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Investment Incentives 

  • ยท   The role of the private sector and foreign investment in the Indian economy is increasing.
  • The rupee is now convertible on the current account, and exchange rates are market-determined.
  •  There has been rapid progress in implementing government commitment to the deregulation process.
  • Industrial policy emphasizes boosting economic growth through encouraging the generation of income and wealth.
  •  The vast and growing middle-class population provides a large domestic market.
  • Skilled manpower and professional managers are available at moderate cost.
  • Capital markets, the banking infrastructure and the financial services sector are well developed.



Industrial Climate 

India has a mixed economy, with the government-owned public sector and the private sector playing active roles. The public sector has traditionally been dominant in infrastructure and in basic industries, while the private sector has played an important role in all other sectors. Until a few years ago, the government exercised considerable control over the private sector through licensing for additional manufacturing capacity; control over imports of capital, raw material, technology and capital goods; and allocation of basic raw material. While the liberalization process began a decade ago, it was in 1991 that it gathered momentum and was set out in the Industrial Policy. The earlier preoccupation with equality in income distribution has been welcomed by industry, some Indian businesses have asked for time to be able to compete with foreign investment.

Framework of industry  
 
In India, the public and the private sector have coexisted in industrial activity, with the former dominant in certain sectors. The present trend is clearly toward a larger role for the private sector, with fresh public investments being more or less restricted to a few strategic and essential infrastructure areas. The government is also pursuing a policy of divestment of equity in public-sector enterprises outside these areas and dilution of its holding through fresh issues to the public, although privatization (in the sense of transfer of majority or complete ownership) is not yet a clearly stated policy.
The majority of big businesses continue to be controlled by state-owned corporations, large family groups and multinationals. However, this dominance has started to dilute with the entry of nonresident Indian technocrats and successful first-generation entrepreneurs.
In many substantial private-sector companies, promoters hold a minority stake but are able to retain control due to dispersal of balance holdings. The public financial institutions hold large chunks of equity in many major Indian private sector companies, but generally follow a policy of noninterference.
India also has a significant base of closely held small and medium-size businesses supplying local and regional markets in competition with the national large-scale manufacturers.

AIMS OF GOVERNMENT POLICY  
 
Economic development plans
In general terms, the government's aim, over four decades of economic planning though successive five-year plans, has been to raise the standard of living of the people through programs also designed to promote equality and social justice.

In the Eighth Plan (1992-97) there is a significant shift from detailed planing to indicative planning, with private-sector investment assuming much greater importance. Recent government pronouncements acknowledge that poverty cannot be removed unless the creation of wealth is restored to its proper place in the development process and that protection must be reduced because the country cannot continue to be insulated from the global economy.

The policies announced since 1991 show a greater reliance on market mechanisms than on physical and quantitative restrictions and bureaucratic controls. This change is underscored by a substantial reduction in areas reserved for the state and those requiring licensing; provision for automatic clearance of direct foreign investment and foreign-technology collaboration in specified industries (see Chapter 4); and elimination of the requirement for large businesses to obtain prior government approval for establishment of new undertaking, expansion, mergers, and takeover. Imports of a number of items have been decanalized, and import restrictions have been virtually removed except for a short negative list of banned, canalized or licensed items. (Canalized items are those imported and distributed through designated public-sector agencies.)

Because difficult economic circumstances necessitated the gradual reduction of high import duties and other taxes, the peak tariff rate is currently 50 percent, compared with 150 percent in 1991. The government has also introduced convertibility for the rupee on the current account and market-determined exchange rates.

State-owned financial institutions and nationalized banks have begun to raise additional capital from the public. Several private-sector banks and mutual funds have commenced operations, and a number of foreign tie-ups have taken place in the financial services sector. A number of multinationals are setting up projects in diverse sectors

The policies also allow for areas that continue to be reserved for the public sector to be opened up selectively to private enterprise. Additionally, there is a special program to attract substantial foreign investment that would provide access to high technology and world markets. Investment proposals are considered as a whole without predetermined parameters or procedures.

Investment trends

For a number of years prior to 1980, there was considerable emphasis on the public sector, greater control over the activities and expansion of "large" businesses, and pressure on multinationals to "Indianize" in varying degree's. The 1980s saw dilution of public-sector dominance, and private investment was allowed in core industries such as power, steel, petrochemicals, and telecommunications equipment. The 1991 Industrial Policy made a substantial reduction in the areas reserved to the public sector, and the portfolio of public-sector investments is being reviewed with a view to focusing the public sector on strategic, high-technology and essential infrastructure areas. Generally, no fresh government investment is contemplated outside these areas, and future nationalization has been rules out. While there is as yet no clear policy of privatization (in the sense of transfer of majority or complete ownership), the government is pursuing a policy of offloading a part of its shareholding in public-sector enterprises to mutual funds, financial institutions, workers, and the general public.

Various measures are being taken for improving infrastructure, by encouraging the creation of additional capacity and provision of new services by private enterprise and foreign investors as well as the better performance of existing units, particularly in the areas of power, telecommunication and transportation.

Regional / special industry development

The government had been pursuing a national policy of dispersing economic growth to the rural and less - development urban areas where more employment opportunities and increased incomes are needed. Recent changes have included a realization in this policy. While some incentives for investments in these areas continue to be available, government policy has shifted to encouraging development of identified growth centers by focusing public investment in the development of infrastructure at these centers. Consequently, the government seeks to achieve balanced regional development through removal of constraints to such development; licensing is no longer used as an instrument for influencing location.

A package of incentives is available to all potential investors for investment in certain priority sectors of the economy. In general, this covers industries that support agriculture, industrial development, infrastructure, employment generation, and foreign exchange earnings.

Free-trade zones
Seven export-processing zones provide facilities for duty-free imports for the manufacture of export item under certain conditions. Also, 100 percent export-oriented units (EOUs) can be set up outside these zones. While these units are set up to cater to the export market, they may be allowed to sell up to 25 percent of their production in the domestic tariff area.

The government is also setting up a number of Soft ware Technology Parks (STPs) for export of computer software through shared date-communication facilities. Seven of them are now operational. It is also possible to get a private facility recognized as an STP, making it eligible for benefits similar to those granted to operations in government-established parks, including domestic sales of up to 25 percent of the value of software production. In addition, the government has a scheme for the setting up of Electronic Hardware Technology Parks (EHTPs), which would offer manufacturers the same kind of benefits. The permitted level of domestic sales for EHTPs may be as high as 30 percent of production for finished equipment and 40 percent for components.

All units under these various schemes are required to adhere to prescribed value-added norms. India has no free-trade zones that allow imports for reexport purposes without processing.

Financial service services

Financial services for commerce and industry are provided by both private-sector institutions. The former consist of nationalized and other scheduled banks (i.e., those registered with the Reserve Bank of India), specialized financial institutions and insurance corporations. Private providers of financial services comprise smaller financial service agencies and banks and branches of international banking corporations. Significant developments have taken place in the area of financial services, with expansion and specialization in services offered both by scheduled banks and by smaller financial services agencies. The capital markets have also been gaining in depth and volume of capitalization.

Public / private sector cooperation

Cooperation between the public and private sectors takes place at many levels. Private-sector leaders have traditionally served on planning bodies and boards of public-sector corporations; Similarly, government and private-sector leaders share many other platforms and forums, e.g., chambers of commerce and industry associations, and they have worked together to attract foreign direct investment. The last few decades have also seen the promotion of numerous joint projects in which the government and private-sector promoters have nearly equal equity stakes. Many such ventures have also included participation by foreign corporations.

Labor / management relations

The Indian workforce, skilled or unskilled, is on the whole respectful of authority and has good relations with management. However, all large enterprises have one or more labor unions, often with political affiliations. Labor legislation helps to avoid many disputes but can also make discharge and retrenchment difficult. Union membership is voluntary. Negotiation of wages and employment conditions between management and union is an accepted practice, and such negotiations usually result in collective agreements, which when registered with the government are valid and legally enforceable for the agreement period (usually three years).

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