FOREIGN DIRECT INVESTMENT (FDI)

DEFINATION:

FDI refers to an investment made to acquire lasting interest in enterprises operating

outside of the economy of the investor. Further, in cases of FDI, the investor’s purpose is
to gain an effective voice in the management of the enterprise. The foreign entity or
group of associated entities that makes the investment is termed the "direct investor". The
unincorporated or incorporated enterprise-a branch or subsidiary, respectively, in which
direct investment is made-is referred to as a "direct investment enterprise". Some degree
of equity ownership is almost always considered to be associated with an effective voice
in the management of an enterprise; the BPM5 suggests a threshold of 10 per cent of
equity ownership to qualify an investor as a foreign direct investor.

Once a direct investment enterprise has been identified, it is necessary to define which
capital flows between the enterprise and entities in other economies should be classified
as FDI. Since the main feature of FDI is taken to be the lasting interest of a direct
investor in an enterprise, only capital that is provided by the direct investor either directly
or through other enterprises related to the investor should be classified as FDI. The forms
of investment by the direct investor which are classified as FDI are equity capital, the
reinvestment of earnings and the provision of long-term and short-term intra-company
loans

BACKGROUND

Foreign Direct Investment flows are usually preferred over other forms of external
finance because they are non depth creating non-volatile and there returns depend on the
performance of the project finance by the investors. FDI also facilitates trade and transfer
of knowledge, skills and technology in a world of increased competition and rapid
technological change, their complementary catalytic goal can be very valuable.
Foreign direct investment in India has constituted 1% of gross fixed capital formation in
1993, which went up to 4% in 1997 the 10th plan approach postulates a GDP growth rate
of 8% during 2002- 07. given the incremental capital-output ratio (ICOR) and the
projected level of domestic savings it leaves a savings gap/ current a/c deficit of around
2.2%.

Why India went Global?

In the year 1991, Mr. ManMohan Singh, the then Finance minister of India took the
decision of opening the Indian economy for foreign investors. This decision has been like
a boon for the Indian economy as it has been able to fetch more and more investment
because of which India has become one of the fastest growing economies in the world.
During early 90’s India was in a great economic crisis. At that point of time India’s forex
reserves were on the verge of extinction. Many Indian companies and even banks had
gone bankrupt. At this point of time the debts were increasing at an alarming rate and
also there was a lot of pressure from the World Bank on the Indian government to adopt
a free trade policy. The Indian succumbed to the pressure and had to open the Indian
economy for foreign investors and because of which there was a lot of international
capital flow in India.
India’s GDP, at market prices, is nearly $800 billion per year. Exports of goods And
services amount to $ 133 billion a year. Net capital inflows average about US $ 19 billion
annually.
The trade-GDP ratio (including both goods and services) has gone up from 25% in 1992-
93 to 35% in 2003-04. In addition, gross flows on the capital account Went up from 15%
to 20% of GDP. Summing up, the total integration of trade And capital, increased from
40% of GDP to 55% of GDP over an eleven-year Period.

With exports continuing to grow at a brisk pace and capital inflows continuing To remain
robust, I expect that the ratio of total integration will rise steadily over The next ten years.
A new aspect of India's globalisation is outward FDI by Indian companies, who Are now
enormously confident, and are in the process of becoming multinational Corporations. In
2003-04, outward FDI from India amounted to a sum of $1.4 Billion -- a small step by
world standards, but a giant leap for India. In my view This is only the beginning. Indian
companies are hungry to go abroad, acquire Manufacturing firms as well as brands, and
position themselves at the doors of New markets. For the first time, Indian companies are
seen as potentially major Players in the world market.

The traditional face of Indian business has changed dramatically in the last few Years.
Indian firms are no longer only seekers of foreign technology or Producers of staple
goods or providers of low-end services. Their engagement With the world has acquired
new dimensions. Even in the traditional engagement in goods and services, India has
become the Leading nation in software services – TCS, Infosys and Wipro are
acknowledged World brands. India is also a major hub for manufacturing and export of
manufactured products, especially in sectors such as automobiles, auto parts and
accessories, leather goods, textiles, pharmaceuticals, petroleum products and machine
tools. And if you will add handicrafts and hand made products, flowers and herbs, the
traditional engagement with the world is quite impressive.

INTERNATIONAL CAPITAL FLOW

1. Inward capital flow

2. Outward capital flow

1. Inward capital flow includes

 FOREIGN DIRECT INVESTMENT (FDI)

 PORTFOLIO INVESTMENT (PI)

 FOREIGN INDIRECT INVESTMENT (FII)

2. Outward capital flow includes

 Indian companies investing abroad

INTERNATIONAL CAPITAL FLOW

INWARD CAPITAL OUTWARD

FLOW CAPITAL FLOW

FOREIGN DIRECT
INVESTMENT

PORTFOLIO
INVESTMENT

NRI INVESTMENT

THE EXPERIENCE OF FOREIGN DIRECT INVESTORS IN INDIA

In an FDI Survey of 2004 identifies five thrust areas where a dedicated effort by the
government would result in strong FDI inflows in the near to medium term. These
include IT and related services, chemical & chemical products, rubber & plastic products,
electrical machinery & apparatus and services sector. A large proportion of respondents
from the aforementioned sectors have assessed India favorably as an investment
destination, perceive opportunities for greater FDI in their industry/sector and are
planning expansion of their Indian operations.
While the outlook for FDI inflows into India in the near to medium term remains
positive, security and terrorism concerns weigh heavily on the minds of foreign investors.
Besides security concerns, factors like exchange rate volatility, hardening commodity
prices and higher interest rates in home country can also spoil the party as far as
investment inflows into India are concerned. Global and regional trade initiatives would
on the other hand give a boost to FDI inflows into India.

The present round of survey sees a much-improved performance amongst the

participating companies vis-à-vis results obtained last year. We also see an improvement
in the perception of foreign investors with regard to the operational parameters and the
prevailing market conditions in India. It is heartening to note that while 40% of the
participating companies in FICCI FDI Survey 2003 had made a ‘positive’ assessment of
India as an investment destination, this proportion has seen a quantum jump to 73% in the
present survey.
The improvement seen in various areas is reflected in the FDI Attractiveness Index, a
summary measure of India’s attractiveness as a FDI destination, which has registered a
gain of almost 8% going up from 3.6 in the last year to 3.9 in the present survey.

THE POSITIVE FINDINGS

THE LARGER PICTURE

The FDI Attractiveness Index has registered a value of 3.9, a gain of almost 8% from
the previous two years (in 2004).
The upward movement in the index value has meant that perception of the foreign
investors about India as an investment destination has improved significantly and India is
being perceived as a fairly attractive investment destination.

The participating companies are extremely bullish on India with 73% of the investors
making a ‘positive’ assessment of India as an investment destination.

This is a sharp rise in comparison to the response received last year where only 40% of
the investors placed India on their ‘positive’ list.

The proportion of investors who feel that there exist opportunities for greater FDI in
their sector has increased from an already high 82% obtained last year to 93% in the
present round.

PERFORMANCE MEASURES

A substantial 77% of the investors have said that their Indian operations are profitable.
A further 9% are breaking even. It is noteworthy that the spread of profit making firms
encompasses almost all the major industrial sectors and is not just restricted to a few
sectors.

Reinforcing the attractiveness of the India proposition is the finding that of the 77% firms
that are making profits through their operations in the country, nearly three fourths are
able to meet or surpass their profitability targets.

The growth seen in the last few quarters has benefited all segments of the manufacturing
and services sector, which has enabled them to scale up their capacity utilization. Almost
a fifth of the respondents have reported a near complete or full capacity utilization.
Another 42% of the companies surveyed are utilizing between 70-90% of their
installed capacity.
A resounding 86% of the respondents are planning expansion of their operations in
India. This is higher than the 78% who responded similarly in FICCI’s FDI survey 2003
and is a clear reflection of the investors’ long-term commitment to and optimism about
India.
OPERATIONAL PARAMETERS

The overall policy framework in India has been rated as being ‘average to good’ by
88% of the respondents. This is higher than the 82% who responded likewise in
FICCI’s FDI Survey 2003.

A notable development in the present FDI Survey is the improvement in the approval
mechanism, perceived by the respondents, at both the Center and the State level. The
proportion of respondents reporting that handling of approvals and applications at the
Center is ‘average to good’ has increased from 69% in FDI Survey 2003 to 86% in
the present survey.

74% of the respondents has rated the legal framework and regulatory mechanism as
‘average to good’. This represents a sharp increase from the last survey where only 53%
of the respondents felt likewise.

An overwhelming majority of 79% respondents have said that availability of skilled

manpower in India is ‘good’.

The ease in bringing in funds is ‘medium to high’ according to 94% of the

respondents. This is an improvement over last year where 87% of the respondents shared
a similar opinion. The related issue of repatriation of funds has also seen progress with
the proportion of respondents who faced constraints on this front falling sharply from
45% in the last survey to 24% in the present round.
MARKET CONDITIONS

49% of the respondents feel that the growth rate of the Indian market is ‘high’ and
another 40% feel that it is ‘moderate’. These proportions indicate a significant shift in
FICCI RESEARCH DIVISION 4 the perception of the respondents about the growth rate
of the Indian market as in the last survey the corresponding figures were 16% (high) and
66% (medium) respectively.

The percentage of respondents checking ‘high’ with respect to profitability in the

Indian market has shot up from a meager 2% in the last survey to 14% in the present
survey.

66% of the respondents feels that the Indian market is ‘highly’ competitive and 25%
are of the opinion that it is ‘medium’.

INFRASTRUCTURE

Among the infrastructure facilities available, it is only the country’s telecom network –
its reach and quality – that the foreign investors seem to be satisfied with. It is heartening
to note that ALL the respondents have rated telecom facilities in India to be either
‘average’ or ‘good’.

Bandwidth availability has been rated as ‘average to good’ by 82% of the

respondents. This represents a significant jump from the last survey where 67% of the
respondents felt likewise. This also points to the constant upgradation of communication
facilities being done in the country.
INDIA’S STRENGTHS

According to the respondents the top 3 motivating factors for their entry in to India are-
Market Size
Highly skilled manpower
Low cost of infrastructure and operation

98% of the respondents have rated India’s attractiveness as an export platform as

‘medium to high’.

India’s attractiveness as an ‘off- shoring’ destination has been rated as ‘high’ by 63%
of the respondents.

86% of the respondents has rated India as a highly attractive destination in terms of
availability of skilled IT/BPO workforce.

INDIA’S CHALLENGES

Ground level hassles continue to be a major impediment for foreign investors. As

observed in the last survey, where 91% of the respondents had rated ground level hassles
in India as ‘medium to high’, 88% of the respondents have voiced similar concerns in
the present survey.

Transport, Roads, Power and Water availability continue to remain a cause for
concern amongst the investor community. The present survey sees no improvement in
the respondent’s evaluation of these facilities and they continue to be rated as
unsatisfactory.

The quality of services being offered at the ports and airports also leave a lot to be
desired. No wonder 43% and 42% of the respondents respectively finds port and
airport facilities in India to be much below international standards. These facilities
were rated similarly by 43% and 49% of the respondents in FICCI FDI Survey 2003.

The time consuming procedures and systems to be complied with often leads to time and
cost overruns, which is bothering the investors. The proportion of respondents citing
procedural delays as ‘quite to very serious’ has seen no significant change between the
last and the present round, with the respective proportions being 96% and 93%.

According to the participating companies, the rigidity in the country’s labour laws is
another major impediment in the way of greater FDI inflows. While last year 75% of the
respondents had assessed the problems on account of the existing labour laws to be
‘quite to very serious’, this figure stands at 69% in the present round.

Foreign Direct Investment (FDI) is permited as under the following forms of

investments.

1. Through financial collaborations.

2. Through joint ventures and technical collaborations.
3. Through capital markets via Euro issues.
4. Through private placements or preferential allotments.

Forbidden territories:
FDI is not permitted in the following industrial sectors:

1. Arms and ammunition.

2. Atomic Energy.
3. Railway Transport.
 4. Coal and lignite.
5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,
zinc.

Flow of FDI in different sectors (US$ million)

Sector/ industry 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000-
93 94 95 96 98 99 00 01
Chemicals & allied 47 72 141 127 304 257 376 120 137
products
Engineering 70 33 132 252 730 580 428 326 273

Domestic 16 2 108 1 15 60 - - -
appliances
Finance 4 42 98 270 217 148 185 20 40

Services 2 20 93 100 15 321 369 116 226

Electronics & 33 57 56 130 154 645 228 172 213

electric equipment
Food & dairy 28 44 61 85 238 112 18 121 75
products
IT & related 8 8 10 52 59 139 106 99 306
services
Pharmaceuticals 3 50 10 55 48 34 28 54 62

Others 69 76 162 347 278 660 262 553 578

280 403 872 1419 2058 2956 2000 1581 1910

Total
Capital controls prevalent as of late 2004
The present state of capital controls may be summarized as follows:
Current account there are no current account restrictions, other than the limit upon
individuals of purchasing no more than $10,000 per year for the purpose of foreign travel.
Restrictions upon the currency market access are severely restricted, primarily to banks.
Only economic agents with a direct current account or capital account exposure are
permitted to trade in the market. Exchange traded currency derivatives are absent.
Importers/exporters face binding restrictions on the size of their currency forward
positions.
Outward flows by individuals are limited to taking $25,000 per year out of the country.
Outward flows by firms Firms are limited to taking capital out of the country which is
equal to their net worth.
Borrowing by firms External borrowing by firms must be of at least 3 years maturity
below $20 million and of at least 5 years maturity beyond. Borrowing up to $500 million
by a firm “for certain specified end-users” – e.g. expanding a factory, or importing capital
goods – is allowed without requiring permissions. There is a ceiling whereby approvals
for borrowing by all firms (put together), in a year, should not exceed $9 billion per year.
This ceiling has never been reached.
Firms are “required to hedge their currency exposure”, but there is no mechanism for
verifying this and substantial restrictions on their activities on the currency forward
markets are in place.
Borrowing by banks the central bank controls the interest rate at which banks borrow
from foreigners through “nonresident deposits”.
According Gordon & Gupta (2004) analyses the determinants of deposits.
 • The top 5 states according to certain sources have remained unchanged
between the last and the present round of the FDI survey.
• Maharashtra retains its position as the top state in terms of having a positive
investment climate.
• Karnataka has improved its position from third in the last survey to second in
the present survey.
• Andhra Pradesh has climbed down the ladder to the third position from second
position in the last survey.
• Tamil Nadu and Gujarat have once again been ranked as the fourth and fifth
most attractive states in terms of investment climate.

What the government has done to attract FDI?

• In pursuance of Government’s commitment to further facilitate Indian industry,

Government has permitted access to FDI through automatic route, except for a
small negative list. Latest revision to further liberalise the FDI regime are as
under:

• Increase in the FDI limits in “Air Transport Services (Domestic Airlines)” up to

49 per cent through automatic route and up to 100 per cent by non-resident
Indians (NRIs) through automatic routes. (No direct or indirect equity
participation by foreign airlines is allowed).

• Further, reviewing the guidelines pertaining to foreign/technical collaborations

under automatic route for foreign financial/technical collaborations with previous
ventures/tie- ups in India as per Press Note No. 18 (1998), it has been decided that
new proposals for foreign investment/technical collaborations would henceforth
be allowed under the automatic route, subject to sectoral policies as per the
following guidelines:
 1. Prior approval of the Government would be required only in cases where
the foreign investor has an existing joint venture for technology
transfer/trade mark agreement in the ‘same’ field.
2. Even in the above mentioned cases, the approval of the Government
would not be required in respect of the following:

i) Investments to be made by venture capital funds registered with SEBI;or

ii) Where the existing joint venture investments by either of the parties is less than 3 per
cent; or

iii) Where the existing venture/collaboration is defunct or sick.

• In so far as joint ventures to be entered after the date of Press Note dated January
12, 2005 are concerned, the joint venture agreement may embody a ‘conflict of
interest’ clause to safeguard the interest of joint venture partners in the event of
one of the partners desiring to set up another joint venture or a wholly owned
subsidiary in the ‘same’ field of economic activity.

• Foreign investment in the banking sector has been further liberalised by raising
FDI limit in private sector banks to 74 per cent under the automatic route
including investment by FIIs. The aggregate foreign investment in a private bank
from all sources will be a maximum of 74 per cent of the paid up capital of the
bank and at all times, at least 26 per cent of the paid up capital held by residents
except in regard to a wholly owned subsidiary of a private bank. Further, the
foreign banks will be permitted to either have branches or subsidiaries, not both.
Foreign banks regulated by a banking supervisory authority in the home country
and meeting Reserve Bank’s licence criteria will be allowed to hold 100 per cent
paid up capital to enable them to set up wholly-owned subsidiary in India.
 • FDI ceiling in telecom sector in certain services (such as basic, public mobile
radio trunked services (PMRTS), global mobile personal communication service
(GMPCS) and other value added services), has been increased from 49 per cent to
74 percent, in February 2005. The total composite foreign holding including but
not limited to investment by FIIs, NRI/OCB, FCCB, ADRs, GDRs, convertible
preference shares, proportionate foreign investment in Indian promoters/
investment companies including their holdingcompanies etc., will not exceed 74
per cent.

• In January 2004, guidelines on equity cap on FDI, including investment by NRIs

and Overseas Corporate Bodies (OCBs) were revised as under:

– FDI up to 100 per cent is permitted in printing scientific and technical magazines,
periodicals and journals subject to compliance with legal framework and with the prior
approval of the Government.

– FDI up to 100 per cent is permitted through automatic route for petroleum product
marketing, subject to existing sectoral policy and regulatory framework.

– FDI up to 100 per cent is permitted through automatic route in oil exploration in both
small and medium sized fields subject to and under the policy of the Government on
private participation in exploration of oil fields and the discovered fields of national oil
companies.

– FDI up to 100 per cent is permitted through automatic route for petroleum products
pipelines subject to and under the Government policy and regulations thereof.

– FDI up to 100 per cent is permitted for Natural Gas/LNG pipelines with prior
Government approval.
Portfolio Investment

The Indian stock exchange has been witnessing the most spectacular rise in its
history, scaling new heights in the recent past. The last 2 years have proved to be the
most phenomenal for the Indian stock market as equity prices have gained sharply.
Increased liquidity on account of record inflows from FII’s supported well by inflows
from domestic investors such as mutual funds among others has driven the market to new
levels. There is absolutely no doubt that the current rally reaffirms the emergence of the
Indian Stock Market on the global investment radar as reflected in the record inflows
during the last 2 years or so. The number of FII’s entering India has gone up sharply in
recent years itself. According to a report in The Hindustan Times august 31st edition the
current year has seen an FII inflow of above US $8 billion and they are buying stocks
across the sectors. It is pertinent to note that almost 50% of the floating stocks are now
owned by the FII’s; they seem to have more confidence on India than we Indians.

Strong macroeconomic factors coupled with India Inc’s solid performance have
boosted the confidence of FII’s in the Indian stock market. Corporate India is finally
coming of age and has begun to underline its presence in the global business arena.
Companies like Infosys, TCS, Ranbaxy, ONGC, and Reliance industries have earned
their way into the global big leagues demonstrating their competence, managerial skills,
and a strong desire to compete globally, which has heralded the arrival of brand India on
the global map. An improved corporate governance scenario in the country too has
worked to the advantage of Indian companies. And the number of companies with more
than $1 billion market capitalization has more than doubled to over 50 from 24 in 1993.
More and more Indian companies are now going for overseas acquisitions, which is sign
that India Inc. is ready to prove its mettle globally. The Indian IT and ITES story remains
intact as companies here have shown tremendous amount of resilience in the wake of
vociferous protests the world over. All this has added to India’s attractiveness as an
investment destination.
 It took Sensex 13 long years, since it was introduced in 1986, to touch 5000-mark
in December 1999 and again retouch it in November 2003, after the country’s market
went into slump in 2001. However, it has taken less than 2 years to cross the 7000-mark,
which was hardly thinkable even 9 months back. Also, importantly unlike the past rallies
of 1992, 1994 and 2000, which saw valuations, touch dizzying levels, which were not
justified by fundamentals; the current rally does not suffer from such aberrations. The
valuations are based on strong fundamentals. Increased liquidity driven by foreign
inflows. India Inc’s solid performance, strong GDP growth, good monsoons, solid rupee,
burgeoning forex reserves, and the government’s commitment to reforms are some of the
major factors which have been behind the sizzling performances of Sensex. So overall the
story from the point of view of a global investor is such that if he looks across the globe,
only two countries India and China offers opportunities on a sustained basis. Hence, the
guiding philosophy is that if you are a long term investor, India is a great country to bet
your investments on.

The major drivers

While a host of factors have contributed to the growth of portfolio investments in India
the major factors driving the Sensex are as follows:-

Liquidity – the driver no. 1

A major factor that has been driving the Sensex to new highs has been the increasing
liquidity in the Indian stock market, with strong inflows from FII’s. In fact, in recent
times as the number of FII’s registering with SEBI has gone up sharply, from 637 in 2004
to 733, as on July 14, 2005,it has resulted in sharp rise in inflows. The net inflows from
FII’s during the first seven months have already touched $5.42 billion as on July 14 2005,
during the last calendar year FII’s pumped in close to $8.5 billion experts believe that this
year we could see the FII inflows surpassing last year’s number. Their optimism is based
on the fact that the India growth story has been; in recent times attracting more and more
FII’s across the globe, with Japanese investors coming to India this year for the first time.
According to a report in The Economic Times, July 12, 2005 edition, Japan has emerged
as one of the biggest investors in recent times. It estimates that Japanese in the Indian
market have crossed the $1.5 billion mark. It further adds that Japanese investors with
over $10 trillion in savings are looking at newer emerging markets. More so, with terribly
low interest rates in Japan, it adds. However it is not only the FII’s that are chasing the
Indian equities. In fact, in recent times a new breed of investors called private equity
funds with significant war chests have been knocking on the doors of the Indian capital
market, with some of them like Newbridge Capital already making an entry. According
to the said ET report, many big names in private equity capital like Blackstone (the
combined corpus is expected to be in the region of around $1.3 billion) HSBC, Actis,
Ankar Capital Management, LLC, Mirae Asset Management (from Korea) the US based
Carlyle group with around $30 billion under management are coming to Indian market.
Even investors from regions which did not had presence in India like Australia to have
invested in India market. The Commonwealth bank of Australia have already invested
over $900 million in India. Market experts feel that with several FII’s and private equity
funds entering India, the liquidity scenario will sustain its momentum. Lots of funds are
chasing stocks across the globe and India is among the most attractive destinations of the
emerging markets of the world. In fat, we are likely to receive FII funds flow in the same
manner that china has been receiving in the last 10 years. Whenever valuations are
attractive, funds will flow stronger. It is worth staying invested for a long term growth
formation in a portfolio.

Robust domestic economy

The Indian economy has been one of the fastest growing economies in the world, next
only to China. Thanks to the strong in GDP, India now ranks 10th among the largest
economies in the world. The country’s GDP has been growing at a healthy rate in recent
years. In fact in February 2004 it clocked a growth rate of 8.5% and is expected to grow
well over 6%. “We are confident of achieving a 7% growth rate this year as all
indications point that. But we want to make it all inclusive by developing infrastructure,
particularly in backward districts and states.” - Manmohan Singh. These were the words
of our Prime Minister at a ceremony to mark the 75th anniversary of India house in
London. The fact is India is India is one the fastest growing economies with well
developed and transparent markets. Ultimately the global liquidity flows to the markets
are providing high returns. India’s GDP is expected to grow at 6.5% - 7% over the next
foreseeable future. With agriculture contributing to 25% of the GDP, the corporate sector
is expected to deliver a growth of 15% to 20%. From the perspective the markets are
reasonably priced at this juncture.

Strong rupee

A strong rupee against major international currencies like dollar and euro has also had a
strong sentiment on the market. After touching a record low of Rs.49.06 per dollar in
May 2002, the rupee gained in strength to hover at Rs.43.53 per dollar, as on July 14,
2005. it has no doubt boosted the confidence of foreign investors, which has resulted in
huge inflows in recent times. The FII’s invested a record sum of $8.5 billion in 2004;
their investments have so far this year have already gone past the $5.42 billion mark,
which is quite encouraging, given the fact that FII’s invested $6.5 billion in the whole
calendar year 2003.

Surging forex reserves

India’s foreign currency reserves have kept soaring substantially in recent times, from a
meager $40 billion, as at the end of the calendar year 2000 to $137 billion, as on July 1,
2005. According to the Ministry of External Affairs, Government of India, this makes
India the sixth largest foreign exchange holder in the world; this is remarkable
considering the fact that the forex reserves were less than $1 billion in 1991 before the
economic reforms were started. It notes that the comfortable situation of forex reserves
has facilitated further relaxation of foreign exchange restrictions and a gradual move
towards greater capital account convertibility. This has helped build confidence among
foreign investors in India’s strength.
India Inc’s solid performance

Healthy operating margins and hence improved bottom lines have been the two major
hallmarks of India Inc. during the last couple of years. The turnaround in performance
has been contributed significantly to the huge rise in seen in stock prices in recent times.
A benign interest rate regime in the country too has helped companies strengthen their
balances sheets by either replacing high cost debts with cheaper debts or completely
retiring them. Also, a benign interest regime has led to growing consumerism in the
country, which has helped companies from several sectors improve their top line. It has
also made debt oriented and other instruments less attractive compared to equity related
ones. This has resulted in investors looking at equity investments to earn better returns.

IT story still intact

Despite concerns over outsourcing in developed countries like the US and UK, the Indian
IT industry has managed to maintain its growth momentum. Also, though competition is
heating up in the outsourcing arena with nations like Israel, Philippines, china among
others giving tough competition to India, domestic outsourcing firms have managed to
maintain their lead globally.

Other Drivers

The breadth of the Indian markets has been on an expanding spree. In the last one or two
years, many Indian companies have found themselves breaching the billion dollar
revenue figures especially the software and technology related companies, not to mention
the evergreen oil companies. In fact, the recent IPOs of ONGC, TCS, NTPC and JET
Airways, to name a few, have been able to raise a record Rs.305 billion from the Indian
capital markets. The Rs.320 billion which were raised for the entire period 1995 to 2003
gives a picture suggesting the stability and confidence seen in the Indian capital markets
towards home grown and now globally growing giants. With more IPOs in the offing, it
can only be expected that they might further add fuel to the market indices.

Non-resident Indian (NRI)/Person of Indian Origin (PIO)/Overseas Corporate

Bodies (OCB)

Who is non-resident Indian (NRI)?

Non-Resident Indian (NRI) means a person resident outside India who is a citizen of
India or is a person of Indian origin

What is an OCB?

Overseas Corporate Bodies (OCBs) are bodies predominantly owned by individuals of

Indian nationality or origin resident outside India and include overseas companies,
partnership firms, societies and other corporate bodies which are owned, directly or
indirectly, to the extent of at least 60% by individuals of Indian nationality or origin
resident outside India as also overseas trusts in which at least 60% of the beneficial
interest is irrevocably held by such persons. Such ownership interest should be actually
held by them and not in te capacity as nominees. The various facilities granted to NRIs
are also available with certain exceptions to OCBs so long as the ownership/beneficial
interest held in them by NRIs continues to be at least 60%.For e.g. Laxmi Mittal, Sabeer
Bhatia.

What are the various facilities available to NRIs/OCBs? NRIs/OCHHs are granted the
following facilities:

BANK ACCOUNTS

NRIs/PIOs/OCBs/ are permitted to open bank accounts in India out of funds remitted
from abroad, foreign exchange brought in from abroad or out of funds legitimately due to
them in India, with authorized dealer.

Such accounts can be opened wit banks specially authorized by the Reserve Bank in its
behalf [Authorized Dealer (AD)].
There are 2 types of NRI accounts:-

Rupee Accounts & Foreign exchange Accounts

Non-Resident (External) Rupee Accounts (NRE Accounts)

NRIs, PIOs, OCBs are eligible to open NRE Accounts. These are rupee denominated
accounts. Accounts can be in the form of savings, current, recurring or fixed deposit
accounts; Accounts can be opened by remittance of funds in free foreign exchange.
Foreign exchange brought in legally,

Ordinary Non-Resident Rupee Accounts (NRO Accounts)

These are Rupee denominated non-reportable accounts and can be in the form of savings,
current recurring or fixed deposits. These account can be opened jointly with residents in
India.

Non-resident (Non-reportable) Rupee Deposit Accounts (NRNR Accounts)

NRIs/PIOs/OCBs, other non-resident Individuals/entities are permitted to open these
accounts. Accounts can be opened by transfer of freely convertible foreign currency
funds from abroad, or from NRE/FCNR accounts. Deposits can be held jointly with a
resident.

Non-Resident (Special) Rupee Accounts with banks in India NRIs/PIOs presently have
the facility of maintaining bank accounts and undertaking financial transactions in India
subject to certain exchange control regulations.

FOREIGN CURRENCY ACCOUNTS Foreign Currency (Non -Resident) Accounts

(Banks) (FCNR (B) Accounts) NRIs/PIOs/OCBs are permitted to open such accounts in
US Dollars, Sterling Pound’s, Deutsche Marks, Japanese Yen and Euro. The account may
be opened only in the form of term deposit for any of the three maturity periods viz; (a)
one year and above but less than two years (ii) two years and above but leas than three
years and (iii) three years only.
AUTOMATIC ROUTE OF RBI WITH REPATRIATION BENEFITS

NRIs/OCBs can invest in shares/convertible debentures of Indian companies under the

Automatic Route without obtaining Government or RBI permission except for a few
sectors

The following are the advantages if you are an NRI:

 All investments made by NRI's in the form of NRE accounts (Saving A/c, Fixed
deposits) does not invite any tax.

 All NRI's can give gifts without paying the gift tax from his / her NRE account to
a close relative or a friend.

 NRI's can also make investments in NR(NR) accounts (Non Resident non
repatriable) accounts without paying any income tax, and also give gifts once in a
life time out of these funds without paying any gifts tax.

 Interests earned on NR (NR) accounts can be repatriated or invested in NRE

accounts.

 The NRI's cannot be questioned regarding their income abroad.

 No wealth tax on funds accumulated abroad.

 Preferential treatment in the allotment of public issues of limited companies.

  Preferential treatment in the allotment of non-agricultural land, houses, sites etc.
by the government authorities.

 Preferential treatment in getting admissions to Medical, Engineering and other

educational institutions.

 NRI's can float offshore companies in tax havens like Mauritius etc. and avail the
benefits arising out of double tax treaties existing between India and other tax
havens.

 Under the income tax act 1961, investment incomes are taxed at a lower rate of
tax, an option exercised for NRI's only.

 Any NRI having only an investment income or long term capital gain need not
file return of income under the income tax act 1961.

 NRI's are permitted to establish school and colleges all over India.

OUTWARD CAPITAL FLOWS FROM INDIA

It is basically capital flow from India to other developed and underdeveloped countries. It
is in the form of investments by Indian companies (public and private). It is mainly done
to get effective returns in terms of foreign exchange. Also there is emphasis on expansion
of Indian companies in foreign markets. It is observed that the top 9 Indian companies
(also known as 9 rattans) invest globally and the rest invest mainly in the Middle East
and African countries
Outward flows owing to reserves accumulation
A major feature of India’s recent experience with capital flows has been the outward
flows of capital taking place owing to purchase of reserves. The recent experience with
the stock of reserves and the flow of net purchases by the RBI on the currency market is
shown in figures below.
This shows a striking buildup of reserves, from roughly $40 billion to $115 billion, over
the period from late 2001 to early 2004. Through this period, RBI purchases on the
currency market went up to $7 billion in April 2004. Patnaik (2003) argues that this
reserves buildup was related to implementing the currency regime. Trading by RBI on the
currency market, and the change in reserves, understates the extent of outward capital
flows, since many other decisions were also taken in order to help sustain the currency
regime which were associated with outward capital flows and reduced inward flows.
These included prepayment of loans of the government, through which the net capital
flows on account of “Official flows” in 2003-04 show an outward flow of $3.12 billion.
Through this period, India experienced current account surpluses. This was a paradoxical
turnaround compared with the starting point of the reforms. A goal of the early reforms
was to find a sustainable mechanism to sustain the import of capital, i.e. a current account
deficit. By 2002, India found itself in a situation with persistent export of capital, which
raised concerns about the adverse impact on GDP growth.

Generic restrictions upon portfolio flows only “foreign institutional investors” are
permitted to invest in the country.
Debt investment by foreign portfolio investors the aggregate investment in government
bonds by all foreign investors cannot exceed $1.75 billion. The aggregate bond
investments by any one fund cannot exceed 30%. The total corporate bond ownership by
all foreign investors cannot exceed $0.5 billion.
Equity investments by foreign portfolio investors the aggregate foreign holding in a
Company is subject to a limit that can be set by the shareholders of the company. This
limit is, in turn, subject to “sectoral limits” which apply in certain sectors. No one foreign
portfolio investor can own more than 10% of a company. Foreign ownership in certain
sector (telecom, insurance, and banking) is capped at various levels. Firms are free to
issue GDRs/ADRs outside the country, which can be sold to a broad swathe of global
investors. Within these restrictions, foreign investors are fully able to convert currency,
Hedge currency risk, and trade in the equity spot or derivatives markets. FDI Foreign
ownership in certain sectors (e.g. telecom, insurance, banking) is capped at various levels
Foreign companies require approval of the first firm they chose to do a joint venture with
in the country, if they wish to start a related business.
For borrowing by all firms (put together), in a year, should not exceed $9 billion per
Year. This ceiling has never been reached.
Firms are “required to hedge their currency exposure”, but there is no mechanism for
verifying this and substantial restrictions on their activities on the currency forward
markets are in place.
Borrowing by banks the central bank controls the interest rate at which banks borrow
from foreigners through “nonresident deposits”.

Why foreign firms prefer Mumbai and Delhi as favourable destination?

The world is toasting India’s economic growth and global companies are
looking at ways to do business here. No wonder an AT Kearney survey ranked India at
No. 2 in most preferred countries for foreign investment after China. Last year alone,
companies from around the world invested $5.6 billion in India. Another $9 billion came
through portfolio investment. Even today, nearly every venture firm in Silicon Valley is
funding young companies in India.

But is this really the true picture? A bit of number crunching reveals 72% of the foreign
companies are located in around Delhi and Mumbai. Among the states, Karnataka and
TN are also popular, but others like Punjab and UP are completely ignored.
Location Jumble: Firstly, how do foreign companies operate in India? One, through a
branch, project, liaison office, etc. These offices engaged in trade, research, consultancy,
trade promotion, etc, could also remit their profits outside India.
The second is through joint venture or 100% wholly owned subsidiaries.
Once registered and incorporated as an Indian company, they are treated like other
domestic company.
Post-liberalisation, there has been a significant rise in the number of
unincorporated foreign companies. From 565 in 1960, they went up to 1840 in 2005.
Interestingly, in 1981, thee were only 300 such companies. “FERA restrictions were a
dampener as many became sick and withdrew,” says Anjan Roy of FICCI. So even as
their number grows, a look at the state-wise distribution throws up some interesting facts.
According to a 2004 data put together by the ministry of company affairs, out of 1754
unincorporated foreign companies, 774 were in Delhi alone, while Maharashtra (read
Mumbai and its surrounding areas) had 503. Karnataka (135), WB (106), TN (101) were
the other three states with high concentration. Naturally, the four main metros are located
here and companies clearly had a preference for them when setting up shop. Even
unincorporated European companies showed the same trend. More than 70% (457 out of
623) of them are operating from Delhi and Maharashtra.
Region wise too, the south has only 12% of these companies. Eastern
India fared worse. Except for British companies in WB, there was not a single European
firm under this category. Similarly, they have no presence in Punjab, Rajasthan, MP and
J&K. UP with a 166 million population has only three European companies. Even Indo-
German joint ventures showed the same trend. Data by the Indo-German chamber of
commerce reveals more than 70% of collaborations are concentrated in Mumbai, Delhi,
Bangalore, Chennai and Kolkata.

What attracts them?

The bias could be seen in the historical context. “Regional bias has been a
part of our industrialization process. This was the primary reason why government took
steps to provide incentives to set up units in backward regions even for Indian
companies” says Biswajit Dhar, IIFT. Unfortunately due to lack of quality infrastructure,
these initiatives were not successful. Perhaps, the same logic works for foreign
companies.
The data on unincorporated companies also shows there are many foreign
companies in WB. Most of them are British tea companies, which operate from Kolkata.
“Traditionally Kolkata was the headquarters for foreign capital, while Mumbai was for
Indian capital. But the Leftist movement changed all that and they moved to
Maharashtra.” However of late, many American and European companies are moving
south, particularly to Karnataka. This state has 34 European and 48 American companies.
“In fact, 44% of our members are in south, while 31% are in west. The east has only 7%
of American companies,” says R K Chopra, secretary general, Indo-American chamber of
Commerce.
Delhi and Mumbai still remain favorites. “Bangalore and Hyderabad are
preferred by technology companies.” MNC’s are familiar with these cities and their
inbound investment advisors, accountants, lawyers are mostly based there. It may be hard
to ask senior managers to move out of these metros. Moreover these cities have political,
financial and inter-governmental resources like embassies and consulates. Foreign firms
generally go to those states where decision-making is fast and administration friendly and
accessible.
Investment risk in India

Soverign risk
India is a vibrant parliamentary democracy and has been one since its political
independence from British rule more than 50 years ago. There is no serious revolutionary
movement in India; hence there is no conceivable possibility of the state collapsing.
Sovereign Risk in India is therefore zero for both "foreign direct investment" and
"foreign portfolio investment." It is however advisable to avoid investing in the extreme
north-eastern parts of India because of terrorist threats. Kashmir in the northern tip is also
a troubled area, but investment opportunities in Kashmir are anyway restricted by law.

Political Risk

India suffered political instability for a few years due to the failure of any party to win an
absolute majority in Parliament. However, political stability has returned since the
previous general elections in 1999. However, political instability did not change India's
economic course though it delayed certain decisions relating to the economy.The political
divide in India is not one of policy, but essentially of personalities. Economic
liberalisation (which is what foreign investors are interested in) has been accepted as a
necessity by all parties including the Communist Party of India (Marxist).

Thus, political instability in India, in practical terms, posed no risk to foreign direct
investors because no policy framed by a past government has been reversed by any
successive government so far. You can find a comparison in Italy which has had some 45
governments in 50 years, yet overall economic policy remains unchanged. Even if
political instability is to return in the future, chances of a reversal in economic policy are
next to nil.

As for terrorism, no terrorist outfit is strong enough to disturb the state. Except for
Kashmir in the north and parts of the north-east, terrorist activity is either non-existent or
too weak to be of any significance. It would take an extreme stretching of the imagination
to visualise a Bangladesh-type state-disrupting revolution in India or a Kuwait-type
annexation of India by a foreign power.

Hence, political risk in India is practically non-existent.

Commercial Risk
Commercial risk exists in business in any country. Not each and every product or service
can be readily sold, hence it is necessary to study the demand/supply situation for a
particular product or service before making any major investment. There is a large
number of market research firms in India (including our own) which will study
demand/supply situation for any product/service and advise the potential investor
accordingly in exchange of a professional fee. The IndiaOneStop website provides some
accurate statistics and insights into the most viable sectors for foreign direct investments

Risk of Foreign Sanctions

India did not seem to be in the good books of the United States government due to its
nuclear weapons and missiles development policy. However, US President Bill Clinton's
state visit to India in 2000 was a massive hit which even saw the President dancing with a
crowd of colorfully dressed women in the northwestern state of Rajasthan. Subsequent to
the visit, visits between the two countries at different levels took place, and the US
government has all but come to terms with the reality of a nuclear-armed India.

Background to the sanctions: The US had imposed some sanctions against India because
of its nuclear tests in May 1998. But these sanctions have been theoretical and even such
theoretical sanctions were relaxed within months of their imposition. Given the fact that
US foreign policy in the post-Cold War era is dictated by its economic interests, it
anyway seemed most unlikely that Iraq or Libya-type sanctions would ever be imposed
on India. India is highly self-sufficient in terms of basic technology and requirements,
hence the threat sanctions could not bring India to its knees. The United States seems to
understand this which is perhaps why it never went ahead with really biting sanctions
against India.

Regardless of how strong the threat of sanctions were, the US President's above-
mentioned state visit to India has laid to rest all doubts. In fact, the United States has
often referred to India as a great potential trading partner as well as, perhaps, a politically
strategic partner in Asia. India's rapidly improving relations with Israel has only lent
further momentum to India-US bonding.

Given the fact that the United States has somehow managed for itself the role of the
world's policeman (a role to which India is explicitly opposed), other countries – notably
Japan and Australia – have also toned down their opposition to India's nuclear weapons
programme. In other words, it is now business as usual for the world vis-à-vis India.

It is however theoretically possible that relations with the United States can go sour again
in the future. If that happens, India's sheer self-sufficiency in all matters except in the not-
so-critical cutting edge technologies, will ensure that no sanction will hurt more than a
mosquito bite on an elephant.
RECOMMENDATIONS

First and foremost the government should invite foreign investors in India and organize
festivals for the meeting of the investors and representatives of different state.

The government should bring proper amendments in the policy towards foreign
investment. The lope holes in the legal system should be filled. The comities made for
making capital flow better in India should consist of economist people from corporate
world, burecrates and not ministers.

Their should be a stable political environment. A stable political environment is very

essential to attract many foreign investors. Both state and central. West Bengal and
Maharashtra are the leading states in foreign investment as they have stable government,
while Uttar Pradesh falls short because of its in stable political environment.

The government which comes in to power after the earlier government should just not
remove all the resolution made by the earlier government. In Italy in the last 50 years 45
governments have been formed yet its overall economic policies remained unchanged.

• In India the NDA government had introduced the disinvestment ministry. This was
later dropped by the UPA government.

The infrastructure should be well developed. Their should be good quality of roads and
railways, the government must also make expressways for quick transportation of
materials from place to place. The ports should be made world class with all modern
amenities. Many foreign companies are now leaving Bangalore, as it doesn’t has a good
infrastructure and are moving to cities such as nodia gurgao and navi mumbai which has
an excellent infrastructure.

The government should make its policies clear to the investors and there should not be
any hidden facts in the policies.
 Unified laws relating to octrio in all states. The sates should not try and put different
taxes which may discourage foreign investment for e.g. taxes Such as entry tax while
entering from one state to another. Special labour laws which are introduced by different
states should also be removed for the smooth flow of investment.

Many satellite cities should be built, which could attract a lot of foreign investors. For
example the satellite city of navi Mumbai has been able to attract a lot of foreign
investors in the it sector.

Public sector companies should be disinvested, as disinvestment is like a magnet to

Attract foreign investors. (The government should make disinvestment of non Profitable
companies and not profitable ones. Like in the case of vsnl, companies Become sick unit
not because of quality but because of various other reasons) Foreign investors have a very
keen interest in public sector companies
.
Outward capital flow of India is very low; government should try and increase it.
Government should invest in foreign companies. It should try and give incentives and
various facilities to companies who invest in abroad so that good foreign Exchange is
possible.

Nris should be given dual citizen ship so that they can invest in the country. The
restriction on industries for nris should be removed. Ocb’s should be invited by the
government to invest in India.

Indian companies should give all their information to the foreign investors. Last but not
the least the politicians should see the interest of the country first and then their personal
interest.
 INDIA OPPORTUNITIES: INFRASTRUCTURE

Market Overview

Infrastructure sector pegged to grow at 15 per cent p.a.

Infrastructure development in India has set off in a major way in the last two years and is
witnessing impressive growth across various segments. A recent study indicates that
India would be merely scratching the surface of the potential infrastructure opportunity
with USD 191.51 billion of investments committed over the next five years. The sector is
estimated to grow at a CAGR of 15 % over the next five years.

Construction sector to be the biggest beneficiary of the infrastructure Boom

In India, construction is the second largest economic activity after agriculture. The
investment in construction accounts for nearly 11 per cent of India’s Gross Domestic
Product (GDP) and nearly 50 per cent of its Gross Fixed Capital Formation (GFCF). It
accounts for nearly 65 percent of the total investment in infrastructure and is expected to
be the biggest beneficiary of the surge in infrastructure investment over the next five
years. The investment in this segment over the financial year 2005 to 2010 is estimated at
USD 124.65 billion.
Key drivers underlying the growth

The growth in the infrastructure sector is being driven by a host of factors, which include:

Political will:

The Government of India (GOI) has initiated an ambitious reform programme, involving
a shift from a controlled to an open market economy. Building further on the initiatives
taken by the previous Government, the incumbent Government is undertaking several
measures to enhance the quantum of investments in the infrastructure segment.

Funding from multi-lateral agencies agencies:

Multilateral agencies such as the World Bank and the Asian Development Bank (ADB)
are funding various infrastructure projects on a large scale in India. Other agencies
include the Japan International Bank for Cooperation (JIBC) that funded the Delhi Metro
(Underground Railway) Project. Various State Governments are mobilizing funds from
these agencies to support rural roads and sanitation projects.

Increased private participation participation:

To encourage private sector participation in the sector, the Government has announced
several tax breaks for investments. It is also devising return schemes that are attractive
for the private participants, such as annuity payments and capital grants for road projects.
Laws are being enacted to improve the finances of utilities and make their management
more transparent, so as to improve returns on these facilities.
Innovative modes of funding funding:

The Government is tapping alternative sources of funds for infrastructure development.

One of these is the cess on petrol and diesel, which is being used to fund road projects
such as the Golden Quadrilateral and the North- South East-West corridor. It is also
contemplating levying a tonnage tax on ships (to fund development of ports), and special
taxes on air travel (for airports).

Airports, Power, Roads, and Realty- Investments surging:

In terms of investments, roads, power and airports are expected to see rapid growth in the
near future as the initial foundations for private investments have already been laid in
these sectors. Further, the increased demand in housing and commercial space as a result
of improved standards of living and economic growth, is expected to result in rampant
growth in the realty sector.

Key Opportunities: Roads- “Motoring Away”

Roads occupy an eminent position in India’s transportation as they carry nearly 70 per
cent of freight and 85 per cent of passenger traffic in the country. Presently, India’s road
network spans a distance of around 3.3 million km.
Government investments provide the impetus for growth:

The focus of successive Governments on improving road connectivity across the country,
has brought about significant investments in road development. Government expenditure
on roads in India is significant - 12 per cent ofcapital and 3 per cent of total expenditure;
however, road maintenance is grossly under-funded with only one third of needs being
met. Recognising the present deficiencies in the road network, the Government of India
has sought to address these through the Tenth National Plan (2002-2007), which has
assigned a high priority to the National Highway Development Programme (NHDP).
As per the National Highways Authority of India (NHAI), a total of23,546 kms of roads
would be constructed in the next two years.
Road projects under execution (in Kms):

One of the most important programmes under NHAI is the National Highway
Development Programme (NHDP). The NHDP has the following components:

a) Golden Quadrilateral Quadrilateral: This project involves the four-laning of almost

6,000 km of national highways that link the four majorcities in India (New Delhi,
Kolkata, Chennai and Mumbai).

b) North-South and East-West (NSEW) Corridor Corridor: This projectinvolves

upgrading the existing 2-lane highways and four-laning ofalmost 7,300 km of national
highways, connecting Srinagar toKanyakumari (North-South) and Silchar to Porbandar
(East-West).This project is likely to be completed by December 2009.

c) Port connectivity and other projects projects: The 10 major ports (Haldia,
Paradeep, Vishakapatnam, Chennai & Ennore, Tuticorin, Cochin,New Mangalore,
Marmugoa, Jawaharlal Nehru Port Trust andKandla) would be connected to the Golden
Quadrilateral bywidening around 400 km of road network. Other road projectsinclude
widening and strengthening of about 780 km of roads.These projects are likely to be
completed by December 2008.

Non-NHDP projects

The two key projects are detailed below:

Pradhan Mantri Bharat Jodo Pariyojana (PMBJP)

The PMBJP programme encompasses 48 new projects for upgrading and four-laning
10,000 km of roads outside the ambit of NHDP. Road stretches are being identified on
the basis of three factors: traffic density, whether these roads connect State capitals with
the NHDP network, and whether these roads are linked to important centers of tourist or
economic activity.

Pradhan Mantri Grameen Sadak Yojana (PMGSY)

PMGSY, launched in December 2000, is a project aimed at improving rural roads and
connectivity of villages. The project will provide road connectivity to 160,000
unconnected rural habitations with populations of 500 persons or more by the end of the
Tenth Plan period (2007), at an estimated cost of USD13.33 billion. The programme aims
at upgrading 500,000 km of rural roads and is being executed as a centrally sponsored
scheme in all the States and six Union Territories.
Private sector participation (PSP) being driven by Government policy

The Government recognises the importance of private participation in development of

roads in the country. It has taken the requisite policy measures to encourage private
investments in the sector. Some of the initiatives undertaken by the Government include:

1. National Legislative Changes Changes: The National Highways Act, 1956 has
been amended to permit private entrepreneurs to undertake National Highways
(NH) projects on a BOT basis and recover their investments through tolls. Under
this Act, a simplified procedure has been prescribed for acquisition of land for the
building, maintenance, management or operation of a National Highway and
separate provisions have been made for the levy and collection of fees in respect
of both public and private funded projects.

2. State legal framework for PSP: The Indian Toll Act, 1851, makes it possible for
State Governments to levy and collect tolls on any road or bridge, which has been
made or repaired at the expense of the Central Government or any State
Government. However, the Act needs to be amended by respective State
Governments to allow the private sector to levy and collect tolls on State roads
and bridges. Some State Governments have indeed amended the Act – for
example Uttar Pradesh and Madhya Pradesh – or otherwise taken legal steps in
order to promote private sector participation

3. Uniform Law: In addition to amending the Indian Toll Act, another avenue being
adopted by some States (e.g. Andhra Pradesh, Gujarat etc) is to enact a uniform
law for infrastructure development.
Build-Operate-Transfer (BOT) emerging as a significant opportunity

In order to promote involvement of the private sector in construction and maintenance of

roads, the Government has now decided to offer projects on a Build-Operate-Transfer
(BOT) basis.

There is a significant opportunity for BOT in the national highways segment as they carry
more than 40 per cent of the traffic even though they constitute just about 2 per cent of
the total road network in the country. The key Government programmes that present a
significant opportunity for BOT include:

♦Pradhan Mantri Bharat Jodo Pariyojana (PMBJP)

♦North-South and East-West (NSEW) Corridor
♦Golden Quadrilateral (GQ) project

For NHDP in particular, the private sector has responded enthusiastically. Under this
programme, projects valued at over USD 1.33 billion are being implemented. The NHDP
has been extended to cover a 50,000 km road network, and these future works will be
undertaken on a BOT basis (through toll or annuity).
Recent projects awarded under BOT:
 U nder Phase I of the NHDP, USD 888.89 million worth of investment has already
come into some 11 BOT-tolled projects.

L&T bagged an USD 146.67 million project to turn 80 km of the Baroda-Bharuch

highway into a six-lane road. It has offered to pay USD 106.67 million upfront to NHAI
in six months.

By June 2005, 707 km of the NSEW corridor had been completed and NHAI had plans
to award the balance length of 4,058 km by the end of the calendar year 2005.

Another highlight was the financial closure of the USD 48.90 million
Thiruvananthapuram City Road Development Project. This is the first urban road project
being undertaken through private participation.

Work on Karnataka’s highway improvement programme is 80 per cent funded by the

World Bank. The project involves upgrading and strengthening 2,269 km of roads at an
estimated cost of USD 451.11 million.

Private sector participation in road development

Some of the key players in this segment and recent projects completed by these
companies are provided in the table below.

Future Funding Requirements

As per a recent World Bank study, the cumulative funding shortfall over the ten-year
period is estimated at USD. 23.22 billion, approximating 39 per cent of the total
requirement. The funding gap assumes that all the road user charges generated on the
highways are returned to the highway sector.
Ports – “Anchoring for Growth”

India occupies a strategic location on the global maritime map. Along its extensive
coastline of 7,517 km, there are 12 major ports. Eleven major ports are Port Trusts,
governed by the provisions of Major Port Trust Act, 1963 and the twelfth, Ennore Port, is
the first major corporate port. In addition, there are 185 minor and intermediate ports
spread across the nine coastal states. These are controlled by the respective states. Indian
ports handle 90 per cent of India’s total foreign trade in terms of volume and 70 per cent
in terms of value.

Ports sector set to attract USD 5.5 billion in the next five years

The Government of India (GOI) is using privatisation as a tool to expand existing port
infrastructure (augmenting the existing capacities as well as developing Greenfield ports).
With the law relating to privatisation already in place, the ports sector is emerging as one
of the most attractive opportunities for private sector investments.

Rampant growth in traffic – driving demand for additional capacity the traffic handled
at the ports has been growing steadily over the past decade. Following the liberalisation
and opening of the Indian economy in the early 1990s, there has been a significant
increase in India’s maritime trade, with traffic increasing from 165 MTPA in 1991 to
over 500 MTPA in 2004-05. The Government has fixed an ambitious target of USD 150
billion for exports by the year 2008-09 to double India’s share in world exports from
nearly 0.8 to 1.5 per cent. Further, the Ministry of Shipping projects the port traffic to
grow to a level of 650 MTPA by 2008. As a result, the Indian ports require capacity
expansion on a large scale. As opposed to the growth of 3.5-4 per cent in global trade,
India has been registering a 10.4 per cent growth in containerised cargo and a 6 per cent
growth in bulk cargo. India’s 3.9 million TEUs (Twenty-foot Equivalent Units) in 2004-
2005 is expected to grow to 4.4 million TEUs in 2005-06 accounting for 5-6 per cent of
cargo in Asia. In the past five years, manufacturing exports from India have increased at
a compounded annual growth rate of 14 per cent. Ores and minerals exports have
increased 4.5 times in last 5 years.

Multiple options exist for private sector participation in ports: Multiplicity of

activities in the port sector makes its privatisation more complex than most other core
sectors. This presents a range of options for private-sector involvement in ownership of
port assets and operations. The most commonly adopted approach has been the
unbundling of various assets and operations under a port, and privatizing each of them
separately. Spurt in private investments follow recent reforms Deregulation in the ports
sector (100 per cent FDI is allowed) and attractive terms of BOT/BOOT/BOMT etc. are
drawing a large number of domestic and foreign players to this sector.

In order to encourage private investment, the Government is planning to develop the

Paradeep port under the BOT model. The project includes deepening of the channel to
accommodate 1,25,000 vessels for USD 34.2 million, developing deep draught iron ore
berth on BOT basis at a cost of USD 72.9 million, developing a clean cargo berth at USD
30.7 million, replacement and procurement of four cranes at cost of USD 6.7 million and
developing railway sidings at USD 5.6 million.

In addition, a new port at Ennore, 25 km north of Chennai has been constructed with
Asian Development Bank's assistance and has been operationalised. The port has been
developed through joint venture formation between major and minor ports.

Some of the major players in the construction industry have notched a presence in the
ports segment; viz. Gammon India Ltd, Larson & Toubro, Skanska Cementation India
Ltd., and Simplex Concrete Piles Ltd etc. Some of the major international players in the
sector are now looking at India as a key target market. Foreign investors in Indian ports
include P&O Ports (Australia), Port of Singapore and International Seaports Ltd.
Recently, the Singapore-based global cargo transportation and logistics major, Neptune
Orient Lines (NOL), has made major investment plans in port development in India.
Several ports privatised in recent times
Port
 privatisation has picked up momentum. In the recent past. 18 private or captive
projects worth USD 1.39 billion have been approved. Of these, 13 projects worth USD
577.78 million are operational. The private participants include global players such as
P&O, PSA, Maersk, Gammon India, CWC and the Dubai Port Authority.

The
 Gujarat Maritime Board and the Maharashtra Maritime Board have identified four
out of 21 and two out of nine minor ports respectively for privatisation.
Some of the privatised berths and terminals in major ports are listed in
the table below:
Projects worth USD 13.33 billion proposed under National Maritime Development
Programme (NMDP)

Under this programme, there are several projects to be completed over the next 10 years.
The programme envisages an investment of over USD 13.33 billion for augmenting the
present capacity and modernisation of the existing ports. The programme is proposed to
be implemented through public-private partnership. The areas for which funds would be
required can be categorised under the following three heads:

• Projects related to port development (construction of jetties, Berths etc.)

• Procurement, replacement or up gradation of port equipment

• Deepening of channels for improvements in drafts

The estimated investment for above projects is USD 13.41 billion, out of which USD
2.54 billion will be raised through budgetary support, and an additional USD 1.13 billion
will be funded through internal resources. The rest of the investment of USD 8.72 billion
will be mobilised from the Private sector.
Sagar Mala Project

The Sagar Mala project is estimated to bring an investment of ~US$ 22 billion over a ten-
year period. Under this scheme, many individual port development plans would now be
strung together in a ‘mala’(thread) and on an ambitious scale.

The Sagar Mala project includes:

√Setting up of new ports; modernisation and expansion of existing ports

√Improvement in draft, productivity and efficiency of Indian ports to benchmark against

international standards;

√Development of inland navigation

“INDIAN PORTS ARE FAST METAMORPHOSING INTO INDUSTRIAL

CLUSTERS TO ENSURE GROWTH”

Having learnt the hard way that mere infrastructure and hinterland
connectivity are not enough to attract business, Indian ports are queuing up to set up SEZ
and offer other value additions. While ports like Dighi in Maharashtra, Mundra in Gujarat
and Cochin in Kerela have already kicked off the setting up of such special zones, the
other 11 major ports are drawing up plans for SEZs.
“A port and an SEZ feed upon each other. Every port, which does not have
a space constraint will set up SEZs,” said Arvind Ahuja, analyst, I-maritime, a
consultancy firm.
The benefits for such a combination are many considering huge savings
these add-ons bring to the customers in the form of tax benefits, nearly 30-40% savings in
transaction costs and easy import-export guidelines. These projects also make sense
especially at a time when the government has set up an equally ambitious export target of
$150 billion by 2008-2009 to double India’s share in world trade to 1.5%.
Last year, when Indian exports touched record levels of $80 billion,
imports were at new highs at $105 billion. Of this international trade, roughly maritime
trade carries out 90% by volume and 70% by value. No wonder, more ports are looking at
every opportunity to offer such benefits. In Maharashtra, for instance, Dighi port located
in Raigad district is one of the first to set up a port-linked SEZ inclusive of a free trade
and warehousing zone.
 “We have already signed few agreements with companies interested to use
both our port as well as SEZ facilities,” said Vishal Kalantri, director, Balaji infra
projects, promoter of Dighi port. Companies like Uttam Galva steel (which exports 70%
of its produce), Essar group and Ispat group have already expressed intent to set up units
at the Dighi SEZ. These value additions will helps Dighi port handle 6.95 metric tonne of
cargo in 2007-08 and 13.90 metric tonne in 2009-10. Ever since 2003, when the port
started operating its 82-metre jetty, it has handled 7 lakh tonne of cargo. In addition to
Dighi, RIL’s Rs. 10000 crore SEZ in Navi Mumbai is also likely to have a port. In
Gujarat where port-led development is he buzzword, developers of minor ports are going
all out to lure cargo traffic.
“With lack of government initiative in port related infrastructure
development, we thought its best to do it ourselves to save time and ensure that SEZs
serve as a magnet to draw industry, thereby driving a huge cargo business automatically
into the port, said Gupta of Adani group. The Adani group’s Rs. 2000 crore Mundra port
is now gearing up to give Ahemdabad a port city status by intending to jointly develop
Rs. 3000 crore dholera port with the JK group nearly 130 kms from ahmedabad. This is
in addition to the 6000 acres SEZ at mundra alone costing Rs. 7500 crore. What’s
interesting is that the Adanis have not just stopped at port projects, they have also tackled
the lac of infrastructure head on with SEZs centered around the two port projects.
Even the Gujarat Pipavav port, which was set up by SEAKING
infrastructure, decided to go for rail connectivity through an SPV Pipavav railway
corporation, which was a 50:50 joint venture between the ministry of railways and GPPL
to construct a 275 km broad gauge railway line linking Pipavav port and Surendranagar at
a cost of Rs. 380 crore in May 2003.
The Adani group has opted for its own rail connectivity with an SPV
Kutch railway company to connect Gandhidham with Palampur through a broad gauge
conversion project of Rs. 500 crore.
Realty- “Scaling New Heights”
The realty sector in India has come of age and competes strongly with other investment
options in the structured markets. The strong economic growth of the country has
augured well for the Indian real estate market. Continuing bullish sentiment in the
economy and slow delivery of stock on the supply side has resulted in realty prices
increasing significantly in many parts of the country.

Housing, IT and Retail driving growth in realty

India’s property market is on a fast track, driven largely by the rapid expansion of its
information technology industry, a retail boom and the simultaneous growth of its middle
class population.

Almost 80 per cent of the real estate development is in the residential space and rest
comprises offices, hotels, malls etc. The number of households in India are expected to
increase at a CAGR of 2.58 per cent owing to growth in urbanisation, increasing
affordability, and further nuclearisation of families. Further, factors such as lower interest
rates, declining EMI rates, increasing disposable incomes, and various Government
incentives are also triggering the growth in the housing sector.

Most large cities, such as Mumbai, Delhi, Chennai, Bangalore, Pune and Hyderabad, are
developing IT clusters, especially designed to house offices of hi-tech companies and
residential townships for their employees. There is also a surge in retail development,
such as shopping malls and multiplexes.

Major reforms witnessed in real estate FDI policy and venture funds. With the objective
of mobilising the requisite capital for augmenting the real estate sector, the Government
of India has introduced reforms and liberalised investment policies for this sector. This is
the first step towards radically changing and reorganising the real estate sector in the
country.
FDI allowed under the automatic route

Post March 2005, the Government of India has decided to allow FDI under the automatic
route in the construction - development sector. Though FDI was already permitted in this
sector, it had to be routed, until now, through the Foreign Investment Promotion Board
(FIPB).

Real estate venture capital funds

The Securities Exchange Board of India (SEBI) has been firm in its stand on restricting
retail investors from investing in real estate as this sector is deemed to be a speculative
asset class. However, in a major policy change in April 2004, it permitted high-risk
capital, Venture Capital Funds to invest in real estate.
Encouraged by this policy move, several large financial firms and private equity funds
have launched exclusive funds targeted at the real estate sector. This has paved the way
for organised debt and equity instruments in the real estate market and the establishment
of Real Estate Funds (REFs).

One of the funds that has got the approval of SEBI and is operational is HDFC India Real
Estate Fund. Apart from this, there are close to 15 funds which are either being planned
or have been proposed. It is estimated that these funds would invest about USD 1.2
billion into real estate stock over the next one year.
Airports- “Ready To Take Off”

India has 450 airports managed by Government agencies such as defence services, State
Governments and the Airports Authority of India (AAI). The AAI manages a total of 120
Airports in the country, which include 11 International Airports, 81 domestic airports and
28 civil enclaves. Top 5 airports in the country handle 70 per cent of the passenger traffic
out of which Delhi and Mumbai together account for 50 per cent traffic.

Upsurge in air traffic creating under-capacity

With air travel becoming more affordable the air traffic in India is witnessing rapid
growth. Though the entry of low-cost air carriers is a key factor, industry analysts
attribute the boom in air travel to India’s economic upswing, increased FDI in various
key industrial sectors, a flood of outsourcing firms, the growing popularity of India as a
tourist destination and the consequent surge in the numbers of foreign travelers arriving
in the country

Passenger and cargo traffic has grown at an average of about 9 per cent over the last 10
years. The domestic passenger segment is likely to grow at 12 per cent per annum over
the next few years. The estimated growth for the international passenger segment is 7 per
cent while the growth for international cargo is likely to be at a healthy rate of 12 per
cent. With the number of passengers in the country expected to grow from 19 million
annually now to 50 million by 2010, a number of new air carriers have entered the space
while several other groups are planning their foray. Airlines in India are expected to buy
at least 280 new planes by 2010, worth an estimated US$ 15 billion, and another US$ 15
billion below worth in the following decade. Market estimates of international aircraft
manufacturer Airbus Industries, indicate that demand for planes from India could grow to
about 800-1,000 in the next two decades.

Presently, Indian airports face several constraints. Due to liberalisation in the sector and a
spurt in new airlines launching their services, the airport infrastructure is under increased
pressure. The limited parking and terminal capacity, delay in passenger clearances, and
bunching up of flights have led to congestion at airports. Moreover, most Indian airports
lack modern ground-handling facilities, night-landing systems, and cargo handling
facilities.

Investments taking off through Public-Private participation

In its effort to develop airports of world class standards, the Government is inviting
private sector participation for developing the existing airports such as Mumbai, Delhi,
etc as well as greenfield airports such as Hyderabad and Bangalore. The total investments
envisaged in Indian airports over the next five years are USD 5.07 billion.

Upgradation of metro city airports

The cost of upgrading Delhi, Kolkata, Chennai and Mumbai airports is estimated at USD
2.22 billion. The Government is keen to hand over Mumbai and Delhi airports to private
parties for operations and modernisation. The modernisation of the two airports is
estimated to cost USD 666.67 million. Private parties will recover their investment
through levying special surcharge for airport facilities. The government has appointed a
consultant for the privatisation process of these two airports. Similar initiatives are
expected in this sector over the next 2-3 years.

Hyderabad Airport
The first phase of this project to build an international airport at Shamshabad in
Hyderabad, is expected to cost USD 257.78 million. The Malaysian MAHB consortium
will develop this project along with the Government of Andhra Pradesh (GoAP) and the
AAI. The Malaysian consortium will have a 74 per cent equity stake in the project and
the rest will be shared equally between AAI and GoAP. The advance development fee of
USD 23.78 million, paid by GoAP, will be recouped by levying an additional tax on the
existing airport at Hyderabad. The GoAP recently cleared USD 70 million of interest-free
loans and granted USD 23.78 million as advance development fees for this project. The
state support and shareholders’ agreements are expected to be signed soon. This would be
followed by a concession agreement between the developer and the Indian government.

Bangalore Airport
The project cost is estimated at USD 288.89 million, with a debt-equity ratio of 2:1.
About 74 per cent of equity will be held by its developers, Siemens Consortium. The
Karnataka Government will invest 13 per cent through Karnataka State Industrial
Investment & Development Corporation, and AAI will hold the rest. The project has
achieved financialclosure, and construction has begun.

More than just airports

There is a wider real estate angle to the development of airports today. An estimated USD
1,650-1950 million is being planned for investment in over one thousand acres of land
comprising golf courses, hotels, convention centres, malls, office space and entertainment
centres at the Kolkata, Hyderabad and Bangalore airports.
The new business model

Other projects
The Central government intends to modernise airports at Madurai, Trichy and
Coimbatore. Modernisation of the Coimbatore airport is expected to cost USD 9.3
million.

Legislative reforms for airport investments in place

The Airport Authority of India (Amendment) Bill, 2003 has been passed by Parliament.
The Bill provides a legal framework for operational and managerial independence to
private operators. It also seeks to ensure a level playing field to private sector greenfield
airports by lifting control of AAI except in certain respects.

Special Economic Zones - “Mushrooming Across India”

The growth in industrial parks in India is being primarily driven by Government reforms
through Special Economic Zones (SEZs). Presently, there are 11 operational SEZs and
approvals have been granted for setting up of another 42 SEZs in the private/joint sectors
or by the State Governments and its agencies on the basis of the proposals received from
them.

Benefits of SEZ

The Passing of The Special Economic Zones Act 2005, is expected to infuse further
growth in the sector. Some of the key benefits offered by Indian SEZs include:

• Exemption from customs duty on import of capital goods, raw materials, consumables,
spares etc.

• Exemption from Central Excise duty on procurement of capital goods, raw materials,
consumable spares etc. from the domestic market.

• 100 per cent Income-tax concessions upto 10/15 years.

• No license required for import.

• Facility to retain 100 per cent foreign exchange receipts in EEFC Account.

• Facility to realise and repatriate export proceeds within 12 months.

• Commodity hedging by SEZ units permitted

• Profits allowed to be repatriated freely without any dividend balancing requirement.

• Full freedom for subcontracting including subcontracting abroad.

• In house Customs Clearance.

• Concession on dividend distribution Tax and Minimum Alternate

Tax.

• No restriction on domestic sales.

Impressive export performance of SEZs

Exports from the SEZs during 2003-04 were of the order of USD 3,079 million as
compared to the export of USD 2,235 million during 2002-03, representing a growth of
38 per cent over the previous year.
As on March 31, 2005, there are 811 units in operation in the 8 functional SEZs.
Investment by the units in these Zones is of the order of USD 405 million. The SEZ units
collectively provide employment to about 1,00,650 persons

Passing of SEZ Act opens floodgates to investments

The passing of the SEZ Act 2005 (however, the Draft SEZ Rules would come into force
only on receiving the assent of the Central Government and thereby being notified in the
Official Gazette of India) has prompted 45 new projects worth over USD 33.33 billion in
investment. Some of the recent investments include:
Private sector investing in SEZs on a large scale
Indian and foreign companies are rushing to set up special economic zones or to convert
existing projects into SEZs as a strong economy, rising investment by foreign companies
and tax sops make the setting up and management of SEZs a profitable proposition.
Reliance Industries Ltd. (RIL), the Anil Dhirubhai Ambani Enterprises(ADAE), Finnish
giant Nokia, auto major Mahindra & Mahindra and ONGC, among others, are pouring
investments and resources into building vast enclaves for industrial and commercial use
which they hope will compete with China’s Shenzhen Special Economic Zone, and
trigger even faster economic growth. Reliance Industries, the country’s largest private
sector company, has already announced plans for a 15,000-acre SEZ in Haryana at a cost
of USD 3.33-4.89 billion. In Jamnagar, where the company already has a large refining
and petrochemical complex, RIL plans to build another SEZ to house a second 30
million-tonne refinery and another petrochemical complex. The company is also close to
picking up significant stakes in the Mumbai Integrated SEZ outside the city. ADAE’s
Reliance Energy has acquired about 1,000 hectares in Ghaziabad for a multi-product
SEZ. ONGC is planning an export-oriented oil refinery near Mangalore and an SEZ. The
steel baron, LN Mittal’s upcoming 12 million-tonne steel project in Jharkhand and
Posco’s similar project in Orissa, both estimated to cost over USD 8.90 billion, are likely
to be declared SEZs.

The rush for SEZs is chiefly because of the various tax sops announced by the
government and an attempt to cash in on the growing demand for land in the country
caused by higher and higher levels of investment. Other companies setting up SEZs
include Mahindra & Mahindra, which is planning to set up two projects in Chennai and
Jaipur. The area covered by the Jaipur Project is expected to be over 3,000 acres and is
likely to cost over USD 244.44 million. Flextronics, the USD 16 billion electronics
manufacturing services provider, is believed to be building a large facility near Chennai,
is intende to be upgraded as an SEZ.

Other companies planning to set-up SEZs include Ranbaxy, Wipro, Zydus Cadila,
Biocon, Orient Textiles, the Maharashtra Airport Development company and the Tamil
Nadu Industrial Development Corp.
Telecommunications

One of the fastest growing sectors in the country, telecommunications has been zooming
up the growth curve at a feverish pace in the past few years.
The number of mobile phones (including 20.8 million WLL (M)) as on January 31, 2006,
was about 83 million, which is over 63 per cent of the total number of phones in the
country.
Over 32 million new telephones were added during April-January of the current financial
year, with five million additions occurring in January alone, taking the total number of
phones in the country to 130.8 million as on January 31, 2006.
Tele-density has increased from 8.8 per cent in January 2005 to 11.7 per cent at the end
of January 2006.
According to the Telecom Regulatory Authority of India (TRAI's) quarterly performance
indicators, Internet user base has grown 15 per cent from September 2004 to September
2005, with private operators accounting for 2.6 million users.
The gross subscriber base of the fixed and mobile services together reached 113.07
million at the end of the quarter July-September 2005, from 104.22 million as on June
2005, registering an increase of 8.49 per cent during the quarter.
Under the Bharat Nirman Yojana, a total 66,822 villages are to be provided with village
public telephones (VPT) by November 2007.

Destination India
The growth statistics of the sector combined with the government's decision to increase
the foreign direct investment cap in the sector to 74 per cent is generating interest among
global investors. India, one of the fastest growing countries in telecom manufacturing in
the world, will attract another US$ 855 million as foreign investment over the next two
years.
India has become the ‘crown jewel’ in Hong Kong-based Hutchison Telecom,
contributing about 41 per cent of the group's total revenues of US$ 3.1 billion in 2005.
This amounted to more than half of Hutch International’s gross profit.
Nokia calls India its stepping stone to success. It said that convergence and 3G products
will increase exponentially from 2005-07 in Asia with key drivers being India along with
Brazil and China.
The China-headquartered Haier group, with a global presence in home appliances and
consumer electronics, has set up a joint venture for telecom in India for the handset and
equipment business.
Nortel, North America's biggest telecommunications equipment provider, has signed a
five-year deal to provide call centre services for Bharti, which has a more than 22 per
cent market share of the mobile phone market in India.
Israeli telecommunications equipment maker ECI Telecom opened a new research and
development centre in India in an effort to reduce the time to market new products.

Global forays
India offers an unprecedented opportunity for telecom service operators, infrastructure
vendors, manufacturers and associated services companies. With global telecom bigwigs
keenly looking at the fast-growing Indian market, domestic majors are busy dialing in
new deals and expanding overseas.
Bharti, which has been offering telecom services in Seychelles for the last seven years
under the brand Airtel Seychelles Ltd., announced that it would soon launch next
generation 3G services there with an initial investment of US$ 968,309.
Videsh Sanchar Nigam Ltd (VSNL) has said that SNO Telecommunications (PTY) Ltd,
in which the company is a principal shareholder, has received a telecom licence to
operate in South Africa.
The Tata Group will invest more than US$ 230-million in South Africa over the next
three years to develop and operate telecommunication services.
Reliance Infocomm has joined hands with China Telecommunications to provide direct
telecom connectivity for the first time between the two countries. It will now route
communications traffic between India and China on a global network of its group
company Flag Telecom
Oil & gas

Estimated to be a US$ 90 billion industry, the Indian oil and gas industry is among the
largest contributors to the central and state exchequers in India. Its share approximates
US$ 13.58 billion. Most of the country’s 25 refineries, with a capacity to process 2.5
million barrels per day, are run by state-run companies.
India ranks sixth in the world in terms of petroleum demand and by 2010, India is
projected to replace South Korea and emerge as the fourth-largest consumer of energy,
after the United States, China and Japan.
Since India is dependent on imports for nearly 70 per cent of its petroleum requirements,
energy security has become a prime government concern. In recent years this has taken
the form of trying to get a stake in oil and gas fields from Myanmar to central Asia and
Africa. However, the major thrust still lies in searching for hydrocarbons in onshore and
offshore blocks in India. Recent gas finds are making oil majors take notice of the
potential in prospective basins.
Total, the world’s largest oil and gas company, intends to set up a refinery jointly with a
local player.
The Scotland-based Cairn Energy PLC first arrived in the Indian subcontinent in 1994. It
now has 12 oil and gas discoveries in Rajasthan to its credit. The company has invested
around US$ 2 billion in the last ten years. Cairn generates more than 60 per cent of its
revenue from oil and gas fields in India and the percentage is likely to go up when fields
in the Rajasthan block are commissioned.
India imports about 75 per cent of its requirement of crude petroleum. However, it
continues to have a net exportable surplus in refined petroleum products. The imports of
petroleum products were 8.83 million tonnes (MT) in 2004-05 and 7.32 MT in April to
November 2005. Against this, exports of petroleum products were 18.21 MT in 2004-05
and 12.68 MT during the period April-November 2005.
Refining capacity has increased from 118.37 MT per annum (MTPA) as on April 1,
2003, to 127.37 MTPA as on October 1, 2005. The targeted capacity by the end of the
Tenth Five Year Plan is 141.70 MTPA.
Overseas Investments

To meet its spiralling demand, India is investing heavily in oil fields abroad. India's state-
owned oil firms already have stakes in oil and gas fields in Russia, Sudan, Iraq, Libya,
Egypt, Qatar, Ivory Coast, Australia, Vietnam and Myanmar.
India has 20 per cent participation in Russia’s Sakhalin I and has 20 per cent participatory
interest in that country’s national company, Rosneft. The Sakhalin-1 oil and gas project,
in which ONGC-Videsh Ltd (OVL) has equity, has begun production on October 1, 2005.
GAIL (India) Limited has signed three sweeping memoranda of understanding with as
many Chinese companies.
Oil and Natural Gas Corp (ONGC) will tie up with Norway’s state-owned oil firm Norsk
Hydro to jointly explore for oil and gas in the Gulf region.
India's ONGC Videsh Ltd and Kazakhstan's KazMunaiGaz will jointly develop oil and
gas properties in the Caspian sea region.
The government is working on increasing the country’s investment potential to US$ 250
billion. And with the current investment wave, it appears that day would not take long in
arriving.
Aviation

Revolutionised by liberalisation, the aviation sector in India has been marked by fast-
paced change in the past few years. From being a service that few could afford, the sector
has now graduated to being a fiercely competitive industry with the presence of a number
of private and public airlines and several consumer-oriented offerings.
The market was galvanised a couple of years ago by the introduction of lower price tags
which ensured that people could travel at the fraction of the original price of air travel. It
was spurred further by the entry of Air Deccan, India's first budget airline, which offered
hard-to-believe tariffs.
This was the trigger point for the sector to move from having simple economy, business
and first class fares, to multiple slab tariffs such as apex fares, internet auctions, special
discounts, bulk purchases and last day fares. Some of the tariffs offered are so low that
they have brought airline fares neck-to-neck with upper class railway fares. Little wonder
then that the consumer prefers air travel to the railways.
The fare reduction has given the sector a huge boost with domestic and international
traffic growing by 24.2 per cent and 18 per cent, respectively in April-December, 2005.
Private airlines now account for 68.9 per cent of domestic traffic.
The boom in the aviation sector in India can be gauged by the fact that in one year, the
number of people seeking pilot licences has multiplied three times. In April 2005, it was
300. In April 2006, the number rose to 1045.
In the last financial year, the civil aviation industry has achieved the biggest ever growth
in aircraft movement and passenger traffic. Passenger traffic in the domestic airports
increased by 22.3 per cent to 59.54 million, while aircraft movement increased by 14.2
per cent to 730,000.
Jet Airways tops the list of domestic and national carrier operators with 8,168 flights
operating till June 2005. Indian Airlines ranks second with 7,562 flights, followed by
Sahara (3,225 flights), Air Deccan (2,889 flights), Spice Jet (483 flights) and Kingfisher
Airlines (267 flights).
Aircraft manufacturer Airbus said, “India is one of the world’s most promising markets
and it is predicted that 100 million new urban middle-class consumers will become
potential air travellers by 2010.”
The increase in passenger traffic calls for upgraded infrastructure facilities. The
international airport in Delhi and Mumbai are being modernised and upgraded through
private sector participation. In the joint venture (JV), the Airports Authority of India
(AAI) and other Government PSUs will hold 26 per cent equity. The balance 74 per cent
will be held by the strategic partner. Foreign direct investment (FDI) in this transaction
has been capped at 49 per cent. In addition to these 10 non-metro airports, AAI has
identified 15 more non-metro airports, namely, Agatti, Aurangabad, Bhopal,
Bhubaneswar, Coimbatore, Indore, Khajuraho, Nagpur, Patna, Port Blair, Rajkot, Trichy,
Vadodra, Varanasi and Vizag, for development.

Acquisitions

The India story dominated the Paris Air Show in mid 2005 with several existing and yet-
to-be-launched airlines surprising the world with hefty order announcements. The
virtually unknown low-cost start-up, IndiGo, lifted the tally of Indian deals to US$ 13
billion. The Delhi-based airline ordered a full fleet of 100 jets in the single-aisle A320
family.
Low-cost carrier Spicejet signed a US$ 700-million deal for ten aircraft with Boeing,
even as Jet Airways and state-owned Air-India and Indian Airlines placed orders worth
US$ 3 billion for aircraft engines.
General Electric said it had won an order worth more than US$ 2.2 billion from Air-India
for engines for the airline's new Boeing 777 and 787 fleets. The company said in a
statement that Air-India had placed an order for the GE90-115B engine for eight 777-
200LRs and fifteen 777-300ERs. In addition, the airline has ordered for the GEnx engine
to power twenty seven 787-8 aircraft.
Indian, as Indian Airlines is called now, signed a deal worth US$ 500 million with CFM
International to purchase engines for its newly acquired fleet of Airbus aircraft. The
CFM56-5b engine will power Indian's new fleet of 43 Airbus A320s scheduled for
delivery between late 2006 and 2010.
The other deal at the world’s largest air-show was an order for A380 superjumbos and
A320s by Kingfisher Airlines.
Domestic air travel in India is predicted to grow 20 per cent over the next five years.
Boeing has raised its 20-year market forecast for India for aircraft purchases from US$ 25
billion to US$ 35 billion. Both Airbus and Boeing are waiting for the next big order,
expected from Air India. The airline is evaluating medium and large capacity aircraft and
is expected to order 50 wide-body jets, worth almost US$ 5 billion at list prices.
The aviation sector is likely to see the launch of many new airlines, including Premier
Airways, Star Air and East West Airlines this year. The first of these, Premier Airways, is
formed by a group of ten NRIs in the US. The airline will be based in Chennai.