India - Market OverviewIndia - Market Overview
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Bilateral U.S.-India trade expanded to $115 billion in goods and services in 2016 against a backdrop of declining overall levels of global trade volumes. The United States remained India’s largest trading partner, with exports of American goods and services to India reaching $42.0 billion (up 5.8% from 2015), and imports from India hitting $72.9 billion (up 4.8% from 2015). The United States also remained India’s top export market – and its $31 billion trade surplus with the U.S. is its largest with any country - while India is the 18th biggest export market for U.S. goods. Top U.S. export categories to India in 2016 were: precious metal and stones ($7.0 billion), machinery ($2.0 billion), agricultural and related products ($1.5 billion), optical and medical instruments ($1.3 billion), mineral fuels ($1.2 billion), and electrical machinery ($1.2 billion). Top U.S. import categories from India in 2016 were: precious metal and stones ($11 billion), pharmaceuticals ($7.4 billion), agricultural and related products ($3.8 billion), mineral fuels ($2.4 billion), miscellaneous textile articles ($2.3 billion), and machinery ($2.1 billion).
U.S. foreign direct investment (FDI) stock in India was $28.3 billion in 2015 (latest data available), a 4.4% increase from 2014. U.S. FDI in India was led by professional, scientific, and technology services, manufacturing, and wholesale trade investments. India's FDI stock in the United States was $9.3 billion in 2015, up 3.7% from 2014. India's direct investment in the U.S. is also led by professional, scientific, and technology services, but also depository institutions, and manufacturing. Most major U.S. companies are active in the market, including fast growing U.S. franchisors that are responding to changing consumer tastes and a rapidly expanding middle class - particularly in tier 1 and tier 2 cities. India is the fourth fastest growing source of FDI into the United States.
India’s economy performed well in 2016, with GDP growing at over 7% coupled with a stable rupee and steady, relatively low inflation. The IMF estimates that India will continue to grow at between seven and eight percent in 2017-2018. This growth is being spurred by further market liberalization and reforms addressing India’s ease of doing business, as well as an active Government of India-driven campaign to increase local manufacturing, grow the agricultural sector, and attract greater levels of inward foreign direct investment.
In May 2014, the Narendra Modi-led Bharatiya Janata Party (BJP) won the world’s largest democratic election, defeating a Congress-led coalition that had been in power for the past decade. The 2014 election marked a turning point in investor sentiment, as a fractured minority government, seemingly unable to advance essential economic reforms, was displaced in favor of a government that had won on a platform of economic growth. The advent of a BJP-led government at the center, combined with the monetary stewardship of Raghuram Rajan, the respected Governor of the Reserve Bank of India, made an immediate mark on investor sentiment. Stabilized currency rates and improved economic performance seemed to demonstrate that an era of policy paralysis and populism had ended in favor of a business-friendly growth agenda.
In August 2014, Prime Minister Modi announced his Make in India initiative—a branded campaign to attract international capital to the country’s struggling manufacturing sector. Make in India has provided momentum to the country’s economy. The initiative aims to increase the share of manufacturing GDP from 16% to 25% and create 100 million jobs by 2020; gradually transforming the investor sentiment and raising optimism for doing business in India.
India’s Smart Cities program was officially launched in June 2015 with a state-by-state competition to identify 100 cities that would receive central government funding from the Ministry of Urban Development to capitalize related infrastructure upgrade projects. In January 2016, the first 20 cities were announced, 13 more cities were selected in May and another 40 announced in June, 2016. The next group of winners is expected to be announced in June 2017. The Government of India is investing a total of $7.5 billion in intelligent urban infrastructure upgrades for the 100 cities over a five year period. This program covers multiple sectors, but focuses primarily on water and wastewater, power, sanitation, solid waste management systems, efficient urban mobility and public transportation, IT connectivity, e-governance and citizen participation. Central government funding is to be augmented by state and city budgets, with additional funds expected through public-private partnerships at the project level.
On June 20, 2016 the Government of India (GOI) announced major changes aimed at further opening the economy to foreign investment. The long-awaited rules reinforce the government's plan to develop more business-friendly policies as India looks to spur job creation and maintain its growth momentum. This is second in a series of FDI openings by the Modi-led government, the earlier one being the liberalization of various sectors in November 2015. Per the new norms, 100% FDI is now permitted in civil aviation and e-commerce, among others, and requirements have been modified to allow for up to 100% FDI in the defense sector in special cases. The government has also relaxed local sourcing requirements for single-brand retailers of high technology products. Other measures have been taken by the Central and State Governments to facilitate manufacturing, improve the business environment, and promote the development of industrial corridors across India.
On November 8, 2016, Prime Minister Modi unexpectedly “demonetized” all INR 500 and INR1000 banknotes, totaling 86 percent of cash in circulation, in a bid to root out corruption and digitize the economy. In the short term, the move led to a cash shortage that impacted consumer sales, but India’s formal economy still grew at seven percent in the October-December 2016 quarter. The result was in line with the country’s 7.1 percent GDP growth for the April 2016-March 2017 fiscal year. The Reserve Bank of India said in its June statement that the effects of demonetization on the broader economy are sector specific and transient. However, the commercial State Bank of India told institutional investors in June that demonetization’s long term impact is uncertain, and “demonetization has and may continue to result in a slowing down of the Indian economy.” According to the World Bank, “In the long-term, demonetization has the potential to accelerate the formalization of the economy, leading to higher tax collections, and greater digital financial inclusion,” provided the government take necessary steps to tax property and increase access to and usage of the internet for digital transactions.
In recent months, PM Modi has enjoyed political momentum buoyed by his Bharatiya Janata Party’s (BJP) victories in state elections. The BJP performed particularly well in Uttar Pradesh, a massive state with more than 200 million residents, which will increase the number of seats Modi’s party holds in the upper house of Parliament. The BJP currently holds a majority in the lower house. The successful passage of a constitutional amendment to establish a national Goods and Services Tax (GST) to replace the complex web of national and state-government taxes with a unified national tax system also looks on-track to be implemented by July 1, 2017. This should further buoy Modi’s reform agenda and support continued economic growth and expansion.
Given India’s decentralized political system, US companies doing business in India should be prepared to encounter varied political and economic conditions across India’s twenty-nine states and seven union territories. There are differences at the state level in the quality of governance, regulation, taxation, labor relations, and education levels. The country ranks 130 out of 189 in the World Bank’s Ease of Doing Business Report.
While the government has managed to push through a number of investor-friendly reforms, including an increase in FDI limits in the defense and insurance sectors to 49% or more, on others, such as land acquisition, it has failed to muster sufficient political support to move forward. Thus, while the outlook has improved considerably, objective conditions for doing business in India remain similar to years past.
Opportunities in the current scenario, however, are still abundant. Indian conglomerates and high technology companies are generally equal in sophistication and prominence to their international counterparts. Certain industrial sectors, such as information technology, telecommunications, pharmaceuticals, textiles and engineering are globally recognized for their innovation and competitiveness. Foreign companies operating in India emphasize that success requires a long-term planning horizon and a state-by-state strategy to adapt to the complexity and diversity of India’s markets.
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