted.1

SEZs are growing in number, size, and production output and as a result are becoming more

vital to the success of the Indian economy. Indian exports from SEZs increased by 114

percent between the 2000 and 2004 fiscal years and are expected to grow at an even faster

rate in coming years. Exports from SEZs were valued at $5.1 billion for the 2005 fiscal year

and are projected to reach $15 billion in the 2007 fiscal year, a 195 percent increase.2

Electronics (half of which is software development) and gems and jewelry made up more

than 75 percent of the exports from SEZs during 2002 (latest available data). Total

investment in India’s SEZs increased by almost 75 percent between 1998 and 2003, with the

proportion of foreign investment rising 7 percent, to 25 percent of total.3

Incentives to Invest in SEZs

SEZs provide three types of incentives for enterprises to locate their business operations in

India. First, the SEZs provide tax, tariff, and financial incentives, by defining SEZs as free

trade enclaves. Second, the zones improve on the general bureaucratic and administrative

situation that many businesses face when establishing in India. Third, SEZs provide reliable

infrastructure that is not always available elsewhere in India. All of these incentives are

applied equally to both Indian and foreign firms.

Tax and financial incentives for potential investors include substantial income tax deductions

for the first 10 years of operations. For the first five years after operations begin, firms pay

no income tax at all. For the next two years they receive a tax reduction of 50 percent.

During years 8-10, the firm can debit up to 50 percent of its profits from the previous year

to a “Special Economic Zone Re-investment Allowance Reserve Account.” This value can

then be used within three years of when the account was established for future reinvestments

in the business, such as machinery and plant improvements. Outside 
 4

 Fraser, et al. European Policy Centre, “EU-India Relations .”

 5

 Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India—Facilities

and Incentives.”

 6

 The Foreign Investment Promotion Board oversees cases which are approved outside this “automatic

route,” a process which takes approximately 6 weeks.

 7

 Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India—Facilities

and Incentives.”

 8

 Confederation of Indian Industry, Northern Region, “Special Economic Zones—Engines for Growth,” 1.

 9

 U.S. India 2006 CEO Forum, “U.S. India Strategic Economic Partnership.”

 10 By comparison, China reportedly spends $260 billion on infrastructure annually. Bindra, “India Battles

Infrastructure Woes.”

 11 World Bank, “Enterprise Surveys, India 2006.”

4-2

of the SEZs, India's average tariff rates are still among the highest in the world.4 This makes

India a much less attractive destination for export-oriented firms that depend on imported

inputs. However, tariff incentives exempt firms in SEZs from all customs duties on imported

goods, so long as they are re-exported, which creates a beneficial environment for export

oriented firms who need inexpensive and easy access to manufacturing inputs. Other

financial incentives include the reimbursement of duties paid on furnace oil and exemptions

from state and central sales taxes paid on domestic purchases. SEZ units can also borrow up

to $500 million per year through recognized banking channels without maturity restrictions.

Profits are allowed to be freely repatriated.5

SEZs allow investors to avoid many bureaucratic and administrative barriers as well. First,

the limits on foreign equity ownership that apply to certain sectors in India are eliminated

in SEZs. Second, all investments in SEZs are administered through the automatic route,

which empowers the Reserve Bank of India (RBI) to automatically approve the investment

within a period of two weeks.6

 Third, firms operating in SEZs do not need a license to import

goods. Unlike in India’s previous generation of Export Processing Zones (EPZs), customs

inspections are kept to a minimum in order to eliminate delays in product availability. These

factors provide incentives for investment by improving manufacturer’s ability to access

production inputs. Other administrative barriers have been eliminated as well. In general,

separate documentation is no longer required for customs and the administration of the

Export-Import Policy. Firms in SEZs also have an exemption from industrial licensing

requirements that is normally only provided to small scale industries and sectors.7

 The

clarification of these administrative procedures makes the investment process much simpler

in SEZs compared to other areas of India.8

One of the most important incentives that SEZs provide is reliable infrastructure. The USIndia CEO Forum, composed of 20 chief executives representing a broad spectrum of

industrial sectors from both countries, has identified India’s poor infrastructure as a key area

of needed economic cooperation and a major impediment to new U.S. investment. The

Forum recognized that “India’s infrastructure needs exceed its domestic funding capacity”

and one of its recommendations was to continue setting up large scale SEZs that comprise

world-class infrastructure with integrated real estate, power, and transportation facilities.9

Outside of the SEZs, with a population of just over 1 billion, India spends just $35 billion

a year on infrastructure,10 and investors frequently encounter difficulties related to

infrastructure.11

Adequate infrastructure is a prerequisite for an area to be approved as an SEZ. All of India’s

SEZs have uninterrupted water and power supplies, guaranteed by state governments; power

is distributed through sub-stations that are dedicated to distributing power only to a specific

SEZ. Additional infrastructure facilities include developed plots, built-up space, and
 12 World Bank, “India Transport Sector.”

 13 This information was acquired from the various Web sites of operational SEZs. These sites include 

http://www.sez2.com, http://www.leandlasez.com, http://www.csez.com, http://www.surssez.com, and

http://www.nap2.com. 

 14 Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India—Home

Page.”

 15 Government of India, Ministry of Commerce & Industry, “Special Economic Zones—About.”

 16 Ibid.

 17 A single window facility is a streamlined system that allows all applications to be directed to one single

point for review.

 18 Industries Commissionerate, Government of Gujarat, New Initiatives, Special Economic Zones. 

4-3

telecommunication lines, as well as supportive services, such as in-house customs facilities,

post offices, banks, canteens, courier services, travel agents, medical services, shopping,

food services, and worker housing. Most importantly, however, the SEZs provide reliable

access to trade opportunities through well integrated transportation facilities. The majority

of the zones are within 25 km of a major metropolitan area that provide ports and airports,

and other transportation services essential to international merchandise trade. Even though

ports and airport facilities are often not available within or directly adjacent to the zone, each

SEZ provides access to these facilities through both railways and highways. Many Indian

highways are narrow and congested, with poor surface quality and the rail system also faces

severe capacity constraints with very high rail freight costs.12 By contrast, most SEZs have

newly built, high quality rail and highway systems that reduce congestion and transportation

costs.13 See chapter 3 for additional information on India’s infrastructure concerns outside

of the SEZs.

Establishment and Licensing of SEZs

In India, an SEZ is a specifically delineated, duty-free enclave that is deemed to be foreign

territory for the purposes of trade operations, including tariff treatments.14 Goods transiting

into the SEZ areas from the rest of India are considered Indian exports. Goods coming from

the SEZ areas into the Indian economy are treated as Indian imports. The laws, regulations,

and incentives that apply to these zones are separate from those that apply to the rest of the

country.15

In March 2000, India’s new Special Economic Zone Policy modified the country’s existing

policy on EPZs to establish SEZs that would provide an environment to facilitate the

production of goods intended for export. SEZs can be set up by the public sector, by private

firms, or as joint cooperative efforts between the two sectors.16 

The change to SEZs was meant to solve several problems with the existing EPZ policy. One

significant issue was the lack of a single window application facility,17 both within the zone

and at the national level. Without such a “single window,” establishing both EPZs and the

individual firm units within them, required a firm to acquire individual clearances from

several separate departments within the government and the EPZ administrative body.

Within the EPZ, separate departments were in charge of approving and allocating land

allotments, water and power supplies, and building and environmental clearances. The

establishment process has been greatly simplified in the current SEZs. In addition, conditions

for approval have been relaxed, customs rules have been simplified, and additional oversight

responsibilities have been given directly to the Development Commissioners Office in order

to maintain consistency.18
 19 Government of India, “SEZ Rules 2006, Chapter 2, Procedure for Establishment of Special Economic

Zone.” 

 20 Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India—About.” 

 21 Government of India, Ministry of Commerce & Industry, Department of Commerce, Annual Report

2005–2006, 59.

 22 Government of India, Ministry of Commerce & Industry, ‘Special Economic Zones in India—How to

Apply.”

4-4

In the SEZ Act of 2005, the Indian government clarified and simplified the procedures for

establishing an SEZ. The Act established specific minimum size requirements for different

types of SEZs. There are exceptions to some regulations in order to promote certain

industries or in regions of the country that are considered to be land restricted (table 4-1).

Other criteria for approval reinforce that the units within the SEZ must abide by local laws

and regulations as well as develop necessary infrastructure. For example, SEZs must abide

by local laws in regard to area planning, sewage disposal, pollution control, as well as all

other industrial and labor laws. Also, at least 35 percent of the land area must be used for the

core manufacturing processes, and directly associated storage and distribution facilities. The

remaining land area can be used for non-core production facilities such as hospitals, housing

developments, shopping, and other commercial development.19

The approval process for the development of a new SEZ is shared by the federal and state

governments. Proposals for establishing an SEZ are first routed through the concerned state

government, which has 45 days from the date of receipt to render a decision. The state

forwards the application, along with its recommendation, to the Board of Approval, part of

India’s federal Department of Commerce.20

An individual firm’s proposal to set up a new business unit within an SEZ must be approved

by the Approval Committee for each Zone (figure 4-1). The Committee consists of the

Development Commissioner, the Customs Authorities, and representatives of the relevant

state government. The Development Commissioner is the de facto chairman of the Approval

Committee and head of the SEZ. All clearances for importer-exporter code number, change

in the name of the company or implementing agency, land allotments, and development

plans are given through a single window facility by the Development Commissioner,

generally within 15 days.21 If approved, firms receive a letter of permission from the

Commissioner, which specifies the items of manufacture or service activity, annual capacity,

projected annual exports for the first years in dollar terms, net foreign exchange earnings,

and any limitations regarding the sale of finished goods and their by-products in the

domestic tariff area.22
4-5

TABLE 4-1 India: Types of special economic zones 

Type of SEZ Description

Minimum size

requirements Other

Hectares

New multi-product SEZs Zones with general production in a

wide variety of product types and

industries

1,000 

Sector specific SEZs Zones for use on production in

specific industries

100 Approved on a case by

case basis

Service sector SEZs Zones that provide only services

without manufacturing capability

100 

Converted Export Processing

zones

Converted from a previous EPZ None

Port-based SEZs Zones based at ports or airports None Approved on a case by

case basis

Sector specific SEZs in areas of

Indian competitive advantage

Specifically applies to gems and

jewelry, information technology, and

bio-technology

10 Approved on a case by

case basis

Multi-product SEZs in land

restricted states

Land restricted in particular states 200 a

Sector specific SEZs in land

restricted states

Land restricted in particular states 50 a

Source: Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India,”

http://www.sezindia.nic.in/ (accessed November 2006).

Land restricted states include Assam, Arunachal Pradesh, Nagaland, Manipur, Mizoram, Tripura, Sikkim, Goa, a

Meghalaya, Himachal Pradesh, Jammu, Kashmir, Uttaranchal, and the Union Territories.
 23 Embassy of India, “FDI Policy and Procedure.” Industries which require an industrial license include

alcoholic drinks; cigarettes and tobacco products; electronic aerospace and defense equipment; explosives;

hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates of hydrocarbons and

their derivatives.

 24 Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India—How to

Apply.”

 25 Government of India, Ministry of Commerce & Industry, “Special Economic Zones in India—Criteria

for Automatic Approval.”

 26 EIU, India Country Commerce Main Report.

 27 Ibid.

4-6

An industrial license is required for business unit proposals involving industries retained

under compulsory licensing, manufacturing of items reserved for small scale sectors, and

situations in which the proposed location is restricted.23 These proposals are first considered

at the national level by the SEZ Board of Approval, and then by the Secretariat for Industrial

Assistance at the Department of Industrial Policy and Promotion, who grants the actual

license. If the SEZ approval and the industrial license are granted, then the application is

forwarded to the local Development Commissioner, who can then issue a letter of

permission. The SEZ Act also specifies that the units must be net foreign exchange earners,

but that they will not be subject to any predetermined minimum export performance

requirements.24

While the Indian government continues to restrict FDI in industries that are considered

sensitive outside of SEZs, such as agriculture and retailing, 100 percent investment is

allowed through the automatic route for all activities in Special Economic Zones (SEZs),

except for the manufacturing of weapons and defense equipment, hazardous chemicals,

narcotics, alcohol, and tobacco products.25

Other FDI Incentives

India provides investment incentives outside of SEZs as well. These are generally designed

to channel FDI to specific industries, promote development of economically impoverished

regions, and encourage exports. The lack of reliable infrastructure outside of the SEZs is a

significant factor preventing India from reaching its full growth potential. With this in mind,

the Indian government has begun to remove restrictions on foreign investors in

infrastructure. Beginning in March 2005, the government has allowed 100 percent FDI in

infrastructure and construction development projects, as well as townships and housing

projects, subject to minimum capitalization requirements.26

In addition to liberalizing ownership equity caps, there are a number of tax incentives for

foreign firms to invest in infrastructure, including 10-year tax holidays that can be used

anytime during the first 20 years of operation for enterprises that build, maintain, or operate

infrastructure facilities. Other incentives include exemptions from income tax on interest and

from long-term capital gains tax on infrastructure investments, and the ability to deduct 50

percent of profits for five years for setting up and operating large, specific types of

infrastructure.27

Additional FDI incentives in India include accelerated depreciation and permitting tax

deductions for R&D expenses. The specifics vary slightly depending on the region and
 28 Ibid.

4-7

industry. The FDI approval process has also been shortened and simplified through the

implementation of the automatic route for approval in more and more industries. These

incentives, along with the continued liberalization of caps on foreign firms’ ownership equity

in most industries, have contributed to the recent steep increases of FDI in India.28

 1

 Prior to 1991, all FDI proposals were approved on a case-by-case basis with a 40 percent total foreign

equity participation cap. IMF, India: Selected Issues, 21.

 2

 Industrial licenses are regulated under the Industries (Development and Regulation) Act of 1951, and are

used to regulate the scale, technology, and location of certain investment projects that may present

environmental, safety, or strategic concerns to the government of India. Government of India, Ministry of

Commerce & Industry, Department of Industrial Policy and Promotion, Investing In India: Foreign Direct

Investment Policy & Procedures, 8. Industrial licenses are granted by the Secretariat for Industrial Assistance

(SIA) within the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry.

Decisions are usually rendered within 4 to 6 weeks of filing. Government of India, Ministry of Commerce &

Industry, Department of Industrial Policy and Promotion, Investing In India: Foreign Direct Investment

Policy & Procedures, 8.

 3

 Ibid., 34.

 4

 The FIPB is part of India’s Ministry of Finance.

 5

 Investments below Rs 10 million (approximately $234,000) in plant and machinery.

 6

 Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and

Promotion, Investing In India: Foreign Direct Investment Policy & Procedures, 1–6.

 7

 EIU, India: Country Commerce 2006, 22.

 8

 Foreign firms may establish as an incorporated or unincorporated entity, an incorporated company, a

liaison or representative office, a project or branch office, or a “stand alone” branch office in a special

economic zone. Government of India, Ministry of Commerce & Industry, Department of Industrial Policy

and Promotion, Investing In India: Foreign Direct Investment Policy & Procedures, 14–15.

5-1

CHAPTER 5

FDI Regulation and Dispute Settlement

FDI Procedures

Foreign investment policy in India has been significantly liberalized since comprehensive

macroeconomic reforms began in July 1991.1

 As of April 2007, 100 percent foreign equity

is permitted in most sectors via automatic approval, with a handful of sectors subject to

industrial licensing restrictions,2

 and only a few industries are entirely closed to foreign

participation due to political or national security sensitivities (appendix A).3

 This chapter will

review India’s regulatory environment for FDI, including the approval process for new

investments; regulation related to labor and intellectual property concerns; and legal

alternatives for dispute settlement.

Foreign investment in India is approved through two routes: automatic and case-by-case

government approval. Under the automatic route, foreign investment in an Indian entity does

not require prior government approval. To qualify for the automatic route, companies

investing in approved industries must notify the Reserve Bank of India (RBI) within 30 days

of receipt of funds and issuance of shares to the foreign investor. In other cases, government

approval by the Foreign Investment Promotion Board (FIPB) is required.4

 These cases

include sectors that require industrial licenses, foreign investments exceeding 24 percent of

equity in small-scale industries,5

 foreign investments where the foreign interest has an

existing venture in the same field in India, and all proposals falling outside the

predetermined sectoral caps or in sectors where FDI is usually not permitted, but authorized

in certain cases at the discretion of the Indian government.6

 Foreign investments in existing

companies and foreign technology collaboration agreements are also subject to case-by-case

approval requirements.7

 There appear to be few or no limitations on forms of establishment.8
 9

 EIU, India: Country Commerce 2006, 21.

 10 Planning Commission, Government of India, Foreign Investment, India, 32–33.

 11 Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and

Promotion, Investing In India: Foreign Direct Investment Policy & Procedures, 21.

 12 Government of India, Planning Commission, Foreign Investment, India, 71.

 13 Sahoo, “Foreign Direct Investment in South Asia,” 10.

 14 World Bank, The Investment Climate in Brazil, India, and South Africa, 23–24.

 15 Bhati, Foreign Direct Investment, 91.

 16 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India, 113.

 17 Due to the unregulated discretionary power of state and local regulators, corruption has been identified

as an additional obstacle to FDI in India. World Bank, Sustaining India’s Services Revolution, 30.

 18 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India, 113.

5-2

In addition to approving particular investment proposals, the FIPB is also the primary contact

for large multinational companies planning extensive investment projects.9

 The Department

of Industrial Policy and Promotion (DIPP), under the Ministry of Industry and Commerce,

is responsible for all other foreign investment activity in India.10 Within DIPP, the Secretariat

for Industrial Assistance (SIA) provides a one-stop shop (or “single window facility”) for

entrepreneurial assistance, investor facilitation, project setup and monitoring, and application

processing.11 Further, the Foreign Investment Implementation Authority (FIIA), which is

chaired by the SIA, provides proactive investor services for projects that have already

received central government approval.12 The FIIA helps investors obtain state-level

clearances, assists with any operational problems, and liaises between various government

agencies on behalf of investors to speed approval of FDI inflows.13 Chapter 3 discusses the

approval process for FDI in India’s special economic zones (SEZs).

FDI Regulation

Although Indian business regulation principally falls under the jurisdiction of federal law,

state governments are empowered to design and regulate their own FDI policies.

14

Consequently, the regulatory burden on foreign investors tends to be higher at the state level

where application and approval procedures can vary widely across states. Moreover, FDI

projects already approved at the central government level tend to bottleneck as they proceed

since nearly 70 percent of the approvals and applications needed for eventual FDI

implementation are obtained from state governments.15 State-level impediments to FDI can

be severe, to the point that companies have been known to abandon FDI projects mid-way

through implementation due to issues such as onerous zoning, land-use, and environmental

regulations.16 In addition to difficult compliance procedures, such as the example mentioned,

regulatory burden can take other forms in India. These can include long delays in getting

new connections from public sector utilities, frequent visits by government inspectors, and

the payment of bribes to avoid bureaucratic red tape.17 As a result, the federal government

has made efforts to establish independent regulators in sectors such as telecommunications,

securities, and insurance in order to streamline supervision below the federal level.18 Since

it is impossible to comprehensively address all of the state FDI regulations here, appendix

B provides website links to the investment promotion agencies for each of India’s states and

territories.
 19 Sahoo, “Foreign Direct Investment in South Asia,” 11.

 20 IBRD/World Bank, Doing Business in South Asia 2007, 31.

 21 EIU, India: Country Commerce 2006, 81.

 22 Ibid.

 23 World Bank, The Investment Climate in Brazil, India, and South Africa, 19.

 24 IBRD/World Bank, Doing Business in South Asia 2007, 31.

 25 World Bank/IFC, India: Investment Climate and Manufacturing Industry, 28–29.

 26 Deloitte, China and India: The Reality Beyond the Hype, 5.

5-3

Labor Regulation

As described in chapter 4, the state of the labor market and related regulations are also an

important factors for foreign investors to evaluate when making an FDI commitment. Similar

to FDI policy, labor regulations are enacted at both the central and state government levels.19

As of 2006, India maintains 47 national laws and 157 state regulations that directly or

indirectly address labor markets (table 5-1).20 India has a number of labor laws addressing

issues such as the resolution of industrial disputes, the regulation of working conditions,

labor compensation, insurance, child labor, and equal pay. Generally viewed as more

protective of workers’ rights, Indian laws such as the Minimum Wages Act, the Payment of

Wages Act, and the Employees Provident Fund and Miscellaneous Provisions Act guarantee

employee salaries regardless of whether companies are profitable, allow central or state

governments to set worker wages in any type of business establishment, prohibit any

unauthorized wage deductions or reductions, and ensure retirement savings and benefits for

all permanent company employees.21

Many of these labor laws are viewed as overlapping, potentially inconsistent, and

cumbersome.22 In particular, the Industrial Disputes Act (IDA) requires companies with more

than 100 employees to secure state government permission to dismiss workers. Such

permission can be difficult to obtain, but application of the IDA tends to vary across states.23

According to recent research, Indian states with more restrictive labor laws tended to have

fewer factories, with estimates suggesting that almost 3 million formal manufacturing jobs

were lost due to the general application of IDA provisions.24 Furthermore, businesses that

hire contract workers to fill production gaps are subject to the Contract Labor Act, which

gives state governments the right to abolish contract labor at any time, in any industry, in

favor of permanent workers.25 In states where contract labor is more restricted, keeping

employment below the 100 employee threshold is the only way companies can maintain

flexibility in the allocation of manpower. Consequently, Indian labor laws tend to reinforce

exit barriers for investors and dampen overall FDI in labor-intensive industries.26
5-4

TABLE 5-1 Selected Indian Labor Laws

Law Description

Employees Provident Fund and Miscellaneous Provisions

Act of 1952

This Act ensures the financial security of employees by

providing a compulsory savings system. It establishes a

contributory Provident Fund where employees’

contributions shall be at least equal to that made by the

employer. The savings is payable to the employee after

retirement or can be withdrawn partly for specified

purposes.

Industrial Employment (Standing orders) Act of 1946 This Act requires employers in industrial establishments

to clearly define the conditions of employment by issuing

duly certified standing orders. Standing orders issued

under this Act deal with the classification of workers,

holidays, shifts, payment of wages, leave, termination,

etc.

Industrial Disputes Act of 1947 Provides for the investigation and settlement of

industrial disputes such as lockouts, layoffs,

retrenchment, etc. The Act specifies the conditions that

must be met before an employee is terminated.

Terminations falling outside of these guidelines must

receive government approval.

Minimum Wages Act of 1948 Prescribes minimum wages for all employees in any

type of establishment. Central and state governments

can revise specified wage levels.

Payment of Bonus Act of 1965 The Act provides for the payment of bonuses to persons

employed in certain establishments on the basis of profit

or productivity. This Act is applicable to establishments

employing 20 or more people. A minimum bonus is

required, even if the employer suffers a loss during the

fiscal year.

Payment of Gratuity Act of 1972 Provides for the payment of gratuity to all employees in

all establishments employing 10 or more people

(regardless of the type of work). Gratuity is payable to

an employee on his retirement or resignation at a rate of

15 days salary for each completed year of service,

subject to a maximum of about $7,800.

Payment of Wages Act of 1936 Regulates the time limits within which wages shall be

distributed to employees and that no unauthorized

deductions are made by employers.

Workmen’s Compensation Act of 1923 Provides that compensation will be given to any worker

suffering an injury during the course of employment, or

to his dependents in the case of death. The Act

specifies the rate at which compensation shall be paid to

the employee.

Source: Government of India, Ministry of Labor Web site.
 27 USTR, 2007 Special 301 Report, 26; and U.S. Department of Commerce, U.S. Commercial Service,

India Country Commercial Guide.

 28 U.S. Department of Commerce, U.S. Commercial Service, India Country Commercial Guide.

 29 EIU, Country Commerce 2006, 45.

 30 ICC, Global Survey on Counterfeiting and Piracy, 10.

 31 PhRMA, PhRMA Survey of Pharmaceutical Counterfeiting Laws and Remedies, 8.

 32 Ibid., 8–9, 64–65.

 33 Seizure data has inherent limitations; for example, due to resource limitations, the percentage of imports

that is inspected is reportedly small. Seizure data thus may not fully and accurately reflect the extent or

product and country of origin structure of trade in counterfeits. OECD, Counterfeiting and Piracy:

Measurement Issues, 9.

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Intellectual Property Rights Regulation

Important improvements have been made in India’s intellectual property rights (IPR) regime

in recent years. India has substantially revised its laws to bring them into compliance with

the requirements of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property

Rights (TRIPS), which requires protections for various forms of intellectual property.

However, according to the United States Trade Representative (USTR) and U.S. Department

of Commerce (DOC), substantial concerns remain because of inadequate IPR protection and

enforcement.27 India’s legal framework, and particular enforcement issues, in the

predominant intellectual property areas of trademarks, copyrights, and patents are described

below. The laws governing the protection of pharmaceutical products are explored in greater

detail in the case study in chapter 8.

Trademark Protection

The legal framework of India’s trademark laws is generally considered consistent with

international standards.28 India revised its law with passage of the Trademarks Act of 1999,

which came into effect in 2003, to comply with the requirements of TRIPS. The Act

broadens the definition of a trademark and simplifies the procedural requirements for

registration. It also provides civil and criminal remedies for trademark infringement.29

The actual level of protection afforded trademarks under the law is more problematic.

According to a survey of business executives conducted by the International Chamber of

Commerce, India is ranked as having the third worst IPR protection environment, following

China and Russia, because of its disproportionate share of counterfeiting and piracy.30 In the

area of pharmaceuticals, the Pharmaceutical Research and Manufacturers of America

(PhRMA) reports that while civil remedies for counterfeiting are generally available, the

volume of litigation is substantial and judicial delays hinder the process of obtaining relief.31

Although criminal remedies for counterfeiting hold the promise of a speedier resolution and

a greater deterrent power, inadequate resources and low rates of conviction hamper their

availability. Better results may be available in cases involving pharmaceutical counterfeiters

whom criminal courts are more likely to convict because of health and safety risks.32

India exports a large amount of counterfeit products, although the situation may be

improving.33 In 2005, U.S. Customs and Border Protection reported that it seized counterfeit

goods valued at about $2 billion from India. India was the fourth largest source of all

counterfeits in the United States (behind China, Hong Kong, and the United Arab Emirates).

Despite being fourth overall, India was the number one source of counterfeit pharmaceuticals
 34 USCBP, FY 2005 Top IPR Commodities Seized. Similarly, India was the source of 75 percent of all

counterfeit medicines seized by European authorities in 2005. EC, EU 25 Breakdown of Number of Cases

Registered. 

 35 U.S. government official, e-mail communication to Commission staff, February 21, 2007. 

 36 IIPA, 2003 Special 301 Report: India, 122.

 37 USTR, 2007 Special 301 Report, 26. WIPO is a specialized agency of the United Nations responsible

for promoting the development and harmonization of international IP laws.

 38 USTR, 2007 National Trade Estimate Report, “India.”

 39 USTR, 2007 Special 301 Report, 26.

 40 IIPA, 2007 Special 301 Report, 54.

 41 A product patent grants patent rights—that is the exclusive right to control production and

distribution—relating to the product. A process patent grants exclusive rights with respect only to a particular

means or process used to make the product.

 42 A compulsory license is one issued by the government that allows the use of a patented invention

without consent of the owner, upon payment of a royalty.

5-6

in 2005, accounting for 61 percent of pharmaceutical seizures from all sources.34 More

positively, seizures of counterfeits from India were down in 2006; India fell to the eighth

largest source of counterfeit products and pharmaceutical seizures in particular were

substantially lower.35

Copyright Protection

At the time India’s amended Copyright Act went into effect in 1995, it was considered “one

of the most modern copyright laws in any country,” particularly because of its rigorous

criminal enforcement provisions.36 Today, the challenges of copyright protection in the

digital environment reportedly require India to update its laws, for example, by joining and

implementing the two World Intellectual Property Organization (WIPO) Internet Treaties.37

Both treaties seek to ensure that traditional means for copyright protection apply to digital

works and those transmitted on the Internet. The government of India recently released draft

amendments to implement the provisions of the internet treaties; however, USTR has opined

that the draft amendments are deficient.38

Problems with enforcement of the copyright laws are significant. According to the

International Intellectual Property Alliance (IIPA), a coalition representing the U.S.

copyright based industries, the principal challenge in India is “to make the criminal system

work despite corruption, inefficient court procedures, lack of training, massively long delays,

and few convictions.” Piracy—the unauthorized distribution and use of copyrighted

materials—remains a substantial problem for both U.S. and Indian producers. Piracy of

software, film, popular fiction works, and television cable signals has been labeled

“rampant.”39 Pirated movies and other content are available in the informal markets of major

cities long before their domestic release in theaters. According to the IIPA, music file sharing

and the online infringement of business and entertainment software, as well as deficiencies

in the enforcement environment, substantially burden both foreign and local investors in

copyright-based industries.40

Patent Protection

India inherited its patent laws from the British and, until 1970, provided product and process

protection for all inventions.41 In 1970, India introduced the Patents Act which prohibited

patents on products useful as medicines or foods, shortened the term of chemical process

patents, and expanded the availability of compulsory licensing of patented inventions.42

Effective January 1, 2005, India was required, pursuant to its WTO TRIPS commitments,
 43 USPTO, “U.S. and India Sign Historic Memorandum of Understanding.”

 44 PhRMA, PhRMA Special 301 Submission: India, 135.

 45 Government of India, Ministry of Commerce & Industry, “2006 Year of Record FDI Inflows.”

 46 IBRD/World Bank, Doing Business in South Asia 2007, 36.

 47 Ibid., 36.

 48 U.S. Department of Commerce, U.S. Commercial Service, Doing Business in India, 111.

 49 EIU, India: Country Commerce 2006, 28.

5-7

to provide product protection for pharmaceuticals and agricultural chemicals. It did so

through an interim measure adopted in December 2004 and a new patent law enacted in

April 2005. This new law, including its impact on pharmaceutical FDI, is discussed in detail

in the case study in chapter 8.

India and the United States entered into a Memorandum of Understanding (MOU) in

December 2006. The purpose of the MOU is to further cooperation in the IPR field and to

better promote innovation. The MOU provides for the training of patent personnel and the

sharing of procedures and best practices.43 It responds to the concern of U.S. industry, and

particularly pharmaceutical firms, that Indian patent examiners are not trained or experienced

in the review of pharmaceutical products and other complex technologies, and that there is

a substantial backlog of patent applications awaiting review.44 Moreover, the government of

India reports that 25,000 new patent applications were filed in 2006; the amount of work and

resources that will be required to handle these applications is substantial.45 Patent

infringement cases, like those involving trademarks and copyrights, are subject to lengthy

judicial proceedings and delays. Industries that rely on IPR protections are severely

hampered by the practical difficulties of enforcing these rights.

Other Regulatory Issues

Closing down a business in India involves a cumbersome regulatory process that poses

expensive exit costs. Depending on the state, it takes an average of 10 years to complete

bankruptcy procedures in India, with variations between 8 and 20 years. This compares to

an average of about 4 years in South Asia, 2 years in East Asia, and 1 year in OECD

countries.46 Liquidations in India are governed by the Companies Act, which assigns official

liquidators (OLs) to carry out the bankruptcy proceedings. Industry surveys report that OLs

tend to follow cumbersome procedures and cause undue delays. Moreover, when a case is

finally ready to be heard, courts and tribunals are often already overburdened with large

caseloads, creating even longer delays47

Some regulatory impediments have been eliminated. Performance requirements, such as

local sourcing, no longer exist in most sectors and requirements to hire Indian nationals have

largely been eliminated.48 FDI in the retail housing sector is restricted in most cases, but nonresidents of Indian origin and foreign companies are permitted to acquire or hold real estate

in India, except for farmland, farmhouses, and plantations.49
 50 David, “India Sets Semi Subsidy Policy.”

 51 Ibid.

 52 Incentives are similar to semiconductor loan rules, except that the minimum investment threshold is

$220 million. BusinessStandard.com, “Semiconductor Policy Notified.”

 53 As of April 2007, no official updates on Intel’s investment plans in India have been released. Intel

currently operates a product development center in Bangalore. David, “India Sets Semi Subsidy Policy.”

 54 AMD is noted to be the most interested in taking an actual investment stake. Singapore-based

Flextronics operates a regional manufacturing operation in Bangalore and is currently building an 8 million

square foot industrial park in Chennai. Singh, “Analysts Skeptical of Chip Fab in India.”

 55 The government of India will allow carriers to share cable-landing station infrastructure. As of February

2007, VSNL/Tata owned the majority of Tippu, “India’s Coming Bandwidth Boom.”

 56 In 2006, AT&T became the first foreign telecom operator to take advantage of India’s FDI revision in

2005, which allows up to 74 percent foreign equity ownership (up from 49 percent) in Indian telecom firms.

AT&T has been in partnership with Tata group-owned VSNL since 2000. VSNL, an Indian telecom

company, provides international voice services and is a VoIP provider. Tippu, “India’s Coming Bandwidth

Boom”; and VoIP Now, “VoIP in India.”

5-8

Implications of Recent FDI Policy Changes

Semiconductors

In February 2007, the government of India announced the establishment of the Special

Incentive Package Scheme, which focuses on attracting greater investment in semiconductor

manufacturing and other high technology industries in India. Broadly, the package provides

subsidies in the form of tax breaks and interest-free loans to foreign companies interested in

investing in Indian semiconductor plants with a minimum investment of $550 million. Loans

are available for up to 20 percent of capital expenditures for projects in SEZs and up to 25

percent elsewhere.50 This policy, which will extend through 2010, is expected to generate

between $6 billion and $9 billion in new investments over the next three years.51 The Special

Incentive Package Scheme also covers LCD and plasma screens, storage devices, solar cells,

photovoltaics, and nanotechnology products.52 Following the announcement, Indian

government officials were planning to reopen negotiations with Intel, which established a

chip plant in Vietnam while waiting for India to formulate its long-delayed national

semiconductor policy.53 As noted in chapter 2, SemIndia, an Indian company setting up a $3-

billion chip fabrication plant in Hyderabad, has received informal commitments from global

semiconductor producers such as AMD, SanDisk, Flextronics, and Broadcom since the

announcement.54 However, as of April 2007, further details on these proposed ventures have

not been disclosed.

Telecommunications

In late 2006, the Indian government announced plans to lower the price of bandwidth by up

to 25 percent and allow for its resale to new operators, giving foreign firms greater access

to the largely private-sector telecommunications infrastructure.55 As a result, international

firms such as BT and Cable & Wireless, which are both based in the United Kingdom, are

reportedly interested in entering the Indian telecom market to provide broader advanced

networking services, such as network integration and security. Additionally, current

operators in India, such as AT&T,56 which competes with Indian telecom companies in both

domestic and international long distance services, believe that these changes will also

improve overall service quality and reliability since end-to-end control of transmission

systems are now possible. Moreover, broadband internet service, which has grown over

600 percent since 2005 to 1.5 million Indian subscribers, is seen as the primary driver of the
 57 Tippu, “India’s Coming Bandwidth Boom.”

 58 Ibid.; and VoIP Now, “VoIP in India.”

 59 Gupta, “India Gears Up For Retail,” 28.

 60 These products are seen not to affect small domestic traders or the rural economy. Maddox, “From

Single Brand to Open Season.”

 61 Ganesh is owned by Mohan Murjani, a non-resident Indian. Bellman, “As Economy Grows, India Goes

for Designer Goods.”

 62 Ibid.

 63 The joint-venture agreement was approved by the Indian government in January 2007. Economist.com,

“Indian Retailing: Getting Cheaper and Better.”

 64 Grocer, “Bharti to Invest $2.5 Billion in Chain.”

 65 Gupta, “India Gears Up For Retail,” 28.

 66 Ibid., 29.

5-9

bandwidth market in India.57 Expansion in services such as Internet telephony (VoIP), which

reached 1 billion minutes in India during the first quarter of 2006, reflecting six-fold growth

from 160 million minutes in 2005,58 will also likely provide greater investment opportunities

in the Indian telecom sector as bandwidth prices continue to fall.

Retailing

Due to lingering political and social sensitivities within the retail sector, foreign investors

in India’s retailing industry remain limited to single-brand retail outlets. With a total of

12 million retailers in India (97 percent of which are small mom-and-pop style businesses),

there is strong opposition to foreign involvement.59 However, the Indian government is

actively considering whether to allow greater foreign investments in specific products,

namely, sporting goods, stationery, construction materials, and electronics.60 As of March

2007, foreign investors were allowed to control a maximum of 51 percent equity in Indian

retail ventures that sell products under a single international brand. In 2004, Arvind Brands,

the second largest domestic apparel company in India, created a joint venture with Tommy

Hilfiger licensor, Ganesh,61 to establish Hilfiger-branded clothing and apparel stores

throughout India.62 In November 2006, Bharti Enterprises and Wal-Mart announced a jointventure agreement where Wal-Mart would provide its goods wholesale to the Indian retailer

and provide logistics and distribution services to the joint venture.63 Specifically, Bharti, a

major Indian telecom operator, is planning to invest $2.5 billion to create a national

supermarket chain creating 10 million square feet of retail space and employ 60,000 people

by 2015.64 Industry sources estimate that retail sales in India will grow from $300 billion in

2006 to an estimated $427 billion by 2010 and $637 billion by 2015.65 Overall, industry

reports suggest that the biggest challenge for international retailers entering India will not

be overcoming FDI restrictions, but rather, how quickly they will be able to adapt to local

consumer buying habits and to the logistics infrastructure.66

Litigation and Alternative Dispute Resolution

Litigation in India

The Indian court system is severely backlogged and suffering from infrastructural

difficulties. The Law Commission of India, a branch of India’s Ministry of Law & Justice,

reported that over 2 million cases in 13,000 district courts were pending in 2004. The Indian

court system as a whole has an estimated backlog of 25 million cases which would take
 67 Law Commission of India, On Revision of Court Fees Structure (189th Report); Human Rights Features,

Legal Reform and Investment Prospects in India; Economic and Social Council, Commission on Human

Rights, Civil and Political Rights, Including the Questions of the Judiciary, Administration of Justice,

Impunity. The Indian court system includes the Indian District Courts, Appellate Courts, and the Supreme

Court as well as local or specialized courts.

 68 Human Rights Features, Legal Reform and Investment Prospects in India; and Economic and Social

Council, Civil and Political Rights, Including the Questions of the Judiciary, Administration of Justice,

Impunity.

 69 Economic and Social Council, Civil and Political Rights, Including the Questions of the Judiciary,

Administration of Justice, Impunity.

 70 Ibid..

 71 Government of India, Ministry of Law and Justice, “Civil Procedure Code As Amended Enforced as of

Today.”

 72 Ibid.

 73 Government of India, Ministry of Law and Justice, “Landmark Legal Reforms in the Social Sector.”

 74 Abdullah, Inaugural Address.

 75 Venkatesan, “Trial and Execution.” 

 76 Rs. 25,000 equals $614.33 at the exchange rate of 40.7 rupees/dollar on May 21, 2007. Venkatesan,

“Trial and Execution.”

 77 Ibid.

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approximately 324 years to clear if the court system proceeds at its present rate.67 Civil and

criminal cases are reported to take between 10 and 20 years to be determined by a court.68

Such long delays lead to further problems once the case finally reaches the court. Witnesses

frequently lose recollection when they are called to give testimony so long after witnessing

an event.69 Similarly, evidence often becomes tainted or disappears over the many years

prior to trial.70 Such problems often lead to the adjournment of cases and further delays once

the case finally reaches the court.

In an effort to address the longstanding problems with India’s court system, the Indian

national government issued a series of amendments to its Code of Civil Procedure. The two

most pertinent amendments are the Code of Civil Procedure Amendment Act of 1999 (1999

Amendment) and the Code of Civil Procedure Amendment Act of 2002 (2002 Amendment).

Both the 1999 Amendment and the 2002 Amendment came into force on July 1, 2002.71

The 1999 Amendment was designed to lessen the number of cases reaching the Indian courts

by making Alternative Dispute Resolution (ADR) compulsory for certain civil disputes in

India, and to lessen the time a judicial proceeding takes by limiting the allowable number of

adjournments in a each litigation.72 Moreover, the 1999 Amendment prevents further appeal

for certain cases to lessen the burden on the court system.73 The 1999 Amendment requires

certain civil cases to attempt a resolution through ADR, and only if a case is not resolvable

through ADR will it be allowed to proceed to the Indian courts for litigation.74

Similarly, the 2002 Amendment’s objective is to shorten the length of judicial proceedings

by placing limitations on a number of procedures, changing other procedures, and limiting

certain appeals. The 2002 Amendment allows the service of summons by means of e-mail,

fax, or private courier.75 It also specifies that there shall be no second appeal from any decree

“when the subject-matter of the original suit is for the recovery of an amount not exceeding

Rs. 25,000.”76 Additionally, the 2002 Amendment specifies a series of strict time limitations

for the submission of the commission report to the Court, the pronouncement of the

judgment, and provides that the judge has the discretion to put time limitations on oral

arguments.77 Despite these efforts to expedite judicial proceedings, many foreign investors

choose to resolve disputes arising in India through ADR mechanisms.
 78 The potential arbitration stipulations are commonly referred to as “arbitration agreements” or

“arbitration clauses.”

 79 Human Rights Features, Legal Reform and Investment Prospects in India.

 80 IACA Part I, Chapter I(1)(f).

 81 Particularly: the requirements and validity of the arbitration agreement, the composition of the arbitral

tribunal; the jurisdiction of arbitral tribunals; the conduct of arbitral proceedings; the making of arbitral

awards and termination of proceedings; recourse against arbitral awards; finality and enforcement of arbitral

awards; and appeals. IACA Chapters II-X.

 82 These three conventions are: (1)The New York Convention of 1958 on the Recognition and

Enforcement of Foreign Arbitral Awards (New York Convention); (2)The Geneva Convention on the

Execution of Foreign Arbitral Awards of 1927 (Geneva Convention); and (3)The Geneva Protocol on

Arbitration Clauses of 1923 (Geneva Protocol). India is not presently signatory to any bilateral conventions

regarding arbitration.

 83 Law Commission of India Web site. 

5-11

Alternative Dispute Resolution (ADR) in India

Foreign investors frequently choose to enter arbitration agreements when engaging in

business in India, to avoid the problems of the judicial system. The terms of a potential

arbitration are generally stipulated in a contract78 by investors before any legal problems

arise, although parties may also agree to arbitrate after a legal dispute occurs. Investors often

contractually stipulate that arbitration will take place outside of India, opting instead for the

more established arbitration venues of the United States or United Kingdom. In one recent

example, a dispute between two private airline companies was brought to arbitration in

London, rather than in New Delhi or Mumbai.79

The Indian government actively promotes alternative dispute resolution (ADR) mechanisms

as an alternative to litigation. The Indian Arbitration and Conciliation Act of 1996 (IACA)

creates a coherent system of arbitration of both domestic and international disputes. The

IACA applies to both domestic arbitration between Indian parties and international

arbitration, defined as arbitration occurring when one party is a non-resident of India,

incorporated outside India, a foreign government, or a company whose central management

is controlled outside of India.80 The Act governs all major aspects of international

commercial arbitration taking place in India.81 The IACA also statutorily incorporated the

New York Convention, the Geneva Convention, and the Geneva Protocol into the domestic

laws of India, which gives investors recourse under both domestic and international law for

violations of these conventions.82

 

Furthermore, in 2003, the Indian government set forth proposals to incorporate mediation

and conciliation, two additional forms of ADR, more integrally into its legal regime

(box 5-1).83

Additionally, India is a party to three international, multilateral treaties pertaining to

arbitration. All three purport to recognize and/or enforce the arbitral awards of other

countries signatory to each Convention. The conventions make it easier to enforce, and

illegal not to enforce, arbitral awards issued in India within other nations that are parties to

the conventions, as long as the requirements of the conventions are met.
 84 United Nations Web site.

 85 Article V of the New York Convention presents a list of defenses to the enforcement of the arbitral

award.

 86 See: Article VII(2) of the New York Convention.

 87 ICADR Web site.

 88 The Center offers dispute resolution for almost any kind of dispute ranging from commercial to family

law disputes as well as ADR guidelines. The panel of arbitrators and conciliators range from retired Indian

Supreme Court judges to ICADR-trained arbitrators and conciliators. ICADR offers numerous forms of

alternative dispute resolution, including: arbitration, mediation, conciliation, mini-trials, mediationarbitration, and negotiations. 

 89 Committee Report on Reforming Investment Approval & Implementation Procedures, 52, Para. 4.84. 

 90 Ibid.

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The New York Convention,

the largest multilateral

convention governing the

recognition and

enforcement of foreign

arbitral awards, presently

has 142 parties, including

the United States and India,

and is the applicable law

between the United States

and India.84 The New York

Convention obliges its

parties to recognize and

enforce arbitral awards

made in the territory of

another party, subject to

certain provisos.85 The

Geneva Protocol and the

Geneva Convention were

both ratified by India on

October 23, 1937. The United States has not ratified either convention, but the two treaties

are in force between India and other countries that have ratified the Convention or Protocol,

but are not parties to the New York Convention.86

In an effort to promote ADR in India, the Indian national and state governments founded the

International Center for Alternative Dispute Resolution (ICADR) in 1995. The ICADR is

an autonomous agency that works under the aegis of the Indian Ministry of Law & Justice,

to encourage the use of ADR mechanisms for both international and domestic disputes, and

to provide support services and a venue for these disputes.87 The ICADR provides an

optional forum for parties desiring to settle disputes via ADR mechanisms in India, rather

than New York or London. The center is headquartered in New Delhi and has regional

branches in Hyderabad and Bangalore.88 Parties to a contract may contractually stipulate in

their arbitration agreements that the ICADR will be the forum for dispute settlement.

Additionally, parties may subsequently agree to settle an existing dispute in the ICADR. 

It was reported in November 2002 that the center has been receiving an average of only two

to three cases per month.89 According to the Indian government, the infrequent use of the

ICADR can be attributed to “limited knowledge and awareness about this mechanism.”90 The

report further suggests that all national and state governments should promote the use of the

ICADR to investors, and tell investors to contractually stipulate its use as a forum in their

Box 5-1. Forms of ADR: Mediation, Arbitration, and

Conciliation

Mediation is distinguished from arbitration in many ways,

including: 

• Under arbitration, an arbitrator or arbitration panel makes a

binding decision, whereas decisions in mediation are made

by the parties and the mediator acts as a catalyst; 

• Under arbitration, the only settlement option is an arbitral

award, whereas mediation has numerous settlement options;

• An arbitral award is generally rendered in favor of one party

or the other whereas mediation generally reflects a

compromise between the parties; 

• The parties have less control over the arbitral process than

the mediation process. 

The conciliation process is closer to mediation than to arbitration,

although the differences between conciliation and mediation vary

among jurisdictions and venues.
 91 Ibid.

 92 Anderson, “Legal and Practical Protection of U.S. Foreign Investment,” 136.

 93 Ibid.

 94 Prasad, and Balan, “Strategies for U.S. Companies to Mitigate Legal Risks,” 14–16.

 95 Kantor, “Arbitration Award May Alter Dabhol Debate,” 1; and Anderson, “Legal and Practical

Protection of U.S. Foreign Investment,” 136.

 96 Kantor, “Arbitration Award May Alter Dabhol Debate,” 1. 

 97 Ibid. 

 98 Ibid., 2. 

 99 Ibid., 1.

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arbitration agreements.91 The ICADR, the Indian government suggests, offers a forum within

which investors can settle their disputes in an expeditious manner.

ADR in Action: The Enron Dispute and the Dabhol Power Plant

The Dabhol dispute is the largest, most complicated investment dispute in recent Indian

history, and has affected subsequent FDI dispute settlement procedures. The Dabhol project

began as a joint venture to build a 2,200 megawatt power plant in the western Indian state

of Maharashtra.92 Enron was the majority investor with a 65 percent equity share in the

Dabhol power project; General Electric (GE) and Bechtel Enterprise Holdings, Inc. (Bechtel)

each maintained 10 percent equity; and the Maharashtra State Electricity Board (MESB) held

the remaining equity share of 15 percent.93 The $3 billion Dabhol power plant had nearly

completed construction when the government of Maharashtra stopped paying its agreed

amount under the power purchase agreement with U.S. investors, allegedly because the cost

of power produced by the plant was too high.94 Following these events, numerous lawsuits

were initiated between the investors and the Indian government, and at least six international

arbitral proceedings were initiated relating to the Dabhol breakdown.95

The Indian government placed anti-arbitration injunctions on Dabhol-related arbitration

proceedings which were subject to jurisdiction in India, thus delaying arbitration

indefinitely.96 Nonetheless, GE and Bechtel were awarded $57.1 million from the U.S.

Overseas Private Investment Corporation (OPIC) via arbitration, that side-stepped the Indian

injunctions because none of the parties to this arbitral proceeding were subject to Indian

jurisdiction.97 Bechtel and GE brought the proceedings against OPIC in order to recover

claims under a political risk insurance policy that was taken out to cover the Dabhol project.

The OPIC-GE/Bechtel proceeding illustrates how arbitration can aid in the expedient

resolution of disputes arising in India.

India and the United States entered into an Investment Incentive Agreement in 1997 in order

to encourage OPIC to support U. S. investment in India, and to encourage investors to use

OPIC when investing in India.98 Under this agreement, if the national government of India

is found in breach of its obligations under the agreement, it will be obliged to pay the insurer

(OPIC) the amount OPIC has to pay the insured (in this case, GE and Bechtel). The

$57.1 million award to GE and Bechtel in the present case, creates an obligation for the

Indian government to pay OPIC that sum, free from the interference caused by the injunction

on arbitrations issued by the Indian courts.99

The MESB was found in violation of a multitude of its obligations under the power purchase

agreement in the OPIC arbitration. These obligations were counter-guaranteed by the Indian

government, making the Indian national government responsible for reimbursement to GE
 100 Ibid.

 101 Ibid.., 2.

 102 American Arbitration Association, International Centre for Dispute Resolution, “Bechtel Enterprises

International (Bermuda) Ltd.”

5-14

and Bechtel.100 The MESB was found responsible, in this arbitral proceeding, for over ten

breaches of its obligations, including its failure to pay under the power purchase agreements

and the rescission (denunciation) of the power purchase agreement.101 The arbitral tribunal,

chaired by a former U.S. federal judge, determined that because of the breaches by the

MESB, OPIC must pay GE and Bechtel the $57.1 million under the political risk insurance

policies that were issued by OPIC to the two companies in 1995.102 Thus, GE and Bechtel

recovered their costs from OPIC under their political risk insurance policy because MESB

had breached its obligations under the power purchase agreement. The government of India

is obliged under the Investment Incentive Agreement to reimburse OPIC for the money

awarded to GE and Bechtel.

The OPIC-GE/Bechtel proceeding is one example of how arbitration agreements with a nonIndian venue can allow damaged parties to recover their losses from disputes arising in India

in an expeditious manner. Recovery was granted to GE and Bechtel, even in face of a

proceeding that would have been delayed indefinitely if it were brought in the Indian court

system. 
 1

 SAFTA members are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. EIU, India:

Country Commerce 2006, 51.

 2

 BITs are bilateral agreements aimed at protecting and promoting foreign investment through legallybinding rights and obligations. OECD, Directorate for Financial and Enterprise Affairs, Investment

Committee,“Salient Features of India’s Investment Agreements,” 3.

 3

 Tax treaties serve to prevent the double taxation of income earned in one country by a resident of

another country. India Mart, Taxation - Tax Treaties.

 4

 The most favored nation principle requires that no member country give preferential trade treatment to

one WTO member or non-member without giving the same preferential trade treatment to all WTO

members. The market access principle requires member countries to open their markets to other members

within the limits of the agreement. The national treatment principle requires that no member country give

preferential trade treatment to domestic-made products that it does not give to like products from other

member countries. 

 5

 Van den Bossche, The Law and Policy of the World Trade Organization, 106. The special status of

“developing country” is primarily a matter of self-declaration, that is, a member will declare itself a

developing country in order to gain the special treatment afforded developing countries within the WTO.

6-1

CHAPTER 6

India’s Investment-Related International

Agreements

India is a founding member of both the General Agreement on Tariffs and Trade (GATT)

and the World Trade Organization (WTO). India also is a signatory to the South Asia Free

Trade Agreement (SAFTA), which promotes mutual trade, economic cooperation, and

greater investment-related activities among its members.1

 India has entered into 57 bilateral

investment treaties2

 (BITs) but does not have a BIT with the United states. India also

maintains Double Tax Avoidance Agreements3

 (tax treaties) with 70 countries, including

major trading and FDI partners China, Germany, Japan, Mauritius, the United Kingdom, and

the United States (appendix C).

World Trade Organization

India’s membership in the WTO benefits foreign investors primarily through two

agreements: the Agreement on Trade Related Investment Measures (TRIMs), and the

General Agreement on Trade in Services (GATS). In addition, WTO membership imposes

the general obligations of most favored nation (MFN) treatment, market access (MA), and

national treatment (NT) with regard to trade policy.4

 These also affect foreign investment,

as India’s obligations under these principles may affect investors’ evaluation of India’s

investment environment. WTO rules allow certain exemptions from these principles for the

benefit of developing country members, which make up approximately 75 percent of all

WTO members, including India.5

 India’s status as a developing country provides it with

flexibility as to its obligations under both the TRIMs and the GATS.

Agreement on Trade Related Investment Measures

The TRIMs Agreement is the WTO agreement that most directly addresses investment,

although only certain trade-related investment measures are covered by the agreement. It
 6

 TRIMS Agreement, Articles 1–2.

 7

 Measures that requires certain levels of local procurement by an entity. See: Annex to TRIMS

Agreement.

 8

 Measures that restrict the value or volume of imports a foreign investor can use to produce goods for

export. See: Annex to TRIMs Agreement.

 9

 WTO, Indonesia—Certain Measures Affecting the Automobile Industry, 337–42.

 10 Local content...requirements in the production of News Print... Rifampicin and Penicillin-G, and

[d]ividend balancing requirements in the case of investment in 22 categories [of] consumer goods.” U.S.

Department of Commerce, The Agreement on Trade Related Investment Measures.

 11 U.S. Department of Commerce, The Agreement on Trade Related Investment Measures.

 12 TRIMS Article 4.

 13 GATS Article 1(2)(a-d). 

 14 Ibid. The other modes are cross-border supply of services, consumption abroad, and the presence of

natural persons. For additional information, see WTO, “Understanding the WTO, Services: Rules for Growth

and Investment.”

6-2

prohibits quantitative restrictions (quotas) and violations of the NT principle for investment

measures related to trade in goods.6

 Moreover, the TRIMs includes an illustrative list of

TRIMs that violate the NT principle and the prohibition on quantitative restrictions,

including local content requirements7

 and trade balancing requirements.8 In one significant

WTO case, Indonesia-Autos, a dispute settlement panel defined such prohibited “traderelated investment measures” to include all measures posited on the TRIMs illustrative list,

and thus these measures are open to action in the WTO.9

 If a measure is found to be in

violation of the NT principle or the prohibition on quantitative restrictions, then the measure

will have to be withdrawn by the nonconforming state.

The TRIMs agreement requires members to eliminate all non-conforming TRIMs, and

contingent on the member’s status within the WTO, the members were given variable

amounts of time to eliminate all TRIMs. Developed country members were given two years,

developing country members were given five years, and least developed countries were

given seven years. Soon after the entry into force of the TRIMs Agreement, India notified

the Committee of its three inconsistent TRIMs.10 India, as a developing country member, was

given the five year transition period for these TRIMs,which ended on December 31, 1999.

None of these non-conforming TRIMs are presently in force in India.11 The TRIMs

Agreement allows developing countries to temporarily deviate from their national treatment

obligations and the prohibition on quantitative restrictions in accord with certain exceptions,

but to date, India has not pursued that option.12

General Agreement on Trade in Services

The GATS is the second area of the WTO agreements to directly address investment. The

GATS, which applies to all WTO members, outlines four modes through which member

countries can trade services.13 The third mode of trade in services applies to investment, and

is defined as “the supply of a service. . . by a service supplier of one Member through

commercial presence in the territory of any other Member.”14 This “commercial presence”

mode brings foreign investment into the scope of the GATS.

The GATS is a “positive list” agreement. WTO members are only bound to MA and NT

provisions for the service sectors that they choose to include in each country’s Schedule of

Commitments. Each WTO member develops a list of service sectors to be included in its

commitments. For each sector, the schedule lists the sectors for which it has agreed to accept

WTO obligations, and the limits to its MA and NT commitments for each sector. Table 6-1
6-3

TABLE 6-1 India, GATS Schedule of Commitments, Mode 3: Covered Service Sectors

Service Sector

Type of

Restriction Description

All industries on

schedule

National

Treatment

In case of collaboration with public sector enterprises or government

undertakings as joint venture partners, preference in access will be given

to foreign service suppliers/entities which offer the best terms for transfer

of technology.

Business services Market Access Commitments apply to engineering, computer and related, R&D, and

technical testing and analysis services. Foreign firms may establish only

through incorporation, with a foreign equity limit of 51 per cent.1

National

Treatment

No restrictions.

Telecommunication

services

Market Access Commitments apply to local/long distance services, wire-based, circuit

switched data transmission, facsimile, private leased circuit, and cellular

mobile telephone services. GATS schedules lists licensing requirements,

restrictions on new licenses, and subsector specific variant requirements. 

Foreign equity is limited to 25 percent for most subsectors. 1

National

Treatment

Unbound for all subsectors.

Audiovisual services Market Access Commitments apply to motion picture or video tape distribution services.

Commercial establishment permitted only through representative offices,

which may function as branches of foreign companies, but may import no

more than 100 titles per year.

National

Treatment

NT commitments subject to certification that the motion picture in question

has won an award or otherwise been recognized by good reviews in

prestigious journals or at an international film festival.

Construction services Market Access Commitments apply to construction of roads and bridges only. Foreign

firms may establish only through incorporation, with a foreign equity limit of

51 per cent.1

National

Treatment

No restrictions.

Financial services:

Insurance

Market Access Unbound except for commitments on overseas brokers, which may

establish representative offices in India to procure reinsurance business

from Indian insurance companies, and place reinsurance business abroad.

National

Treatment

Unbound

Financial services:

Banking & securities

Market Access Commitments apply to 7 specified banking and securities subsectors,

including deposit taking, lending, and securities underwriting and

placement. The commitments specify limits on new banking licenses, limits

on foreign equity of 51 percent for certain subsectors, and other

restrictions.1

National

Treatment

Unbound except for entities established in accordance with the limits

specified in India’s market access commitments. 

Tourism & travel

related services

Market Access Commitments apply to hotels and lodging; and travel agency and tour

operator services. Foreign firms may establish only through incorporation,

with a foreign equity limit of 51 per cent.a

National

Treatment

No restrictions.

Source: WTO, India, Schedule of Specific Commitments, GATS/SC/42, as revised by Supplements 1-4 (Suppl.1-

Suppl.4).

a

The actual permitted foreign equity cap under current Indian law may be higher. For instance, India has raised

the permitted foreign equity to 74 percent in telecommunications companies.
 15 India’s Schedule of GATS Commitments (as revised by Supplements 1-4).

 16 Ibid.

 17 Sri Lanka will have until 2013 to reduce its tariffs to zero.

 18 South Asian Association for Regional Cooperation, Agreement on South Asian Free Trade Area.

 19 Ibid.

 20 Dikshit, “Ban on FDI from Bangladesh May Go.”

6-4

outlines India’s commercial presence (Mode 3) commitments included in its GATS

Schedule.15

As a positive list system, the GATS is quite transparent regarding each member’s

commitments. For each sector that is included in India’s Schedule of Commitments, the MA

and NT limits are the maximum restrictions. So, for example, in business services, the only

restriction listed on India’s Schedule is that foreign firms can supply such services only

through incorporation in India, with a maximum foreign equity limit of 51 percent. The

Indian government is not then permitted to impose additional regulations limiting foreign

investors in business services. By contrast, actual practice in India, as defined by local laws

and regulations, may be less restrictive than those outlined in India’s GATS Schedule. In the

business services example above, the Indian government is free to remove the 51 percent

equity cap on foreign investment. For industries identified as “unbound” in its Schedule, and

for sectors not mentioned at all, India has not agreed to any limits to its potential restrictions

on foreign investors, so India can and likely does restrict trade and investment of these

services through its domestic laws and regulations.

India has scheduled the greatest number of commitments in the areas of communication

services and financial services, so investors in these industries are provided the most open

investment environment. India has also scheduled commitments in business services,

construction and related engineering services, and tourism and travel related services.16

South Asia Free Trade Agreement

SAFTA, which entered into effect in January 2006, is South Asia’s most prominent trade

agreement. SAFTA requires the developing countries in South Asia (India, Pakistan, and Sri

Lanka) to reduce their duties to 20 percent in the first phase of a two year period ending in

2007. In the final five year phase ending in 2012, the 20 percent duty will be reduced to zero

in a series of annual cuts.17 The least developed nations in South Asia (Nepal, Bhutan,

Bangladesh and Maldives) have an additional three years to reduce tariffs to zero.18 A

complete elimination of tariffs is estimated to boost intra-regional trade by about 10 percent

over its 2006 level. Although SAFTA does not have specific investment-related provisions,

India has supported the agreement’s general cooperative measures for “expanding

investment and production opportunities. . .” among the contracting states and views it as an

effective mechanism for future regional investment cooperation.19 However, since FDI

restrictions from Bangladesh and Pakistan into India remain in effect, much of the residual

investment benefits gained from greater regional trade liberalization will likely go to

SAFTA’s least developed members.20
 21 These bilateral agreements are estimated to cover 65 percent ($4.5 billion) of India’s inward FDI and

40 percent ($2 billion) of its outward FDI in 2005. OECD, “Salient Features of India’s Investment

Agreements.” 3.

 22 OECD, Directorate for Financial and Enterprise Affairs, Investment Committee, “Salient Features of

India’s Investment Agreements,” 4.

 23 Ibid., 6.

 24 Ibid., 8.

 25 Ibid., 8.

 26 Ibid., 10.

 27 Fenwick & West LLP, Structuring Venture Capital and Other Investments in India, 2.

 28 Ibid., 3.

6-5

Bilateral Investment Treaties

In recent years, India has concluded BITs with both developed and developing nations.21 The

majority of India’s BITs (30 of 57) involve developing countries from Asia (16), the Middle

East (9), Africa (4), and Latin America (1). Generally, India’s BITs focus on the protections

of investments relating to expropriation (nationalization of investments), transfers of income

or capital, and international arbitration and dispute settlement for both state-to-state and

investor-to-state cases.22 India’s BITs also cover areas such as non-discrimination in

treatment, the entry of personnel and foreign-controlled enterprises, and exceptions dealing

with issues of national security or disease and pest prevention. The agreements have a

standard duration of 10 years with their investment guarantees valid 15 years after

termination.23

There is considerable uniformity in the broad principles underlying India’s BIT. However,

some specific differences arise when comparing agreements between developed and

developing nations, differences which likely reflect India’s relative negotiating position. For

example, India’s BITs with Ghana, Indonesia, Oman, and Thailand only apply to investors

which are “nationals or a company of a contracting party.”24 However, India’s agreements

with Australia and other developed countries additionally include indirect or portfolio

investments by third-party institutional investors. Further, under the India-Ghana BIT, claims

or disputes taken or completed before the entry into force of the agreement will not be

covered by the BIT’s obligations. This clause contradicts the general rule that investment

claims are protected equally, regardless of when the BIT takes effect.25 With regard to the

entry and temporary residence of personnel, India’s BITs with Australia and France are

particularly notable for two reasons. First, they permit investors to employ key technical and

managerial personnel regardless of citizenship, and second, they promote “sympathetic”

consideration to the requests for temporary entry and work in connection with the other

party’s investments.26

Double Tax Avoidance Agreements and CECA

Another policy tool India employs to promote FDI is the use of double tax avoidance

agreements. Typically, these tax treaties provide relief from double taxation of income by

providing exemptions and sometimes credits for taxes paid in one of the partner countries.27

The laws of the two contracting states govern the taxation of income in their respective

states. When an entity has income arising from both India and the partner country, the entity

will be taxed under the tax laws of the country of residence.28
 29 EIU, Business India Intelligence, 3.

 30 Fenwick & West LLP, Structuring Venture Capital and Other Investments in India, 3.

 31 To qualify, an offshore company must (1) have two local directors approved by the Mauritian Offshore

Business Activities Act Authority, (2) have a bank account in Mauritius, and (3) comply with Mauritian

corporate formalities. The full benefits of the treaty would apply even if the Mauritian entity is established

primarily for investment into India. Fenwick & West LLP, Structuring Venture Capital and Other

Investments in India, 3.

 32 Mauritian subsidiaries are usually not deemed to have “permanent establishment” in India as long as the

subsidiary does not exercise decision making authority over certain activities. These activities can include

making investment decisions, concluding contracts, or securing goods orders on behalf of the parent.

Fenwick & West LLP, Structuring Venture Capital and Other Investments in India, 2–3.

 33 Ibid.

 34 Government of India, Ministry of Commerce & Industry, “Fact Sheet on Foreign Direct Investment.”

 35 Government of India, Ministry of Finance, various press releases of Department of Industrial Policy and

Promotion.

 36 Thomas, “Singapore, New Tax Haven for Offshore Investors.”

 37 Ibid.

 38 Government of India, Ministry of Commerce & Industry, Department of Commerce, CECA Between

India and Singapore.

6-6

Mauritius, India’s largest source of FDI in recent years, is the most prominent beneficiary

of India’s bilateral tax treaties. Due to the local tax benefits it provides and its close historic

and cultural ties—68 percent of Mauritius’ population is of Indian descent—Mauritius has

been a primary destination for entities interested in entering the Indian market.29 Specifically,

companies planning to invest in India often first establish a holding company in Mauritius,

which offers zero-tax status to overseas corporate bodies (OCBs).30 An OCB in Mauritius

then must obtain a tax residency certificate31 to qualify for the tax treaty between Mauritius

and India. 

To avoid misuse of the treaty by Indian-based companies seeking to avoid paying taxes at

home, the management of the Mauritian holding company must not be from India, and the

company must not have a “permanent establishment” in India. In most cases, companies

avoid “permanent establishment” status by establishing a subsidiary in India with limited

corporate powers.32 However, controversy over the India-Mauritius tax treaty has grown in

India, as there are no strict legal definitions for the terms “management from Mauritius” or

“permanent establishment.”33 Despite these legal uncertainties, FDI from Mauritius reached

$2.6 billion during 2005–06.34 In 2006, FDI approvals from Mauritius into India included

Essar Communications (telecom) for $56 million in equity, ILM Trichy Ltd. (infrastructure)

for $23 million, and Pacifica Infrastructure (construction) for $15 million.35

Notably, in June 2005, India and Singapore signed a Comprehensive Economic Cooperation

Agreement (CECA), which integrated investment provisions, a broad package of trade

liberalization, and a tax treaty similar to the one between India and Mauritius.36 For India,

this agreement was seen as the most ambitious and comprehensive economic agreement ever

concluded with a foreign country.37 CECA is India’s first attempt to integrate “BIT-like”

investment disciplines in a preferential trade agreement, focusing on new investment

facilitation provisions for the movement of natural persons, e-commerce, education, and

media.38 Further, although the CECA with Singapore adopts tax concessions similar to those

of the India-Mauritius tax treaty, the requirements for Singapore tax residency are much

more rigorous compared to those for Mauritius. Specifically, Singapore companies must

satisfy predetermined expenditure requirements and show that they have sustainable and
 39 Annual expenditures on operations in Singapore must be at least $132,000 in the 24 months

immediately prior to when the tax gains are realized. Fenwick & West LLP, Structuring Venture Capital and

Other Investments in India, 4.

 40 Swire, “Singapore and Mauritius Vie To Supply India's FDI.”

 41 Basu, “India, Singapore Ink Pact.” 

 42 Ibid.

6-7

continuous business operations within Singapore.39 Nonetheless, Singapore is eager to

overtake Mauritius as the primary investment route into India.40 According to industry

lobbying groups in India, Singapore’s cumulative investment in India, which was about

$3 billion in 2005, is expected to increase to $5 billion by 2010 and to $10 billion by 2015.41

In addition, since it already acts as a major hub for investment in the region, Singapore is

seen to be able to provide investors with a larger basket of financial services compared to

Mauritius.42 However, it is not yet known whether increased FDI from Singapore will

correspond with decreased FDI from Mauritius.

Other Agreements

Similar to SAFTA, the majority of India’s bilateral and multilateral trade agreements do not

contain detailed clauses regarding investment. However, it is likely that investment

opportunities between parties will grow as trade becomes more liberalized. Appendix B

provides a comprehensive list of India’s partners in trade and investment agreements.

 1

 The largest sector in terms of FDI—"electrical equipments"—totaled $6.9 billion and accounted for

14 percent of the total. Government of India, Ministry of Commerce & Industry, Department of Industrial

Policy and Promotion, “Fact Sheet on Foreign Direct Investment.”

 2

 Licensing refers to the requirement that importers and/or exporters obtain government approval prior to

importing or exporting. As of 1993, motor vehicle importers and exporters no longer needed government

approval.

 3

 The Indian fiscal year runs April 1–March 31.

 4

 McKenzie, “2007 Global Outlook.”

7-1

CHAPTER 7

Case Study 1: Automotive Investment

in India

Introduction

Since the industry opened up to foreign direct investment (FDI) in 1996 and the government

lifted all equity caps for foreign automotive investors in 2002, India has attracted a

significant amount of FDI in the auto sector. Out of 42 separate industry sectors in India, the

“transportation industry,” which includes but is not limited to passenger vehicles and

components, was the fourth largest recipient of FDI from August 1991 through December

2006. With a few exceptions, most FDI has been focused on sales to the local market, but

recently, many automotive firms are investing in establishing production bases for export.

FDI inflows in the sector totaled $3.5 billion, accounting for 7 percent of total FDI inflows

from August 1991 through December 2006.1

 This case study will describe the factors

contributing to the influx of FDI to the Indian automotive sector, including domestic market

conditions and Indian government policies specific to the sector; and examine FDI by

passenger vehicle manufacturers in the most recent 5 year period—2002 through 2006.

Background on the Domestic Indian Automotive Industry

While rapid growth and extensive FDI in the Indian automotive industry are fairly recent

phenomena, the industry itself has a long history. Indigenous automakers Hindustan Motors

Ltd., Mahindra & Mahindra Ltd., and Tata Motors Ltd. were all founded in the 1940s, with

relative newcomer Maruti Udyog Ltd. founded in 1981. Overall economic liberalization,

which began in 1991, led to the delicensing2

 of the passenger car sector in 1993; however,

quantitative restrictions on vehicle imports remained. Many foreign-owned firms established

Indian joint-venture subsidiaries in the 1990s. In 2001, quantitative import restrictions were

removed and in 2002, 100 percent foreign ownership was permitted. 

In the last 5 years, production of passenger cars more than doubled to over 1 million cars in

FY 2005–06 (table 7-1).3

 Production of utility vehicles also nearly doubled, while multipurpose vehicle (MPV) production increased only slightly. The compound annual growth

rate (CAGR) over the 5 year period for total passenger vehicles is 18.2 percent, and

PriceWaterhouseCoopers predicts that, in 2006–07, India’s growth will only be surpassed

by China and Slovakia.4

 
7-2

TABLE 7-1 Indian passenger vehicle production, in units, FY 2001–02 through FY 2005–06

Type of vehicle 2001–02 2002–03 2003–04 2004–05 2005–06

Passenger cars 500,301 557,410 782,562 960,487 1,045,881

Utility vehicles 105,667 114,479 146,325 182,018 196,371

Multipurpose vehicles 63,751 51,441 60,673 67,371 66,661

Total passenger vehicles 669,719 723,330 989,560 1,209,876 1,308,913

Source: Society of Indian Automobile Manufacturers Web site.

Maruti Udyog, majority owned by Suzuki (Japan) accounts for the largest percentage of local

production, followed by Tata (India) and Hyundai (Korea) (figure 7-1). Maruti was founded

by an Indian Act of Parliament in 1981; Suzuki’s initial stake was 26 percent. Maruti was

privatized in 2002 when Suzuki’s stake rose to its current level of 54 percent.

-

100,000

200,000

300,000

400,000

500,000

600,000

Ford General

Motors

Honda Hyundai Mahindra

&

Mahindra

Maruti Tata Toyota All other

Number of vehicles

Figure 7-1 Indian car and light truck production, 2005

Source: Ward’s Automotive Group, World Motor Vehicle Data 2006 .
 5

 India Brand Equity Foundation, Auto Components.

 6

 Fillmore, “Indian Capacity Will Rise,” 4. 

 7

 For example, the two largest Indian automakers, Maruti (majority owned by Suzuki of Japan) and

Hyundai of Korea are planning for large scale exports—Suzuki is planning to export one-half of the output at

its new plant in Manesar, and Hyundai reportedly plans to export a large percentage of its total Indian

capacity, which it is raising to 600,000 vehicles per year. Fillmore, “Indian Capacity Will Rise,” 4.

7-3

The Indian automotive parts industry exhibited growth similar to that of the auto industry

during the 2001–06 period, more than doubling output to an estimated $10 billion, a

response in large part to the strong local automotive market and greater outsourcing by

automakers to their suppliers (table 7-2). According to Indian sources, Indian industry output

is likely to total $18.7 billion by 2009 and then reach an estimated $40 billion by 2014.5

TABLE 7-2 Indian automotive parts

production: FY2001–02 through

FY2005–06, (million U.S. dollars)

Year Production

2001–02 4,470

2002–03 5,430

2003–04 6,730

2004–05 8,700

2005–06 10,000

Source: Automotive Component

Manufacturers Association of India,

“Industry Statistics.” 

Indian exports of passenger vehicles grew consistently at a CAGR of 34.8 percent from FY

2001–02 to FY 2005–06 (table 7-3). Maruti Udyog, Tata Motors, and Hyundai are the key

exporters; leading markets include Sri Lanka, Algeria, South Africa, United Kingdom, and

Italy. By 2010, industry observers predict that capacity will surpass domestic sales by

1 million, leaving a significant quantity of vehicles available for export.6

 Stringent

government automotive emission regulations have ensured that vehicles assembled in India

meet developed market standards, making them exportable. FDI in the automotive sector is

clearly contributing to India’s export growth, with many foreign automakers announcing that

new FDI is aimed, at least partially, at production for export.7

TABLE 7-3 Indian passenger vehicle exports, in units, FY 2001–02 through FY 2005–06

Type of vehicle 2001–02 2002–03 2003–04 2004–05 2005–06

Passenger cars and multipurpose vehicles 50,088 70,828 126,249 160,677 170,193

Utility vehicles 3,077 1,177 3,067 5,736 5,579

Total passenger vehicles 53,165 72,005 129,316 166,413 175,772

Source: Society of Indian Automobile Manufacturers Web site.

Indian exports of automotive components more than tripled during the period, with a CAGR

of 20 percent, and reached an estimated $1.8 billion in FY 2005–06 (table 7-4). A growing

share of Indian production is destined for export markets, which accounted for an estimated

18 percent of Indian production in 2006. Approximately 75 percent of these exports were
 8

 The term OEM refers to original equipment manufacturers (i.e., automakers); the aftermarket refers to

replacement parts sold by dealers, retail operations, and service garages, for example.

 9

 India Brand Equity Foundation, Auto Components.

 10 Just-auto.com editorial team, “ACMA-McKinsey’s ‘Vision 2015' for the Indian Supplier Industry.”

 11 Government of India, Ministry of Heavy Industries and Public Enterprises, Automotive Mission Plan

2006–2016, 45.

 12 At least 80 percent of passenger vehicle sales are now financed by loans. KPMG, Automotive and

Components Market in Asia, 22.

 13 Bissinger, Dream Machines.

7-4

shipped to OEMs, with the remaining 25 percent heading to the aftermarket,8 compared with

a 35 percent share to OEMs in the 1990s.9

 Because original equipment manufacturers

(OEMs) maintain relatively stringent product and quality specifications, the market shift

likely represents, in part, the effect of quality improvements in association with the influx

of FDI. Indian auto parts exports are likely to continue to see significant growth, according

to at least one industry analyst, who has offered an “industry vision” of such exports

reaching $20–25 billion by 2015.10

TABLE 7-4 Indian exports of automotive

parts: FY 2001–02 through FY 2005–06,

(million U.S. dollars)

Year Exports

2001–02 578

2002–03 760

2003–04 1,000

2004–05 1,400

2005–06 1,800

Source: Automotive Component

Manufacturers Association of India at

http://www.acmainfo.com.

India as an Automotive FDI Destination

The Indian Domestic Market

India is one of the fastest growing auto markets in the world, with sales registering a CAGR

of 14.1 percent in the last 5 years (table 7-5), and projected sales of 3 million by 2015.11

Catalysts for increased sales of passenger cars currently include new model offerings,

expanding purchase finance options and low interest rates,12 and reductions in motor vehiclerelated taxes.13 Maruti is the market leader in passenger car sales by a wide margin (figure

7-2). Other important brands in terms of sales are Hyundai, Tata, and Mahindra & Mahindra.

TABLE 7-5 Indian passenger vehicle sales, in units, FY 2001–02 through FY 2005–06

Type of vehicle 2001–02 2002–03 2003–04 2004–05 2005–06

Passenger cars 509088 541491 696153 820179 882094

Utility vehicles 104253 113620 146388 176360 194577

Multipurpose vehicles 61775 52087 59555 65033 66366

Total passenger vehicles 675116 707198 902096 1061572 1143037

Source: Society of Indian Automobile Manufacturers Web site.
 14 newKerala.com, “India—The New Hub of the Automotive Industry.”

 15 Business India Intelligence, “India Automotive: Burning Rubber.”

 16 KPMG, Manufacturing in India, 40. Taken from Sanjeev Sanyal, India’s Changing Households,

Deutsche Bank, November 2004.

 17 Rathore and Swarup, A Review of India’s Automotive Industry, 11.

 18 Government of India, Ministry of Heavy Industries and Public Enterprises, Automotive Mission Plan

2006–2016, ix.

 19 Press Trust of India, “Delphi to Invest $10 Mn in India”; and Doi, “Suzuki Will Build Suppliers

Industrial Park,” 5.

7-5

The composition of the domestic market makes India an attractive FDI destination for

automobile components manufacturers. The middle class is expanding, and is estimated to

reach 450 million in 2007, or about 45 percent of the total population,14 and the potential

pool of drivers—the segment of the population aged 20–60 years—is growing.15 Disposable

incomes in India are reportedly rising quickly, and Indian consumers tend to be more likely

to channel their increased income toward a vehicle purchase than other Asian consumers.16

The market has much room to expand, as the vehicle penetration rate is just 7 cars per 1,000

people17—one of the lowest rates in the world.

India is also attractive to the world’s automakers because it has a large pool of high

technology engineering talent, and its location in the populous Asia-Pacific region allows

it to serve as a regional export base. According to the Indian government, the increasing

competition in the Indian automotive industry has spurred significant improvements in

productivity, making it one of the most productive manufacturing sectors in India.18

In addition to the favorable market and manufacturing environment in India, the presence

of a large number of leading motor vehicle manufacturers has attracted a substantial base of

non-Indian automotive parts producers.19 Because of automakers’ specific product, material,

0

5

10

15

20

25

30

35

40

45

50

Hyundai* Maruti* Mahindra

&

Mahindra

Tata Honda* GM* Ford* All Other

Market share 

percent

Figure 7-2 Indian car and light truck market share, by company, 2005

Source: Ward’s Automotive Group, World Motor Vehicle Data 2006. 

Note: * Majority foreign owned.
 20 Government of India, Ministry of Heavy Industries and Public Enterprises, Department of Heavy

Industry, Auto Policy.

 21 SIAM, “Auto Policy of Government of India.”

 22 Government of India, Ministry of Heavy Industries and Public Enterprises, Department of Heavy

Industry, Auto Policy, art. 8.1.

 23 A CKD is a complete kit needed to assemble a vehicle. It is common practice among automakers to sell

knocked down kits to their foreign affiliates; the automaker is typically able to avoid high import taxes, gain

market access, and/or receive tax preferences for providing local employment, and the assemblers in

developing markets to gain expertise. 

 24 Bissinger, Dream Machines.

7-6

and quality requirements, they generally purchase components from established producers

with the necessary certifications, reputation, and experience. Moreover, automakers prefer

to source components locally to benefit from just-in-time delivery and supplier support. To

meet these objectives, automakers often encourage their suppliers to invest in greenfield

operations or form joint ventures with local manufacturers, particularly when entering new

markets with limited or developing component industries. The size of the local vehicle

assembly industry also offers sufficient production volumes to warrant the level of

investment necessary to support component manufacturing operations in India.

Indian Government Policies Affecting Auto FDI

As noted above, since the 1990s, Indian government policies have been aimed at promoting

a globally competitive auto sector, and FDI is a critical component of this plan. In the past

5 years, the government of India has taken a number of steps toward expanding the domestic

automotive industry and promoting it as a globally competitive player. These policies are

summarized below.

Automotive Policy of 2002

The primary goal of this policy was “to establish a globally competitive automotive industry

in India and to double its contribution to the economy by 2010.”20 Key objectives outlined

in the 2002 policy included modernizing the domestic industry; fostering domestic design,

research, and development; developing alternate propulsion technologies; and establishing

domestic environmental and safety standards on par with international standards.21 In an

important change, the 2002 policy permitted 100 percent foreign ownership of automotive

and automotive parts manufacturing firms without minimum investment criteria. The policy

also addressed import tariffs, with a stated objective of “facilitat(ing) development of

manufacturing capabilities as opposed to mere assembly without giving undue protection;

ensur(ing) balanced transition to open trade, promot(ing) increased competition in the market

and enlarg(ing) purchase options to the Indian customer.”22 Import duties on components and

completely knocked down (CKD) kits23 were reduced to 30 percent in 2003 and to 15

percent in 2005.24 Coupled with a reduction in local content requirements, these changes

encouraged FDI by making it more economical to assemble vehicles in India. The 2002

automotive policy also provided for incentives for R&D and tax concessions.
 25 Government of India, Ministry of Heavy Industries and Public Enterprises, Automotive Mission Plan

2006–2016, xiii.

 26 Ibid., 13.

 27 Ibid., 26.

 28 Ibid., 10.

 29 Ibid., 25.

 30 Ibid., 26.

7-7

Automotive Mission Plan 2006–2016

Recognizing that “the concept of attaining competitiveness on the basis of cheap and

abundant labour, favourable exchange rates, low interest rates and concessional duty

structure is becoming inadequate and therefore, not sustainable,”25 the Indian government

introduced the Automotive Mission Plan (AMP) in September 2006, and finalized in March

2007. The policy states that industry investment in R&D is needed to “increase innovative

breakthroughs for vehicle design as well as in manufacturing technology” and that the Indian

government has a role to play in attracting this investment.26 The vision statement of the

AMP is:

To emerge as the destination of choice in the world for design and manufacture of

automobiles and auto components with output reaching a level of $145 billion

accounting for more than 10% of the GDP and providing additional employment

to 25 million people by 2016.27

These goals are expected to be addressed via large investments from both industry and the

government; according to the AMP, output targets “would require incremental investment

of $35–40 billion. . . by 2016.”28 If successful, India would emerge, in 2016, as the world’s

seventh largest passenger car producer, compared to its current rank of eleventh.29

The AMP envisions that the role of the Indian government would entail facilitating

infrastructure creation, promoting the country’s capabilities, creating a favorable and

predictable business environment, attracting investment, and promoting R&D. Under this

scenario, the role of industry would include designing and manufacturing world-class

vehicles, improving cost competitiveness and labor and capital productivity, achieving

economies of scale and R&D capabilities, and showcasing India’s products in potential

markets.30 Specific portions of the AMP are summarized in box 7-1 below.
7-8

Box 7-1 Key recommended interventions in the AMP

Investment Incentives

• A tax holiday for auto industry investment exceeding $133 million.

• One-stop clearance of FDI proposals.

• Tax deductions of 100 percent of export profits.

• 30 percent deduction of net (total) income for 10 years for new industrial undertakings.

• Duty suspension for machinery for a greenfield plant or for expansion of an existing operation.

• 50 percent deduction on foreign exchange earnings.

• Actions on the part of state governments to ensure power supply and/or promote captive generation and

provide preferential land allotment.

Export Measures

• Reforming the tariff and tax structure.

• Creating a Special Auto-Component Parks system to promote components exports.

• Creating ‘virtual SEZs’.

• Adjusting existing export promotion schemes to ensure that they are WTO compatible.

• Extending product and market focus schemes to the auto sector. 

Research and Development

• Implement the National Automotive Testing and R&D Infrastructure Projecta

.

• Encourage collaboration between industry and research and academic institutions.

• Further develop the facilities and programs of the technical institutes.

• Emphasize fuel economy and alternate propulsion technologies.

• Consideration by the Ministry of Finance of R&D tax concessions, grants of 100 percent for fundamental

research, 75 percent for precompetitive technology/application, and 50 percent for product development;

zero taxes on technology transfers (products, features, alternate fuel, etc.); increased weighted deduction

for expenditures incurred on R&D from 150 percent to 200 percent; and excise duty concession for

‘Made-In-India’ products.

Education, Training, and Labor Law Reform

• Creation in the Eleventh Five-Year Plan period a National Level Specialized Education and Training

Institute for Automotive Sector.

• Providing for multi-year sabbaticals for national laboratory and university R&D personnel to work in

industry.

• Expansion of working hours from 48 to 60 per week with a concomitant expansion of allowable hours per

day.

• Allowing contract labor in core areas for temporary periods.

• Allowing fixed term contacts in certain core activities.

• Increasing flexibility in recruitment and lay-off of workers in response to changes in market demand.

• Creation by companies of a supplementary unemployment benefits fund.

Infrastructure Development

• Continued government investment in road, rail, port, and power infrastructure.

• Creation of three auto export hubs near Mumbai, Chennai, and Kolkatta, able to each handle 500,000

vehicle exports annually by 2015.

• Allowances for automobile retail trade and service infrastructure.

__________________________________________________________________________

Sources: Government of India, Ministry of Heavy Industries and Public Enterprises, Automotive Mission Plan 2006–2016;

Autocar Professional, “Mega Auto Project Well On Course”; and Wells and Sadana, “Hub or Hubris? India and the Automotive

Mission Plan 2006–2016,” 29.

a

The Indian government established the $400 million National Automotive Testing and R&D Infrastructure Project (NATRIP),

jointly funded by industry and government. NATRIP’s detailed project implementation report was approved on July 25, 2006, by

the governing council, which comprises representatives both from the Indian automotive industry and the Government of India.

NATRIP will set up world-class R&D, testing, and proving grounds facilities in the automotive clusters that will be available to all

automakers. The first center is scheduled to open in 2008, with the remaining facilities opening by 2011. 
 31 KPMG, Automotive and Components Market in Asia, 23.

 32 Fillmore, “Short of Engineers at Home,” 7. 

 33 Mahindra World City Web site.

 34 Adityapur Industrial Area Development Authority Web site.

 35 Asian Pacific Bulletin, “Can India Revitalize its Special Economic Zones to Rival Those in China?”;

Johnson, “India Lifts Freeze on Enterprise Zones”; and Srinivasan, “China, India and the World Economy.”

 36 KPMG, Manufacturing in India, 3.

 37 U.S. India Business Council official, interview by Commission staff, January 4, 2007.

 38 KPMG, Manufacturing in India, 35.

 39 Ibid.

7-9

Foreign Investment in the Indian Auto Industry

Automaker FDI decisions are primarily driven by market factors, including proximity to

markets, market size, cost of production, and favorable infrastructure. For example,

automakers tend to assemble vehicles in or near their major markets, or may choose to invest

in a foreign market because of that country’s tariff structure or to improve access to local

markets. Foreign automakers direct their investment toward manufacturing plants, and also

seek to expand their dealer networks and their network certified repair shops. Investments

can also go into R&D facilities, training centers, and purchase financing operations. Because

of India’s improving technical capabilities and low costs, global automakers are increasingly

outsourcing R&D, design, and engineering to their Indian partners or subsidiaries.31 For

example, Suzuki has been increasingly outsourcing more R&D and design work for its

global operations to its Indian subsidiary, Maruti, and scaling back on such operations in

Japan. Since its inception in 2000, Maruti’s R&D staff grew to 250 employees in 2006.32

Several special economic zones (SEZs) are targeted specifically at the automotive industry,

such as the Mahindra World City Auto Ancillary SEZ, which advertises its proximity to Ford

and Visteon as one of the many reasons that automotive suppliers would choose to set up

operations there,33 and Adityapur Industrial Area Development Authority, which boasts

competencies in sheet metal pressed fabricated components and subassemblies; light and

heavy fabrication; castings, forgings and machining; and polymer components.34 Despite the

financial incentives offered by Indian SEZs, these zones have been less successful in

attracting foreign and domestic investment than other economic zones, such as those

operating in China. The Indian zones reportedly lack sufficient size to achieve economies

of scale, have been subject to restrictive labor laws, and lack efficient infrastructure to

facilitate communication and shipment of goods.35

As discussed in chapter 3, foreign investors in India face issues related to infrastructure and

corruption in India, but these are not enough to dissuade investors. Power, road, rail, and port

infrastructure all pose challenges for the automotive industry, raising the cost of production

and lowering efficiencies. Some automotive industry observers consider the unreliable power

supply to be the most significant infrastructure constraint. One source reports that, “on

average, a company can expect nearly 17 significant power outages per month, against one

per month in Malaysia and fewer than 5 in China. At the same time, costs are higher.”36

Many companies reportedly maintain their own private power supplies to compensate for the

national shortcomings;37 one study on the Indian manufacturing sector asserts that over 60

percent of companies rely on private power generation.38 The transportation infrastructure

is also inadequate. An industry official states that India’s weak infrastructure is “the biggest

challenge for industry,” noting that political disagreements between India’s state and federal

governments exacerbate the problems.39
 40 KPMG, Manufacturing in India, 6.

 41 LaReau, “GM Wants More Engineers in India,” 6.

 42 Ward’s Automotive Reports, “Chevy’s Spark Key to GM’s Growth in India,” 7.

 43 Ibid.

 44 Business India Intelligence, “India Automotive: Burning Rubber.”

 45 Ward’s Automotive Reports, “Chevy’s Spark Key to GM’s Growth in India,” 7.

 46 Bhalla and Allen, “GM Says to Buy More Auto Parts from India.”

 47 Bureau van Dijk, Zephyr Mergers and Acquisitions database. The other M&A deal was a 20 percent

stake in International Cars and Motors Ltd., purchased from Sonalika Group of India by Citigroup in 2006. 

International Cars & Motors Ltd. (ICML) was founded in 2003 with a greenfield plant in Amb to

manufacture multi-utility vehicles. Plant capacity is 24,000 multi-utility vehicles (MUV) per year. In 2006,

ICML launched the Rhino, an MUV designed in collaboration with MG Rover with engines sourced from

Isuzu. 3i Web site.

 48 Business India Intelligence, “India Automotive: Burning Rubber.”

7-10

Corruption also adds to automotive companies’ cost of doing business. An official of

DaimlerChrysler acknowledged that corruption exists and that the company’s policy is not

to tolerate it. According to the official, “Now you can’t say, I won’t invest in India because

there is corruption. You just have to accept the fact that you will have to find your own

way.”40

U.S.-based passenger vehicle investment

Both GM and Ford have invested in India through their wholly owned subsidiaries, General

Motors India and Ford India Pvt Ltd., respectively. General Motors India was incorporated

in 1994 as a 50–50 joint venture company with the C.K. Birla Group of Companies

(Hindustan Motors), and became a wholly owned subsidiary of General Motors Co. in 1999

(table 7-6). GM’s technical center in Bangalore employs 800 and conducts engineering and

R&D for local as well as global applications. Company officials recently announced that

they plan to add 200 engineering jobs at the center per year.41 This clearly indicates that GM

is ramping up its presence in the Indian market; the company is introducing the Chevrolet

Spark small car, and hopes to achieve a 10 percent share of the Indian market by 2010.42

GM’s total investment of $750 million43 is geared toward reaching an installed annual

capacity of 225,000 automobiles by 2010.44 According to GM’s chairman and CEO, “India

is ‘the’ candidate for GM’s future investments.”45 While current assembly and domestic sales

plans do not leave room for exports, company officials have said that India could become

an export hub for mini cars in the future.46

Ford commenced operations in India in 1996 through a joint venture with Mahindra &

Mahindra; Ford India became a wholly owned subsidiary of Ford Motor Co. in March 2005.

Two of the three reported M&A deals from the United States name Ford as the acquirer—the

acquisition of Mahindra’s 15.88 percent share of Ford India Pvt. Ltd. to make it wholly

owned by Ford Motor Co. in 2005, and, later in 2005, a $75 million equity infusion by Ford

Motor Co. into Ford India Pvt Ltd.47 Ford is striving for installed annual capacity of 150,000

vehicles by 2010.48
 49 Ford Motor Co., “Volvo to Sell Cars in India.”

 50 As noted earlier, Mahindra was formerly a joint venture partner with Ford, but was bought out by Ford

in 2005.

 51 Bureau van Dijk, Zephyr Mergers and Acquisitions database.

7-11

TABLE 7-6 U.S. automakers with assembly operations in India 

Automaker Year

operations

commenced

JV partner

“ownership

share/JV partner”

Number of

plants/

location

Total

installed

capacitya

Examples of recently announced

investments

General

Motors

1994 NA 1/Gujarat 85000 • Expanded Gujarat from 60,000 to

85,000 in 2007

• Greenfield plant in Talegaon to

begin production in late

2008—capacity of 140,000

Ford 1996 NA 1/Maraimalai,

near Chennai

100000 • Planning diesel engine plant to

produce 100,000 engines/year

Source: Various industry reports, company Web sites, press releases, LocoMonitor, FDI database, and SIAM Web

site.

Note: NA—not available.

 aTotal installed capacity refers to the total number of vehicles that could be assembled per year if plants were

running at full capacity.

European-based passenger vehicle investment

A total of 12 European-based automakers (counting subsidiary investments as distinct from

parent company investments) are invested in India; they include Audi, Bentley, BMW,

DaimlerChrysler, Fiat, Mercedes-Benz, Porsche, Renault, Rolls Royce, Skoda, Volkswagen,

and Volvo. Of these 12, the investments of Bentley, Mercedes-Benz, Porsche, and Rolls

Royce are in retail outlets only; they are not assembling cars in India. Similarly, in 2006,

Volvo announced an investment in a new subsidiary, Volvo Cars India, that will be selling

the XC90 and S80 models imported from Sweden; Volvo has no immediate plans for

production in India.49

Among the 7 EU-15 automakers assembling or planning to assemble cars in India, the

individual level of investment and commitment to the market varies considerably (table 7-7).

BMW and Audi, for example, are just beginning assembly operations, and DaimlerChrysler

produces less than 3,000 vehicles per year. Conversely, Fiat, Renault, Volkswagen, and

Skoda are more heavily invested. Fiat has had the longest presence in India, dating to the

1950s, and is currently aligned with indigenous automaker Tata Motors; Renault, by far the

largest European player in India, is also allied with an indigenous automaker—Mahindra &

Mahindra.50 Volkswagen, although a newcomer, is building a greenfield plant with an

installed annual capacity of 110,000 vehicles, and its subsidiary, Skoda, has an annual

capacity of 30,000 vehicles with a goal of increasing to 50,000 vehicles by 2010.

The M&As reported for European acquirers include a deal in which Fiat SpA of Italy

increased its minority share in Fiat India Ltd. from 19.44 percent to 44.61 percent in 2005;

and a deal in which a 10 percent stake in International Cars and Motors Ltd. was acquired

by 3i Group plc, a private equity/venture capital firm in the United Kingdom in 2006.51
 52 OCO Consulting Ltd., LocoMonitor FDI database.

7-12

TABLE 7-7 EU automakers with assembly operations in India

Automaker Year

operations

commenced

JV partner 

“ownership

share/JV partner”

Number of

plants/

location

Total

installed

capacity

Examples of recently announced

investments

Audi 2006

(announced

investment)

NA NA NA • Plans to start producing cars in

autumn 2007 at a Skoda facility

in Aurangabad

BMW 2005

(announced

investment)

NA 1/Pune 1700 • Greenfield plant for CKD

assembly in Pune came online

in March 2007

DaimlerChrysler 1994 NA 1/Pune 2,000 (at a

rented Tata

facility)

• Constructing a greenfield plant

in Chakan for assembly of

Mercedes-Benz models—5,000

per year expected to begin

rolling off assembly line in early

2009

Fiat 1951 (Fiat

licensed

Premier

Automobiles

to produce a

Fiat model)

 Tata NA NA • Announced JV plant with Tata

in Ranjangaon—to be

operational in 2008 with

100,000 annual capacity,

shared with Tata, as well as

200,000 engines

Renault N/A Mahindra 1/Nashik NA • JV greenfield plant in

Chennai—Mahindra (50%),

Renault (25%), and Nissan

(25%)—annual capacity of

400,000—to be fully integrated

and operational in

2009—capacity rumored to be

increased to 700,000 by 2012

Skoda 1999 NA 1/Aurangabad 30000 NA

Volkswagen 2006

(announced

investment)

NA NA NA • Greenfield construction to

begin in Pune—full-scale

manufacturing plant—annual

capacity to be 110,000 by 2009

Source: Various industry reports, company Web sites, press releases, LocoMonitor FDI database, and SIAM Web

site.

Note: NA—not available.

Asia-Pacific-based passenger vehicle investment

According to LocoMonitor, a total of 9 Asian-Pacific automakers invested in India from

2002 through 2006: Honda, Mazda, Nissan, Suzuki, Toyota, and Daihatsu of Japan; Hyundai

of Korea; Naza of Malaysia; and MG Rover a subsidiary of Nanjing Auto of China.52 Details

of the investment made by MG Rover, (in 2002) are not available and may not have come

to fruition. 

Suzuki and Hyundai are the leading Asian-Pacific automakers in India (table 7-8). Suzuki

owns 54 percent of India’s Maruti Udyog Ltd., the leading passenger car maker in India, and

has been a player in the Indian automotive industry since 1982. Hyundai Motor India

Limited (HMIL), a wholly owned subsidiary of Hyundai Motor Company, is the second
 53 Just-auto.com editorial team, “Hyundai Has Ambitious Plans.”

 54 Automotive Component Manufacturers Association of India, “Industry Statistics.”

 55 OCO Consulting Ltd., LocoMonitor FDI database.

 56 Information for mergers and acquisitions compiled from Bureau van Dijk, Zephyr Mergers and

Acquisitions database.

 57 Of the 44 acquisitions reported in the Zephyr database, the values of 11 deals were not available.

7-13

largest carmaker in India and accounts for 60 percent of all cars exported from India.53

Honda, Toyota, and Hyundai entered the industry in the mid to late 1990s, and Nissan and

Naza are the most recent Asian-Pacific automakers to begin Indian operations.

Component industry

From FY 2001–02 through FY 2005–06, total investment in the Indian automotive

components industry nearly doubled to an estimated $4.4 billion.54 Of known foreign direct

investment, roughly one-half of such projects were in higher technology items such as engine

components, drive trains, and electronic systems. Most of the FDI represented new projects

rather than expansions of existing operations, and focused on manufacturing rather than

R&D and other automotive-related activities. As would be expected because of their leading

positions in the global automotive industry, U.S., German, and Japanese firms were the

principal sources of foreign investment in the Indian components industry.55

Additionally, foreign firms increased their total investment in Indian automotive parts

producers by a minimum of $600 million from 2002 through YTD 200756 with 44 announced

or completed acquisitions.57 U.S. firms led in total number of deals for single countries, with

10 reported acquisitions, and Japanese firms were involved in 8 deals. Europe as a whole

took part in 17 acquisitions, with the United Kingdom and Germany accounting for 5 and

4 acquisitions, respectively. The largest deal for which value was reported was the $128

million acquisition of the majority stake of Ashok Leyland by the Hinduja Group, a Londonbased multinational with interests in manufacturing, banking, and trade, completed in August

2006. 
7-14

TABLE 7-8 Asia-Pacific automakers with assembly operations in India

Automaker Year

operations

commenced

JV partner

ownership

share

Number of

plants/

location

Total

installed

capacity

Examples of recently announced

investments

Honda 1995 Siel

/99%

1/Noida 50000 • Greenfield plant in Rajasthan

announced in 2006—50,000

initial capacity online by 2010,

eventually reaching 200,000

• Expanding Noida to 100,000 by

2007 and to 150,000 by 2010

• Expanding dealership network

from 53 to 100 by 2010

Nissan 2004 Ownership/

100%

NA NA • JV greenfield plant in

Chennai—Mahindra (50%),

Renault (25%), and Nissan

(25%)—eventual annual capacity

of 400,000—to be operational in

2009, reaching full capacity by

2016

Suzuki 1982 Maruti/

54%

4/Gurgaon &

Manesar

600000 • Upgrading Gurgaon

• Expanding the new Manesar

plant opening in 2007 to 300,000

by 2009—large supplier park

included at new facility

• Plan to build R&D center, test

track, and collision evaluation

facility

• Expanding dealership network

from 405 to 600 by 2010

Toyota 1997 Toyota/

89%

Kirloskar/

11%

1/Bangalore 60000 • Considering a greenfield plant as

an expansion of its current

facility—annual capacity would be

100,000—decision awaiting

government approval of site

selection

• Expanding dealership network

from 63 to 200 by 2010

Hyundai 1998 NA 1/Chennai 300000 • Greenfield plant in Chennai being

completed in 2007 to expand total

capacity to 600,000

• Adding a $40 million R&D center,

to employ 800

• Expanding dealership network

from 183 to 250

• Expanding service network to

1,000 in 2007

Naza 2006

(announced)

NA NA NA • Greenfield plant in Tamil Nadu

announced in 2006; output

expected in late 2008

Source: Various industry reports, company Web sites, press releases, LocoMonitor FDI database, and

SIAM Web site.

Note: NA—not available.
 58 KPMG, Manufacturing in India.

 59 Huber, “The Indian Automotive Scenario.”

7-15

Many multinational automotive parts producers from these and other major producing

countries have been manufacturing in India for years, producing a wide range of products

from basic commodities such as castings and forgings to highly sophisticated electronic

systems (table 7-9). Some of these firms have also located technology or development

centers in India. Of the 400 substantive Indian component producers, roughly 40 percent are

joint ventures with foreign manufacturers.58 The Indian government has encouraged local

industry to partner with foreign firms to enhance its potential as an outsourcing location and

global R&D resource center.59

TABLE 7-9 Examples of global automotive parts suppliers manufacturing in India

Company Country Product examples

Aisin Seiki Japan Door latches, window regulators, door

hinges

Bosch Germany Development center for electronic

diesel injection systems

Dana United States Clutches, piston rings, axle housings

Delphi United States Steering systems, wiring harnesses,

driveshafts, catalytic converters,

technology center

Denso Japan Auto electrical components, fuel

pumps, radiators, HVAC units, and

heaters

Faurecia France Automotive seating and interior

components

Siemens VDO Germany Dashboard instruments and

accessories

Visteon United States AC systems, engine cooling systems,

instrument panels

Yazaki Japan Wiring harnesses

Source: Automotive Component Manufacturers Association of India, http://www.acmainfo.com. 
 60 Wells, “Hub or Hubris? Prospects for the AMP to 2016.”

 61 Wells and Sadana, “Hub or Hubris? India and the Automotive Mission Plan 2006–16,” 29.

 62 Government of India, Ministry of Steel, National Steel Policy 2005.

 63 Wells and Sadana, “Hub or Hubris? India and the Automotive Mission Plan 2006–16,” 29.

 64 Ramachandran, “A Grand Plan for Indian Automobiles.”

7-16

Conclusion

The key to continued FDI in India’s auto sector rests with continued expansion of the

domestic market, which seems ensured, and the further development of India as an

automotive export hub. “Much will depend upon individual corporate strategies, particularly

in terms of manufacturing locations in relation to market served.”60 Moreover, because of

extensive forward and backward linkages, the viability of the AMP and the accomplishment

of its goals are reliant on related industries and domestic developments.61 The slow progress

on improvements to the transportation infrastructure and the uncertain availability of inputs

such as steel may make it difficult for India to meet its AMP targets. Like the auto industry,

the steel industry also has a national plan specifying production and other targets.62 However,

meeting these targets depends on expansion of the railway network in order to move iron ore,

coking coal, and finished steel around the country. The supply of fuel for individual

motorists is also problematic in India.63 Some automakers also note that frequently changing

government policies have a negative impact on their investment decisions.64
8-1

CHAPTER 8

Case Study 2: Pharmaceutical FDI in India

This case study traces the impact of India’s changing patent laws on FDI in the

pharmaceutical sector. India’s patent laws have evolved from a model protective of

pharmaceutical patents during the colonial period (1856–1947), to a legal regime intended

to foster the establishment and growth of a domestic industry by excluding pharmaceuticals

from patent protection (1972–2005), and finally to the present law (2005), which

reestablishes patent protection for pharmaceutical products to comply with the requirements

of the international intellectual property system.

The evolution of the patent law appears to have had a substantial impact on domestic and

foreign pharmaceutical investment. Foreign firms dominated the market during the colonial

period. When there was no pharmaceutical product patent protection in India, domestic firms

flourished by reverse engineering patented products to make generic pharmaceuticals, and

the market share of multinational pharmaceutical firms declined. While it is still too early

to definitively identify the impact of the 2005 change to the patent law, it appears to be

motivating increased foreign investment in India’s pharmaceutical sector. In anticipation of

the new law, pharmaceutical FDI increased sharply in 2004, declined in 2005 and then

rebounded in 2006. The decline in 2005 may be attributable to substantial uncertainty as to

how India will implement and interpret its new patent law.

Over the last five years (2002-06), FDI and strategic alliances between foreign and domestic

firms in the areas of clinical trials, data management services, new drug discovery, and the

manufacturing of pharmaceuticals and ingredients all have been on the increase. The

valuable intellectual property connected to these activities is protected through operational

security procedures, contractual protections and due diligence to ensure trustworthy partners.

Multinational firms conduct R&D and manufacturing in India because of cost savings, the

skilled labor force and the country’s disease profile, among other reasons. These firms have,

however, waited to see how the patent law will be interpreted and enforced before expanding

their product patenting and commercialization activities in India.

India is charting a new intellectual property path, attempting to foster access to medicine and

the growth of the domestic pharmaceutical industry while also phasing in compliance with

the requirements of the international intellectual property system. The ultimate impact of

India’s calibrated approach on the quantity and quality of FDI in the pharmaceutical sector

remains to be seen.

The Evolution of India's Patent Laws

The Patent Laws Under British Rule (1856-1947)

India enacted its first patent law in 1856 while the country was under British rule, a period

that lasted until India's independence in 1947. While the patent laws were amended

throughout the colonial period, they consistently provided for the patenting of

pharmaceutical products. Most patents granted during this period went to foreigners. At the
 1

 Mueller, “The Tiger Awakens,” 16–20.

 2

 Ibid., 22–25.

 3

 India Patents Act, 1970, § 83.

 4

 Chaudhuri, The WTO and India's Pharmaceuticals Industry, 37–38.

 5

 TRIPS Article 65.4.

 6

 TRIPS, Arts. 70.8(a) and 70.9.

 7

 WTO, “India—Patent Protection for Pharmaceutical and Agricultural Chemical Products.”

8-2

time of independence, India’s pharmaceutical sector was dominated by multinational

companies with only limited participation by domestic firms.1

The Post-Independence Patent Laws (1947-1995)

With independence in 1947, the Indian Government began preparing a new patent law, with

a goal of fostering the development of an indigenous pharmaceutical industry. In 1972, after

repeated expert reports and deliberations in Parliament, the India Patents Act of 1970 came

into force.2

The 1970 Act imposed substantial limits on patent rights; these limits were intended to

encourage indigenous inventions and secure their production in India on a commercial scale.3

First, and most importantly, pharmaceutical products could not be patented. Second, firms

were permitted to patent only a single process for making a pharmaceutical; a firm could not

block competitors by patenting all possible processes for making a particular drug. Third,

the term for pharmaceutical process patents shortened to 5 years from the grant of the patent

or 7 years from application filing, whichever was less, compared to 14 years from

application filing for all other inventions. And fourth, the Act imposed very broad

“compulsory licensing” provisions for pharmaceutical manufacturing process patents.

Within 3 years of the grant, the patents were deemed “licenses of right,” meaning that

anyone could use the process if they paid a royalty.4

 In sum, pharmaceutical products had

no protection, and pharmaceutical processes were protected only for 3 years if a royalty was

paid and for 5 years if no royalty was paid. 

The Post-TRIPS Patent Laws (1995-Present)

In January of 1995, India became a founding member of the World Trade Organization

(WTO) and agreed to the requirements of TRIPS, the WTO intellectual property agreement

Because India was a developing country that did not provide for pharmaceutical product

patenting when TRIPS came into force, it obtained a 10 year transition period, until January

2005, to put in place pharmaceutical patent protections.5

 During this transition period, India

was required to provide a means for applications to be filed and assigned a filing date, a

“mailbox” facility. TRIPS also required that “exclusive marketing rights”—the sole right to

sell the invention for a specified time—be provided for certain mailbox applications filed

during the transition period.6

 India complied with these requirements through the Patents Act

of 1999, after a WTO complaint was filed and resolved against India.7

In 2002, India amended its patent law to provide the TRIPS-mandated 20 year patent term

for all inventions, to be applied to pharmaceutical patents at the conclusion of the transition

period. The amendments also include new compulsory license provisions. These provisions

permit a compulsory license application 3 years after a patent is granted if the “reasonable

requirements of the public” regarding the invention have not been satisfied, the invention is

not available at a reasonably affordable price, or the invention is not being “worked” or
 8

 India Patents Act, § 84 (2005). Domestic “working” requirements are controversial; the United States

challenged at the WTO such a requirement in Brazil’s patent law, however, the dispute was terminated based

on Brazil’s agreement to provide advance notice where it intended to issue a compulsory license based on the

fact that the patent needed to be domestically worked. USTR, “Brazil.”

 9

 India Patents Act, §§ 92, 92A (2005).

 10 Mueller, “The Tiger Awakens,” 107–09.

 11 U.S. India Business Council, Recommendations of the Breakout Session on Biotechnology/Life

Sciences/Medical Devices Breakout Session, “Issues Raised by Indian Industry” and Indian industry official,

interview by Commission staff, March 28, 2007.

 12 DiMasi, Hansen, and Grabowski, “The Price of Innovation: New Estimates of Drug Development

Costs,” 151. 

 13 See generally, Thomas, Proprietary Rights in Pharmaceutical Innovation, CRS-17–19.

8-3

produced in India.8 The law also provides for immediate compulsory licensing in cases of

a governmental notification of a public health crisis or public non-commercial use, or where

the product will be exported to countries with insufficient manufacturing capacity to address

public health problems.9

 The compulsory license provisions of India’s law are, by far, the

broadest of all the world’s patent systems.10 As such, they raise substantial concerns among

multinational pharmaceutical companies; to date, however, no compulsory licenses have

been sought or issued under the new law.

The critical step in India’s implementation of its TRIPS commitments came in January 2005

with the end of the transition period and the required amendment of its law to provide patent

protection for pharmaceutical products. According to Indian industry representatives, India

now is taking a “calibrated approach” to intellectual property protection that seeks to take

into account concerns for public health and access to medicine as well as the interests of the

domestic industry.11 Notwithstanding this focus on domestic issues, India now has in place

an IP regime that addresses the requirements of the international IP system.

Ongoing Patent Law Controversies

Despite the substantial patent law changes since India’s entry into the WTO, there are still

gaps and provisions that raise objections from multinational pharmaceutical companies. First

and foremost, multinationals seek a law to protect the clinical trial and other data used to

obtain marketing approval of pharmaceuticals that utilize new chemical entities. Clinical trial

data is extremely expensive to amass. The fully capitalized cost to develop a new drug has

been estimated at an average of $847 million, with a substantial portion of these costs

attributable to the conduct of clinical trials.12 Conducting clinical trials in India can

significantly reduce these costs. 

TRIPS requires the protection of such data against “unfair commercial use.” However,

because TRIPS does not define the critical terms included in this requirement, the

obligation’s precise nature arguably is unclear. The United States, the European Union, and

many multinational pharmaceutical firms interpret TRIPS Article 39.3 to require “data

exclusivity,” meaning that data submitted to a marketing authority cannot be used by another

company or person for a particular period (ranging from 5 years in the United States to up

to 10 years in European Union countries). Others assert that developing countries can

flexibly interpret TRIPS to protect test data only against misappropriation or other

circumstances in which it is unfairly obtained.13 Data protection measures have been under

consideration in India for years, with no resolution to date. 
 14 PhRMA, PhRMA, Special 301 Submission: India, 71–72.

 15 KPMG International, The Indian Pharmaceutical Industry: Collaboration for Growth, 18.

 16 India Patents Act, § 3(d).

 17 Mueller, “The Tiger Awakens,” 72.

 18 In other countries, this type of evaluation of medical data is typically done by health care regulatory and

reimbursement officials, not by patent examiners. 

 19 The Group has requested the opportunity to review and resubmit an amended report. Nair, “India:

Mashelkar Committee Withdraws Its Report.” 

8-4

Moreover, a substantial backlog of unexamined patents, a lack of patent examiner

experience, lengthy pre-grant opposition proceedings, and limited resources raise the concern

that the patent law changes have not yet yielded meaningful patent protection.14 Under these

circumstances, the need for data protection—to provide certainty that there will be some

return on the investment necessary to support new drug discoveries—may be considered

particularly acute. According to Pfizer India, the lack of data protection is part of the reason

that “people are talking about India but investing in China.”15

Another controversial aspect of India’s Patent Act is the exclusion from patentability for

derivatives of known substances, unless it can be shown that they are significantly more

efficacious than the original substance.16 This exclusion was meant to preclude

“evergreening”—the practice of extending the terms of patents through related patents on

modified forms of the same drug, new drug delivery systems or new uses.17 The types of

efficacy data needed to show that a derivative is patentable, the ability of patent examiners

to evaluate medical efficacy data, and the standards governing the patent examiner’s data

evaluation are all unclear.18 The Government of India charged a Technical Expert Group

with determining whether this exclusion from patentability was TRIPS compatible. The

Expert Group issued its opinion in December 2006, concluding that it was not, but they later

withdrew the report due to “technical inaccuracies.”19 The multinational pharmaceutical firm

Novartis is in the midst of a high profile challenge to the provision’s legality (box 8-1). 
 20 The Business World (India), “We Are Not Doing This Out of Spite.”

 21 Shared Expertise Forums, “Survey: Pharmaceutical Companies Cautious of Investments in Emerging

China and India Markets.”

8-5

The perceived inadequacies in India’s patent law described above, as well as the Novartis

experience, appear to have impacted multinational pharmaceutical companies’ evaluation

of the investment environment in India. Novartis has stated in the press that it constructed

its new research institute in Singapore rather than India because of its concerns about patent

protection. Also, Novartis announced the creation of a Shanghai research institute because

of its perception that, unlike India, China has a system in place to improve intellectual

property protection. Moreover, Novartis has asserted that because of intellectual property

insecurity, its R&D collaborations in India are limited to supportive work rather than the

development of new medicines.20 More generally, according to a survey conducted by Ernst

& Young and the Economist, more than 62 percent of multinational pharmaceutical

companies surveyed in India consider threats to intellectual property a business risk, and 63

percent believe that their companies risked losing intellectual property rights when trying

to integrate with local suppliers and third party service providers.21 The final chapter on the

actual level of patent protection that India will accord pharmaceuticals has not yet been

written. 

Box 8-1 The Novartis Challenge to India’s Patent Law

Novartis is challenging in the Indian courts the refusal of the patent office to grant a patent for its cancer

drug, Glivec. The patent office found that Glivec was not patentable under Section 3(d) of the Patents Act,

which requires that a new form of a known compound demonstrate improved efficacy, and also found that

the drug did not satisfy the requirements for novelty and an inventive step. The Novartis case challenges

the constitutional validity of the patent law and its TRIPS compatability. The dispute is pending in the

Madras High Court which, in April of 2007, referred part of the case to a newly constituted Intellectual

Property Appellate Board.

Novartis asserts that this is not a case of “evergreening.” Although Glivec is patented around the world, the

pre-2005 bar on product patents precluded Novartis from obtaining a patent in India. Novartis further alleges

that it has demonstrated that the new version of the drug is more effective than a previous version, contrary

to the findings of the patent office. NGOs and health advocates object to the Novartis challenge on the

grounds that it undermines access to medicines and India’s ability to place limits on the patenting of

essential drugs. 

Ironically, although Section 3(d) was intended to limit “evergreening” by multinational companies, it also

limits the ability of domestic firms to obtain patents for incremental innovations. Domestic firms are in the

early stages of investing the large amounts of money and scientific expertise necessary to discover new

drugs. For example, the Indian firm Ranbaxy has reported that its patent applications in 2004 focused

primarily on process discoveries for generics. In 2007, its patent filings focused on new drug delivery

systems and other incremental innovations. Ranbaxy anticipates it will not be in a position to seek patents

for new drug discoveries until 2012.

By limiting the availability of patents in cases of incremental innovation, Section 3(d) may have the opposite

effect of that India intended. It may concentrate valuable pharmaceutical product patents in the hands of

multinational companies because they have access to the resources and expertise needed for the most

complex and costly inventions, at the expense of domestic firms undertaking incremental innovations.

Sources: Novartis, “Questions and Answers”; and Technical Expert Group on Patent Law Issues, “Report

of the Technical Expert Group on Patent Law Issues.”
 22 Mueller, “The Tiger Awakens: The Tumultuous Transformation of India's Patent System and the Rise

of Indian Pharmaceutical Innovation,” 28.

 23 Chaudhuri, The WTO and India's Pharmaceuticals Industry, 18. 

 24 Mueller, “The Tiger Awakens,” 60.

 25 Bureau van Dijk, Orbis Companies database.

 26 Sampath, “Indian Pharma within Global Reach,” 16–17. 

 27 Pharmabiz.com, “Pharmabiz Studies of Top Cos.”

 28 Sampath, “Indian Pharma within Global Reach,” 16.

8-6

The Evolution of the Pharmaceutical Industry in India

The Domestic Pharmaceutical Industry

The composition of India’s pharmaceutical industry has changed with the patent laws.

Multinational firms dominated the Indian market during the colonial period. The removal

of patent protection fostered the growth of the domestic industry and a corresponding decline

in the market share of the multinationals. During the years after enactment of the 1970 India

Patents Act, Indian scientists became particularly adept in the reverse engineering and

production of pharmaceutical products patented outside of India and in the development of

non-infringing production processes. By contrast, the withdrawal of patent protection caused

many multinational pharmaceutical companies to limit their product portfolio in India to

patent-expired products, or to pull out of the market altogether.22 In 1970, foreign firms

accounted for two thirds of the market; by 2004, they held only a 23 percent market share.23

Pharmaceutical firms operating in India are a diverse group with varied interests in the new

patent law. Although there are approximately 6,000 active firms, the top 300 make up most

of the Indian market. In the top tier are approximately 100 domestic and foreign-owned

companies, with annual sales greater than $650,000. The top tier firms, both foreign and

domestic, with their own research agendas and discoveries generally support the amended

patent law, believing that it provides a necessary incentive for innovation.24

The top three domestic firms, in terms of operating revenues, are Ranbaxy Laboratories,

Cipla Ltd., and Dr. Reddy’s Laboratories. The only Indian subsidiary of a multinational firm

with operating revenues sufficient to place it within the top ten firms in India is ninth-ranked

GlaxoSmithKline Ltd. (GSK-India), a subsidiary of UK-based Glaxosmithkline (GSK)

(figure 8-1).25 The top domestic firms compete with multinational corporations in the global

generics market, often have significant investments outside of India, and engage in R&D,

including strategic alliances with foreign and domestic firms.26 In general, the R&D budgets

of domestic firms are substantially smaller than those of the multinationals. Ranbaxy, for

example, had R&D expenditures of 7 percent of sales in 2005, and Dr. Reddy’s

Laboratories’ expenditures were 10 percent, as compared to an average R&D expenditure

of 15 percent for the top 15 global pharmaceutical companies in 2005.27

In the second tier are approximately 200 medium-sized companies including generic

producers and firms that specialize in niche areas such as contract research, with annual sales

ranging from $210,410 to $650,000.28 Many of the mid-sized domestic generics firms have

been exclusively focused on the reverse engineering and manufacturing of patented and

unpatented drugs. These firms generally oppose the new patent law; they do not have
 29 Mueller, “The Tiger Awakens,” 59–60.

 30 Sampath, “Indian Pharma within Global Reach,” 19.

 31 The Economic Times, “Pharma Tops the FDI Chart in ‘04 with $340 mn Inflow.”

 32 Many global investors in India route their FDI through Mauritius to take advantage of the IndiaMauritius bilateral tax treaty. See chaps. 2 and 6 for further discussion of the treaty and its effects.

 33 For overall FDI data, this chapter relies on official statistics of the Indian Ministry of Commerce. For

greenfield projects, the chapter cites data reported by OCO Consulting through its LocoMonitor database.

Discussions of strategic alliances are based on press releases and M&A data is provided by Bureau Van Dijk

through its Zephyr databse. The features and limitations of these data sources are discussed in chapter 1. The

projects and deals identified through the company databases and press releases are illustrative of FDI trends

rather than identical to the data provided by the Indian Ministry of Commerce.

8-7

inventions of their own to protect and the new law undercuts what has been a successful

market niche.29

In the third tier are the remaining firms (approximately 5,700 small firms with annual sales

less than $210,410), some of which perform contract manufacturing services for foreign and

domestic pharmaceutical makers. More than the new patent law, contract manufacturing

firms are impacted by the revisions to India’s Drug and Cosmetics Act, which as of 2005,

require the implementation of Good Manufacturing Practices and have necessitated the

substantial upgrading of facilities.30 Although many smaller firms have been forced to shut

down because they could not meet these enhanced standards, upgrading has provided some

remaining manufacturers with increased opportunities to provide contract services to foreign

firms.

Foreign Direct Investment in the Drug and Pharmaceutical Sector 

Annual FDI inflows into India’s drug and pharmaceutical sector have grown steadily from

$12 million in 1994 to $342 million in 2004, declining to $116 million in 2005, and

rebounding to $216 million in 2006 (figure 8-2). In 2004, FDI inflows increased 463 percent

over 2003 levels, in large part in anticipation of the “advent of the product patent era.”31

Ongoing uncertainty, perhaps attributable to perceived inadequacies in India’s law in the

areas of data protection, the standards for patentability, and compulsory licensing appears

to have tamped down FDI in 2005 and 2006. 

The largest souce of FDI in India’s pharmaceutical industry is Mauritius.32 The United States

is the second largest source, followed by the United Kingdom and Singapore (figure 8-3).

FDI in India takes various forms including greenfield projects (both the establishment of new

facilities and the expansion of existing ones), strategic alliances between foreign and

domestic firms, and mergers and acquisitions (M&A).33
8-8

Figure 8-1 India's top ten pharmaceutical firms by operating revenue, 2005

719,026

1,175,940

534,529

427,142 395,489 380,254 375,193 344,695 342,952 

0

200,000400,000600,000800,000

1,000,0001,200,0001,400,000

RANBAXY

LABORATORIES LTD

CIPLA LTD DR REDDY'S

LABORATORIES LTD

DABUR INDIA LTD LUPIN LTD AUROBINDO PHARMA

LTD

SUN PHARMACEUTICAL

INDUSTRIES LTD

NICHOLAS PIRAMAL

INDIA LTD

GLAXOSMITHKLIN

U.S. dollars

Source: Bureau van Dijk, Orbis Companies database .
8-9
 34 OCO Consulting Ltd., LocoMonitor FDI database.

 35 Ibid.

8-10

Greenfield Projects

During the period from 2002–06, foreign firms undertook about 80 greenfield investment

projects in the pharmaceutical and health biotechnology sectors. The annual number of

projects more than doubled between 2003 and 2004, and remained at high levels in 2005 and

2006 (figure 8-4). Most of the projects were for new facilities (83 percent) rather than

expansions of existing facilities (17 percent). R&D was reported as the focus of most of the

projects (59 percent), followed by manufacturing (26 percent) and sales and service

(9 percent).34

The majority of projects were undertaken by North American firms (51 percent), followed

by European firms, including those outside of the European Union (36 percent). North

American and European firms concentrated their investment activities in R&D, with

66 percent of all North American projects in this sector and 62 percent of all European

projects. For North American firms, the next most frequent investment activity was in sales

and service (20 percent) followed by manufacturing (15 percent). By contrast, for European

firms, most of the remaining investment activity was focused on manufacturing (34 percent)

while only 3 percent was focused on sales and service activities (table 8-1).35 

0

5

10

15

20

25

30

2002 2003 2004 2005 2006

Number of 

projects

Figure 8-4 Greenfield FDI in India's pharmaceutical industry, by year, 2002–06

Source: OCO Cons ulting Ltd., LocoMonitor FDI datab ase .
 36 Biotechmedia, “CRD, Contract Research Organizations.”

 37 Ernst & Young, Unveiling India’s Pharmaceutical Future, 12.

 38 U.S. National Institute of Health, “ClinicalTrials.gov.” 

 39 Chatterjee, “TCS Wins $35 Mn Eli Lilly Contract.”

 40 Singh, “It’s Pharmaceutical Giant’s Third Drug Development Alliance in India in Six Months.”

 41 Jayakumar, "Amgen Opens Subsidiary in India." 

 42 Matthew, “GSK Identifies Asia, Eastern Europe as Major Centres for Clinical Research.”

8-11

TABLE 8-1 Greenfield FDI in the pharmaceutical and health biotechnology sectors by source region and activity,

2002–06

North America Europe Asia Pacific Middle East

No. of

projects

% of

projects

No. of

projects

% of

projects

No. of

projects

% of

projects

No. of

projects

% of

projects

R&D 27 66 18 62 0 0 2 67

Manufacturing 6 15 10 34 4 57 1 33

Sales and Service 8 20 1 3 3 43 0 0

Total projects 41 29 7 3

Source: OCO Consulting Ltd., LocoMonitor FDI database.

Note: Because of rounding figures may not total 100 percent.

Strategic Alliances in R&D

Strategic alliances between multinational and domestic firms are an important part of FDI

in the R&D and manufacturing sectors. In the R&D area, contract research organizations

(CROs) offer pharmaceutical firms a range of services including product development,

clinical trial management, laboratory services, and data management.36 The top three reasons

multinational companies cite for performing clinical trials in India are the number of

potential clinical trial subjects, cost savings, and the country’s disease profile.37 These

reasons must be compelling; despite China’s much larger market size, there are presently 251

clinical trials ongoing in India compared to 227 in China. Companies with a substantial

number of clinical trials ongoing in India include GSK with 25, Bristol-Myers Squibb

(BMS) with 21, Johnson & Johnson with 16, and Pfizer with 14.38

Prominent examples of contract research services being performed in India include the recent

contract between India-based Tata Consultancy Services (TCS) and U.S.-based Eli Lilly

(Lilly), in which TCS’s services will include “clinical trial data management, statistical

analysis and medical writing.”39 In 2007, Lilly also announced a new agreement with the

Indian firm Nicholas Piramal (NPIL), in which NPIL will design and execute Lilly’s global

clinical development program, including investigational drug applications and human

clinical trials.40 The U.S.-based biotechnology firm Amgen recently announced its entry into

the Indian market with the opening of a wholly owned subsidiary in Mumbai. The new

investment will initially focus on strategic alliances with CROs, particularly in the area of

clinical development.41

Already among India’s top ten pharmaceutical firms, GSK-India recently increased its

presence in Bangalore by expanding its clinical trial data management, analyses and

reporting activities to account for more of the data services required for GSK’s global

clinical trials.42 In addition, GSK-India has signed a new R&D agreement with India-based

Ranbaxy to expand their 2003 agreement to increase Ranbaxy’s drug-development

responsibilities. Under the 2003 agreement, Ranbaxy developed drug leads only to the stage
 43 Ranbaxy Laboratories Ltd., “Ranbaxy Signs New R&D Agreement with GSK.”

 44 The Hindu Business Line, “GVK Biosciences to Provide Research Services for Wyeth Pharma.”

 45 Biocon, “Biocon Conducts Ground Breaking Ceremony.” 

 46 Boston Consulting Group, Harnessing the Power of India, 5; and Kumar, “How to Protect Data in

Outsourcing Deals.”

 47 Industry official, interview by Commission staff, Washington, DC, April 24, 2007.

8-12

of candidate selection. Under the expanded agreement, Ranbaxy will “advance the leads

beyond candidate selection to completion of clinical proof of concept.”43

Similarly, Wyeth USA and India-based GVK Biosciences entered into a five year agreement

under which GVK will set up an R&D center in Hyderabad and hire 150 scientists in 2007

to work on Wyeth’s drug discovery projects. According to Wyeth, the driving factors behind

its decision to partner for contract research services were the growing skill base in Asia,

India's 2005 revision of its patent laws, and the high quality of science at GVK.44 Most

recently, in March 2007, U.S.-based BMS and Indian biotechnology firm Biocon broke

ground on a new research facility planned to house 400 scientists working on early drug

development for BMS in India.45

These new and increasingly sophisticated R&D projects may be surprising given the reported

inadequacies in India’s patent law described above, and the fact that India does not have a

data protection law. However, different IP protection mechanisms are relevant to the R&D

projects described here than to projects which involve product patenting and

commercialization. R&D projects depend on the relationship between the parties, precontract due diligence, strong contractual protections, operational security practices, and

documented compliance with international standards such as ISO 27001, which addresses

information security management systems, to ensure the confidentiality of proprietary data.

India’s Contract Act and Information Technology Act may also provide statutory bases for

the protection of sensitive R&D data and proprietary information; to date, these statutes have

been used to protect sensitive information shared in the course of BPO projects.46

By contrast, the data protection law sought by multinational firms would govern the

commercialization of a product and the submission of clinical trial data to drug regulatory

authorities in India. Clinical trial data developed in R&D projects may or may not be

submitted to Indian regulatory authorities. If the data supports global trials, it likely will be

submitted in regulated markets, such as those of the United States and the European Union,

where there are data protection laws. Thus, the lack of a data protection law in India may not

be of critical importance to a company’s decision to conduct preliminary R&D there.

This said, this case study reports numerous instances in which multinational pharmaceutical

firms have stressed the importance of a strong IP protection environment to their investment

decisions. Multinational firms remain wary of investing in countries where the fruits of their

investment will be used to foster low cost competitors.47 The IP landscape in India prior to

2005 gave rise to substantial uncertainty about whether Indian courts would protect sensitive

information developed in pharmaceutical R&D projects. Under the 1970 Patents Act

pharmaceutical products were not entitled to patent protection, thus there would be little

motivation for a court to protect the R& D used to develop these products under existing

contract laws—one could even envision a public policy-based challenge to a contract that

attempted to do so. Now that the law does provide patent protection for pharmaceutical

products, contract law protections for pharmaceutical R&D also may be more available.
 48 Mueller, “The Tiger Awakens,” 52.

 49 The Economic Times, “India’s on Merck’s Outsourcing Radar.”

 50 Government of India, Ministry of External Affairs, ITP Division, “Drugs & Pharmaceuticals.”

8-13

Strategic Alliances in Manufacturing

A second major focus of FDI by multinational companies in India is outsourced contract

manufacturing. This contract manufacturing includes the production of intermediates, active

pharmaceutical ingredients (APIs), bulk drugs, formulations, and generic drugs. U.S.-based

Pfizer, for example, maintains a single drug manufacturing facility in India, but also

outsources manufacturing to about 20 Indian companies.48 U.S.-based Merck has recently

decided to outsource 35 percent of its manufacturing processes to developing countries, and

particularly India, in order to substantially reduce costs. According to Merck, “the critical

factor” driving the decision to increase Indian investment was the patent law change.49 The

Indian government has noted that “top MNCs like Pfizer, Merck, GSK, Sanofi Aventis,

Novartis, Teva, etc. are largely depending on Indian companies for many of their APIs and

intermediates” (table 8-2).50

TABLE 8-2 Selected contract manufacturing deals in pharmaceuticals in India

Indian contract manufacturer Multinational company Product

Lupin Laboratories Fujisawa (Japan) . . . . . . . . . . . . . . . . . . . . Cefixime 

Apotex (Canada) .....................

DMS (USA) . . . . . . . . . . . . . . . . . . . . . . . . .

Cefuroxime Axetil, Lisinopril 

API for cephalosporings

Nicholas Piramal Allergran (USA) . . . . . . . . . . . . . . . . . . . . . . Bulk and formulations

Advanced Medical Optics (USA) . . . . . . . .

AstraZeneca (Sweden) ................

Pfizer (USA) . . . . . . . . . . . . . . . . . . . . . . . .

Eye products

APIs

APIs

Wockhardt Ivax (USA) . . . . . . . . . . . . . . . . . . . . . . . . . Nizatidine (anti- ulcerant) 

Dishman Pharmaceuticals Solvay Pharmaceuticals (Belgium) . . . . . . .

GSK (UK) . . . . . . . . . . . . . . . . . . . . . . . . . .

AstraZeneca (Sweden) ................

Merck (USA) . . . . . . . . . . . . . . . . . . . . . . . .

APIs and formulations 

Intermediates and APIs

Nexium

Losartan

IPCA Labs Merck (USA) . . . . . . . . . . . . . . . . . . . . . . . . Bulk Drugs

Tillomed (UK) . . . . . . . . . . . . . . . . . . . . . . . Atenelol

Orchid Chemicals and Pharmaceuticals Apotex (Canada) .....................Cephalosporin and other

injectables 

Sun Pharma Eli Lilly (USA) . . . . . . . . . . . . . . . . . . . . . . . Cardiovascular products,

anti-infective drugs and

insulin

Kopran Synpac Pharmaceuticals (USA) . . . . . . . . . Penicillin

Cadila Healthcare Altana Pharma (Germany) . . . . . . . . . . . . . APIs and intermediates

Boehringer Ingelheim (Germany) ........

Mayne (Australia) . . . . . . . . . . . . . . . . . . . .

Gastrointestinal and

cardiovascular products

Intermediates for oncology

products

Biocon Bristol Myers Squibb (USA) . . . . . . . . . . . . Bulk Drugs

Shasun Chemicals Eli Lilly (USA) .......................

GSK (UK) . . . . . . . . . . . . . . . . . . . . . . . . . .

Reliant Pharma (USA) . . . . . . . . . . . . . . . .

Alpharma (USA) . . . . . . . . . . . . . . . . . . . . .

Boots (S Africa) . . . . . . . . . . . . . . . . . . . . . .

APIs

APIs

APIs

Generics & APIS

APIs

Jubilant Organosys Novartis . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermediates and APIs

Sources: Government of India, Ministry of External Affairs, ITP Division, and Greene, William.
 51 Ernst & Young. Unveiling India’s Pharmaceutical Future, 10.

 52 IBEF, Pharmaceuticals, 13.

 53 Kumar,“ How to Protect Data in Outsourcing Deals.”

 54 Although not addressed in this case study, Indian firms have been extremely active in the last several

years in acquiring companies in Europe and the United States, particularly in the generics sector. See Greene,

The Emergence of India’s Pharmaceutical Industry and Implications for the U.S. Generic Drug Market,

8–10.

 55 Roumeliotis, “Mylan in India’s Biggest Pharmaceutical Takeover.”

 56 Bureau van Dijk, Zephyr Mergers and Acquisitions database.

 57 Ibid.

8-14

One reason for India’s strength in the area of contract manufacturing compared to other

emerging markets is the large number of manufacturing facilities that the U.S. Food and

Drug Administration (FDA) has certified.51 FDA certification allows pharmaceutical

products to be imported into the United States. Outside of the United States, India has the

largest number of FDA- approved manufacturing facilities, numbering 75 in 2006.52 Another

reason for the strength of contract manufacturing is the large number of scientists and

engineers with unique skills in the areas of process chemistry and biochemistry.

As with contract R&D, contract manufacturing permits the segmentation and protection of

production processes so that valuable intellectual property is not lost. For example, different

variants of a molecule may be tested in different locations, fire walls may be set up between

production functions, and the contract relationship may begin with commodity style

production services and evolve only upon the establishment of trust. Indian expertise in BPO

also has resulted in a demonstrated competence in security practices and contractual

provisions such as non-disclosure agreements, as well as comfort with global standards that

cover security domains.53 The gaps identified by multinationals in India’s IP regime do not

appear to substantially affect collaborations in the manufacturing of pharmaceuticals. In fact,

the success of manufacturing relationships for the production of pharmaceuticals has been

the precursor to increasingly complex and sophisticated R&D and manufacturing

collaborations. 

Pharmaceutical M&A

Cross-border M&A deals in India’s pharmaceutical sector have been on the upswing since

2003 (figure 8-5). European companies have been the most active acquirers with 61 percent

of all deals, followed by North American firms with 26 percent.54

The most significant deal in terms of scale and value has been the January 2007 acquisition

by Mylan, one of the largest generic drug providers in the United States, of a majority stake

in Indian-based Matrix, the world’s second largest API manufacturer, in a $548 million deal.

According to Mylan, the merger was needed to expand its manufacturing platform, obtain

a presence in key markets, and tap into local technical expertise in the production of generic

biologics.55 U.S.-based Watson Pharmaceuticals similarly expanded its operations in India

by acquiring two Indian companies. In 2005, it acquired a finished dosages manufacturing

plant from Dr. Reddy’s. Then, in 2006, it acquired Sekhsaria Chemicals, a company focused

on process R&D and contract manufacturing services. Watson Pharmaceuticals reported that

the two acquisitions would improve efficiencies and cost management and enhance the

company’s competitive position.56 In 2003, U.S.-based Healthscribe reported that it would

buy out its Indian joint venture partner in a $10.3 million deal. The Indian affiliate would

continue to provide BPO services to the healthcare sector.57
 Ibid. 58

8-15

Acquisitions by European companies also focused on expanding Indian operations including

three acquisitions by Iceland-based Actavis during the period from 2005–07. In 2005, it

acquired Lotus Laboraties, a CRO, in a $27 million deal. In 2006, it acquired a

manufacturing plant from Grandix Pharmaceuticals to obtain “backward integration” with

an API and a finished dose development and manufacturing unit. Then, in 2007, it acquired

Sanmar Specialty Chemicals, a developer and manufacturer of API, with the goal of

continuing its backward integration and reducing costs. In 2006, the French company,

Merieux Alliance, acquired a majority stake in Shantha Biotechnics, an Indian company

focused on R&D for infectious disease vaccines, to get access to proprietary research and

a branded product base. M&A activity during this period also enabled European

firms—including AstraZeneca and Solvay—to increase their majority stakes in Indian

affiliates.58

The globalization of clinical research and manufacturing operations—with the goal of

reducing costs and accessing Indian expertise—has resulted in increased M&A activities in

India over the last five years. As with other types of FDI, these M&A activities have

increased in size and scope with the evolution of India’s intellectual property laws towards

compliance with international standards under TRIPS.
8-16

Conclusion

India has charted its own path over the last 35 years, attempting to foster the growth of a

domestic pharmaceutical industry and access to medicine while, more recently, also

addressing the requirements of the international intellectual property regime. Multinational

pharmaceutical firms have responded to India’s movement towards TRIPS compliance by

increasing the quantity and quality of FDI in the areas of R&D and manufacturing.

Multinational firms have adopted a more cautious attitude toward investment in the patenting

and commercialization of pharmaceutical products in India, waiting to see how Indian courts

and patent offices interpret the new laws, and until India enacts data exclusivity legislation.

The ultimate success of India’s “calibrated approach” to fostering the domestic industry and

access to medicine while also addressing international intellectual property requirements

remains to be seen.
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APPENDIX A

Sector-specific Guidelines for FDI in India

A-3

APPENDIX A: Sector-specific Guidelines for FDI in India

Sector/Subsector FDI Equity Cap Entry Route Notes

Air transport services 49% for FDI; 100% for

non-resident Indian

investment

Automatic No direct or indirect equity participation

by foreign airlines allowed.

Airports

 -Greenfield projects

 

 -Existing airports

100%

100%

Automatic

FIPB beyond 74%

Subject to Ministry of Civil Aviation

regulations.

Subject to Ministry of Civil Aviation

regulations.

Alcohol distillation and brewing 100% Automatic Subject to licensing by appropriate

authority.

Asset reconstruction

companies

49% for FDI only FIPB Individual investments beyond 10% of

equity subject to regulation.

Atomic minerals 74% FIPB Subject to Department of Atomic Energy

guidelines.

Atomic energy FDI Prohibited

Banking (private sector) 74% for FDI + foreign

institutional investors

(FII)

Automatic Branches and subsidiaries of foreign

banks subject to RBI guidelines.

Broadcasting

-FM radio

 

-Cable network

 

 

-Direct-to-home

-Hardware setup (Uplinking, HUB, etc.)

-Up-linking news and 

current affairs channel

-Up-linking of non-news 

and current affairs 

channel

20% for FDI + FII

49% for FDI + FII

49% for FDI + FII (FDI

not to exceed 20%)

49% for FDI + FII

26% for FDI + FII

100%

FIPB

FIPB

FIPB

FIPB

FIPB

FIPB

Subject to Ministry of Information and

Broadcasting guidelines.

Subject to Cable Television Network

Rules (1994) by the Ministry of

Information and Broadcasting.

Subject to Ministry of Information and

Broadcasting guidelines.

Subject to Up-linking Policy by the

Ministry of Information and Broadcasting.

Subject to Ministry of Information and

Broadcasting guidelines.

Subject to Ministry of Information and

Broadcasting guidelines.

Cigars and cigarettes

manufacturing

100% FIPB Subject to industrial licensing.

Coal and lignite mining for

captive consumption by power

projects, iron, steel, and

cement production, and other

approved activities

100% Automatic Subject to the Coal Mines Act (1973).

Coffee and rubber processing

and warehousing

100% Automatic
A-4

APPENDIX A: Sector-specific Guidelines for FDI in India–Continued

Sector/Subsector FDI Equity Cap Entry Route Notes

Construction development

projects.

100% Automatic Subject to minimum capitalization and

land size requirements.

Courier services for carrying 

items not covered by the Indian

Post Office Act (1898)

100% FIPB Subject to existing laws and any related

activities exclusively reserved for the

State.

Defense production 26% FIPB Subject to licensing under the Industries

(Development and Regulation) Act (1951)

and further guidelines on the production

of arms and ammunition.

Floriculture, horticulture,

development of seeds, animal

husbandry, pisciculture,

aquaculture, and the cultivation

of vegetables and mushrooms

under controlled conditions

100% Automatic

Gambling and betting sector Prohibited

Hazardous chemicals – 100% Automatic Subject to licensing under the Industries

(Development and Regulation) Act (1951)

and other sectoral regulations.

Industrial explosives –

manufacture

100% Automatic Subject to licensing under the Industries

(Development and Regulation) Act (1951)

and regulations under the Explosives Act

(1898).

Insurance 26% Automatic Subject to licensing by the Insurance

Regulatory and Development Authority.

Investing companies in

infrastructure/services sector

(except telecom sector)

49% FIPB FDI in an investing company will not be

counted toward sectoral caps in

infrastructure/services sector provided

that the investment is no larger than 49%

and company management is Indian. 

Lottery business Prohibited

Mining 100% Automatic Subject to Mines and Minerals Act (1957)

and applicant must declare no existing

joint venture for the same area/and or

mineral.

Non-bank finance companies 100% Automatic Subject to minimum capitalization norms,

subsidiary and joint venture regulations,

and Reserve Bank of India guidelines.
APPENDIX A: Sector-specific Guidelines for FDI in India–Continued

Sector/Subsector FDI Equity Cap Entry Route Notes

A-5

Petroleum and natural gas

sector 

-Other than refining – 

includes market study 

and formulation, 

investment/financing, 

setting up infrastructure 

for marketing

-Refining

100%

26% for public sector

enterprises (PSUs);

100% for private

companies

Automatic

FIPB for PSUs and

Automatic for

private companies

Subject to sectoral regulations by the

Ministry of Petroleum and Natural Gas

and future divestment requirements in

petroleum product trading and marketing.

Subject to sectoral regulations.

Power, including generation

(except atomic energy),

transmission, distribution, and

power trading

100% Automatic Subject to the Electricity Act (2003).

Print media

-Publishing of newspapers 

and periodicals dealing 

with news and current 

affairs

-Publishing of scientific 

magazines, specialty 

journal/periodicals

26%

100%

FIPB

FIPB

Subject to Ministry of Information and

Broadcasting guidelines.

Subject to Ministry of Information and

Broadcasting guidelines.

Satellites – establishment 

and operation

74% FIPB Subject to sectoral regulations by the

Department of Space. 

Special economic zones and

free trade warehousing zones,

covering setting up of units

100% Automatic Subject to Special Economic Zones Act

(2005) and foreign trade policy.

Tea sector, including tea

plantations

100% FIPB Subject to state government approval

and future divestment requirements.

Telecommunications 

services, except ISP without

gateway

74% Automatic up to

49%; FIPB beyond

49%

Subject to licensing and security

requirements by the Department of

Telecommunications

-ISP without gateway, 

infrastructure providing 

dark fiber, electronic mail,

and voice mail

-Manufacture of telecom 

equipment

100%

100%

Automatic up to

49%; FIPB beyond

49%

Automatic

Subject to licensing, security, and future

divestment requirements.

Subject to sectoral requirements.
APPENDIX A: Sector-specific Guidelines for FDI in India–Continued

Sector/Subsector FDI Equity Cap Entry Route Notes

A-6

Trading

-Wholesale, cash and 

 carry trading

-Trading for exports

-Trading of items sourced 

from the small scale 

sector

-Test marketing of preapproved manufactured 

items

 -Single brand product 

retailing

-Multiple brand product 

retailing

100%

100%

100%

100%

51%

Prohibited

Automatic

Automatic

FIPB

FIPB

FIPB

Subject to investment guidelines.

Subject to investment guidelines.

Subject to investment guidelines.

Subject to investment guidelines.

Subject to investment guidelines.

Source: Government of India, Ministry of Commerce & Industry, DIPP, Investing in India: Foreign Direct Investment

Policy and Procedures.

Note: Those sectors not specifically covered here are allowed 100 percent equity, through the automatic route,

without additional restrictions. FDI and FII represent the maximum combined equity limit for direct and foreign

institutional investments.
APPENDIX B

Web site Addresses of State and Union

Territory (UT) Governments and their

Investment Promotion Agencies in India

B-3

APPENDIX B: Website Addresses of State and Union Territory (UT) Governments and their Investment

Promotion Agencies in India

Andaman & Nicobar (UT) 

Government: http://www.and.nic.in

Investment Promotion Agency: http://www.aniidco.nic.in

Jharkhand

Government: http://jharkhand.nic.in

Andhra Pradesh

Government:

http://www.aponline.gov.in/apportal/index.asp

Investment Promotion Agency: http://www.apidc.org

Karnataka

Government: http://www.karnataka.gov.in

Investment Promotion Agency: http://www.ksiidc.com

Arunachal Pradesh

Government: http://arunachalpradesh.nic.in

Kerala

Government: http://www.kerala.gov.in

Investment Promotion Agency: http://www.kinfra.com

Assam 

Government: http://assamgovt.nic.in

Lakshadweep (UT)

Government: http://lakshadweep.nic.in

Investment Promotion Agency:

http://www.lakshadweep.nic.in/depts/industries/home.htm

Bihar

Government: http://gov.bih.nic.in

Investment Promotion Agency: http://www.bicico.com

Madhya Pradesh

Government: http://mpgovt.nic.in

Investment Promotion Agency: http://www.mpsidc.org

Chandigarh (UT)

Government: http://chandigarh.nic.in

Investment Promotion Agency: http://www.citco.nic.in

Maharashtra

Government: http://www.maharashtra.gov.in

Investment Promotion Agency: http://www.midcindia.org

Chhattisgarh

Government: http://chhattisgarh.nic.in

Investment Promotion Agency: http://www.csidcindia.com

Manipur

Government: http://manipur.nic.in

Dadra and Nagar Haveli (UT)

Government: http://dnh.nic.in

Investment Promotion Agency: http://www.oidc.nic.in

Meghalaya

Government: http://meghalaya.nic.in

Investment Promotion Agency:

http://www.meghalaya.nic.in/MIDC/midc.htm

Daman and Diu (UT)

Government: http://goidirectory.nic.in/daman.htm

Investment Promotion Agency: http://www.oidc.nic.in

Mizoram

Government: http://mizoram.nic.in

Delhi (UT)

Government: http://delhigovt.nic.in/index.asp

Investment Promotion Agency: http://www.dsidc.org

Nagaland

Government: http://nagaland.nic.in

Goa

Government: http://goagovt.nic.in

Investment Promotion Agency: http://www.goaidc.com

Orissa

Government: http://orissagov.nic.in

Investment Promotion Agency: www.idcoindia.com/

Gujarat

Government: http://www.gujaratindia.com

Investment Promotion Agency: http://www.gidc.gov.in

Pondicherry (UT)

Government: http://pondicherry.nic.in

Investment Promotion Agency: http://www.pipdic.com

Haryana

Government: http://haryana.gov.in

Investment Promotion Agency: http://hsidc.nic.in/hfi.htm

Punjab

Government: http://punjabgovt.nic.in

Investment Promotion Agency:

http://www.punjabgovt.nic.in/Industry/ind552.htm

Himachal Pradesh

Government: http://himachal.nic.in/welcome.asp

Investment Promotion Agency: http://hpsidc.nic.in

Rajasthan

Government: http://www.rajasthan.gov.in/Rajasthan1024.asp

Investment Promotion Agency: http://www.riico.co.in

Jammu and Kashmir

Government: http://jammukashmir.nic.in

Sikkim

Government: http://sikkim.gov.in

Investment Promotion Agency:

http://www.sikkiminfo.net/sidico/
B-4

APPENDIX B: Website Addresses of State and Union Territory (UT) Governments and their Investment Promotion

Agencies in India—Continued

Tamil Nadu

Government: http://www.tn.gov.in

Investment Promotion Agency: http://www.tidco.com

Uttaranchal

Government: http://www.ua.nic.in

Investment Promotion Agency: http://www.sidcul.com

Tripura

Government: http://tripura.nic.in

Investment Promotion Agency:

http://www.tripura.nic.in/tidc/

West Bengal

Government:

http://www.wbgov.com/e-gov/English/EnglishHomePage.asp

Investment Promotion Agency: http://www.wbidc.com

Uttar Pradesh

Government: http://upgov.nic.in

Investment Promotion Agency: http://www.upsidc.com

Source: Embassy of India, Washington, DC.

Note: Not all states have investment promotion agency Web sites. 
APPENDIX C

Bilateral International Agreements That

Affect Investment in India

C-3

APPENDIX C: Bilateral International Agreements that Affect Investment in India

Country Bilateral Investment

Agreement

Double Tax Avoidance

Agreement

Free Trade Agreement Notes

Argentina X

Armenia X* X

Australia X X

Austria X X

Bahrain X* X Framework

Agreement for

establishing a free

trade area

completed. India-Gulf

Cooperation Council

(GCC) FTA under

negotiation.

Bangladesh X X Under the South Asia

Free Trade

Agreement (SAFTA)

and Asia Pacific

Trade Agreement

(APTA).

Belarus X X

Belgium X X

Bhutan X Under SAFTA.

Brazil X

Bulgaria X X

Canada X Bilateral investment

agreement under

negotiation.

Chile X Framework

Agreement on

Economic

Cooperation.

China X

Croatia X

Cyprus X X

Czech Republic X X

Denmark X X

Djibouti X*

Egypt X X

Finland X X

France X X

Germany X X

Ghana X*

Greece X

Hungary X* X

Indonesia X X

Ireland X

Israel X X

Italy X X

Japan X

Jordan X
C-4

APPENDIX C: Bilateral International Agreements that Affect Investment in India—Continued

Country Bilateral Investment

Agreement

Double Tax Avoidance

Agreement

Free Trade Agreement Notes

Kazakstan X X

Kenya X

Korea X X X Under APTA.

Kuwait X X Framework

Agreement for

establishing a free

trade area

completed. India-Gulf

Cooperation Council

(GCC) FTA under

negotiation.

Kyrgyzstan X X

Laos X

Libya X

Luxembourg X

Malaysia X X

Maldives X Under SAFTA.

Malta X

Mauritius X X X Comprehensive

Economic

Cooperation and

Partnership

Agreement (CECPA)

under negotiation.

Mongolia X X

Morocco X X

Namibia X

Nepal X X Under SAFTA.

Netherlands X X

New Zealand X

Norway X

Oman X X X Framework

Agreement for

establishing a free

trade area

completed. India-Gulf

Cooperation Council

(GCC) FTA under

negotiation.

Pakistan X Under SAFTA.

Philippines X X

Poland X X

Portugal X* X

Qatar X X X Framework

Agreement for

establishing a free

trade area

completed. India-Gulf

Cooperation Council

(GCC) FTA under

negotiation.
APPENDIX C: Bilateral International Agreements that Affect Investment in India—Continued

Country Bilateral Investment

Agreement

Double Tax Avoidance

Agreement

Free Trade Agreement Notes

C-5

Romania X X

Russia X X

Saudi Arabia X X Framework

Agreement for

establishing a free

trade area

completed. India-Gulf

Cooperation Council

(GCC) FTA under

negotiation.

Serbia and Montenegro X

Singapore X X India-Singapore

Comprehensive

Economic

Cooperation

Agreement

Slovenia X

South Africa X

Spain X X

Sri Lanka X X X Under SAFTA and

APTA.

Sudan X* X

Sweden X X

Switzerland X X

Syria X

Taiwan (China) X

Tajikistan X

Tanzania X

Thailand X X X Framework

Agreement for

establishing a free

trade area

completed.

Trinidad and Tobago X

Turkey X* X

Turkmenistan X* X

Uganda X

Ukraine X X

United States X

United Arab Emirates X X Framework

Agreement for

establishing a free

trade area

completed. India-Gulf

Cooperation Council

(GCC) FTA under

negotiation.

United Kingdom X X

Uzbekistan X X

Vietnam X X

Yemen X*
APPENDIX C: Bilateral International Agreements that Affect Investment in India—Continued

Country Bilateral Investment

Agreement

Double Tax Avoidance

Agreement

Free Trade Agreement Notes

C-6

Zambia X

Zimbabwe X*

Sources: Government of India, Ministry of Finance, Economic Survey 2006–2007; Government of India, Income Tax

Department; and OECD, Directorate fore Financial and Enterprise Affairs, Investment Committee, “Salient Features

of India’s Investment Agreements.”

Notes: (*) As of June 2006, agreement has not entered into force.

India is also in framework/free trade agreement negotiations with ASEAN (Association of South East Asian Nations),

BIMSTEC (Bangladesh, Bhutan, Myanmar, Nepal, Sri Lanka, and Thailand), MERCOSUR (Argentina, Brazil,

Paraguay, and Uruguay), and SAARC/SAPTA (Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka).