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India: Market Profile

Major Economic Indicators

Table: Major Economic Indicators (India)
Table: Major Economic Indicators (India)

Latest Development

  • India is expected to remain the world’s fastest-growing major emerging economy in 2017 with a projected growth of 7.2%, after expanding 6.8% in 2016.
  • In July 2017, the Goods and Services Tax (GST), a landmark reform, was rolled out nationally.
  • The Reserve Bank of India (RBI) adopted a consumer price inflation (CPI) based target of 2%-6% over the next five years and cut its policy rate from 6.25% to 6% in August 2017 to maintain momentum for economic growth.
  • Reforms introduced by Prime Minister Modi, including FDI cap relaxation and the “Make in India” Initiative, have improved India’s medium-term outlook.
  • In a further crackdown against black money, India started to ban cash transactions of more than Rs200,000 in April 2017, after the drastic demonetisation in November 2016.
  • India’s cumulative FDI reached US$342 billion as of June 2017, with US$1.7 billion and US$2.3 billion attributed, respectively, to the Chinese mainland and Hong Kong.
  • India’s exports increased by 15.7% in the first five months of 2017 while imports expanded by 32.5% over the same period.
  • India was the third largest export market for Hong Kong in the first seven months of 2017, rising 40.2% YOY to US$11.9 billion.

Current Economic Situation


India is the third largest economy in Asia after China and Japan. Its service, industry and agriculture sectors respectively account for 59%, 24% and 17% of the country’s GDP. Major sectors include finance, insurance, real estate, construction, heavy manufacturing, retail and wholesale trade.   

India’s economy expanded 6.8% in 2016, slightly dragged down by the drastic changes brought by the demonetisation in November 2016. The industry and service sectors were the major growth drivers, expanding 5.2% and 8.8% respectively in FY2016-17 (April-March; the government is considering a change to January-December from 2018), while the agricultural sectors recorded 4.7% growth. According to the IMF, India is expected to grow at 7.2% in 2017, surpassing China in terms of GDP growth.

The Reserve Bank of India (RBI) adopted a consumer price inflation (CPI) based target of 2%-6% over the next five years and cut its policy rate from 6.25% to 6% in August 2017 amid  low inflation and sluggish economic growth.

India’s wholesale price index (WPI), which had been a primary gauge of inflationary pressures, spiked to a 6% increase in March 2017. For Q2 2017, however, the WPI remained stable with marginal inflation of less than 2%. 

External Trade

India’s exports expanded by 15.7% year-on-year (YOY) to US$125.2 billion in the first five months of 2017, while imports grew 32.5% YOY to US$182.3 billion in the same period. India’s major export markets included the UAE, the US and Hong Kong. Major import sources were China, the UAE, Saudi Arabia, Switzerland and the US.

India depends heavily on its service industries for economic expansion, and it holds a dominant share of the global offshore information technology and business process management (IT-BPM) market. According to NASSCOM, an industry association in India, the IT-BPM industry is estimated to contribute to about 10% of India's GDP and account for more than 38% of total services exports. Exports of IT-BPM services are mainly to the developed countries, in particular the US and Europe. IT-BPM revenues are estimated to reach US$154 billion in FY2017.

Economic Reforms

After a landslide victory in the 2014 general elections, Narendra Modi became India’s 14th prime minister. The pro-business government that he once led in Gujarat had achieved the highest GDP growth among Indian states for many years. Therefore, his premiership has instilled stronger business and consumer confidence with growing hopes in India of fiscal consolidation, infrastructure and investment reforms, boding well for India's long-term economic outlook and retail industry growth.

In its Union Budget 2016, the Indian government continued to roll out reform initiatives and reform measures, with a targeted focus on rural and infrastructure development. While promising a phased reduction of corporate income tax (CIT) from 30% currently to 25% in four years in the previous budget, the government fell short of initiating the CIT reduction. In fact, excise duty was raised from 10% to 15% on most tobacco products, and luxury cars would be subject to higher capacity tax. Companies with revenue less than Rs5 crore (about US$0.75 million) are to be taxed at 29% plus surcharge.

In July 2017, the GST, which replaces the previous Value-Added Tax (VAT) and many other indirect taxes, was rolled out nationally. The GST is expected to unify India into a single market and significantly improve ease of doing business. GST is levied in a 4-tier system at the rates of 5%, 12%, 18% and 28% depending on the products. Services are taxed at 18%. GST will not be levied on exports of goods and services, and supplies procurement by SEZs is also exempted. 

Other reform measures having been introduced by the Modi government include relaxation of limits on FDI ownership of different sectors, which is covered below under the section of Investment Policy.

On 8 November 2016, the Modi government made a surprise announcement to replace the current Rs500 and Rs1,000 bank notes with new Rs500 and Rs2,000 bank notes. This measure was introduced to serve multiple aims of reining in black money, tax evasion, counterfeit notes and terrorist money laundering. In a further crackdown against black money, the government introduced a ban on cash transactions above Rs200, 000 in April 2017.

Retail Boom

India is riding on a retail boom bolstered by its fast expanding middle class and young consumers. The India’s retail market size, currently estimated at about US$600 billion, is projected to grow at an average annual growth rate of 12% to reach US$1,000 billion by 2020. With the world’s second largest population (more than 1.2 billion), India has a huge consumer base with increasing discretionary spending.

The National Council for Applied Economic Research (NCAER) projects that the share of middle class as a share of the country’s population will increase from 13.1% in FY2009-10 to 20.3% by FY2015-16, reaching 37.2% by FY2025-26. An expansion of middle-class population will create many opportunities in India’s retail sector.

In addition, retail channels in India have been fast modernising, and professionally managed malls and online shopping are becoming increasingly popular across the country. E-tailing has grown significantly since late 2016 due to a shortage of cash notes after demonetisation and cash restrictions on large transactions. Organised retail currently accounts for an estimate of 7% of India’s retail market and is expected by research company A.T. Kearney to keep growing on account of urbanisation and new investments. It is also noted that retailers are fast expanding in tier-2 and 3 cities due to high real estate costs in major state capital cities.

Since November 2011, FDI is allowed up to 100% in retail trade in single-brand products in India. In 2013, the previous federal government permitted 51% foreign-ownership in multi-brand retail (MBR), but left implementation to individual states. The UK’s Tesco entered into a joint venture with Tata Group to operate MBR supermarkets. In February 2016, India’s Food Processing Minister proposed that 100% FDI be granted so as to benefit farmers and reduce inflation. Since May 2016, 100% FDI in online marketplaces with no more than 25% sales generated from one single vendor is allowed in India. Significant FDI has been drawn into Indian home-grown online marketplaces Flipkart and Snapdeal after the new rules were introduced.

Investment Policy

India's economic policies are designed to attract significant capital inflows on a sustained basis and encourage technology collaboration. Almost all sectors are open to FDI, except for atomic energy, lottery business, gambling and betting, and some forms of retail trading. The Modi government has relaxed FDI rules for various sectors, as in the table below.

Table: India’s FDI Rules by Industries
Table: India’s FDI Rules by Industries

More FDI information can be found at the website of the Department of Industrial Policy and Promotion (DIPP). On the other hand, DIPP has set up a joint venture with the Federation of Indian Chambers of Commerce and Industry (FICCI) and various state governments to promote inward FDI. Invest India is responsible for promoting and facilitating investments to India, acting as the first reference point for overseas investors to offer handholding services. Under India's foreign investment policy, two routes are available for foreign investors, depending upon the industry and the levels of investment contemplated:

1) Automatic Route

Foreign investment proposals under the automatic route will not be subject to any government approval, provided the requisite documents are filed with the Reserve Bank of India within 30 days of receipt of funds. Qualified sectoral investment includes hotels & tourism, and courier services, etc.

2) Government Route

All other proposals for foreign investment, which are not covered under the automatic approval route, are subject to government approval. For investment proposal below US$750 million, the proposal will be approved by the Foreign Investment Promotion Board (FIPB), while proposals above this amount will be approved by Cabinet Committee on Economic Affairs. More information can be found at the official website of FIPB

Foreign Investment

Modi launched the “Make in India” (MII) initiative in September 2014, with the aim of transforming India into the world’s manufacturing hub through actively courting foreign direct investment (FDI) in the manufacturing sector. As a partial assessment of the economic benefit due to the MII, India had recorded an FDI inflow of US$100 billion between October 2014 and June 2017, up 64% YOY. As of June 2017, India's cumulative inward FDI amounted to US$342 billion.

Mauritius was the largest FDI source for India as of June 2017, with a cumulative FDI of US$114.9 billion or 34% of total FDI stock, followed by Singapore (US$57.6 billion; 17% share) and Japan (US$26.1 billion; 8%). The services sector attracted the highest FDI, with a cumulative total of US$61.4 billion (18%), followed by computer software & hardware (US$26 billion, 8%) and construction (US$24.5 billion, 7%).

Inward FDI flow from the Chinese mainland and Hong Kong amounted to, respectively, US$329 million and US$400 million in the first 6 months of 2017. Cumulative FDI from the Chinese mainland and Hong Kong amounted to US$1.7 billion and US2.3 billion as of end-June 2017.

Table: Inward and Cumulative FDI from the Chinese mainland and Hong Kong
Table: Inward and Cumulative FDI from the Chinese mainland and Hong Kong

Bangladesh–China–India–Myanmar (BCIM) Economic Corridor

Under the Belt and Road (BnR) Initiative, China intends to set up economic corridors with many countries in the region, including the Bangladesh-China-India-Myanmar (BCIM) Economic Corridor, which was jointly proposed by China and India in 2013. This BCIM corridor is expected to help trade and investment of concerned countries, particularly enhancing trade with northeastern Indian provinces.

Trade Policy

India’s government has embarked on economic liberalisation since 1991 and continued to work towards a more open trade regime. There has been elimination of quantitative restrictions, simplification of import licence application and reduction of import tariffs. Since 1992, the government has loosened the licensing requirement for imports of capital goods. In March 2001, the government abolished the system of special import licences and the restricted list of imports, leaving only a small negative import list.

Free Trade Agreements

India has concluded several free trade agreements (FTAs) with countries and regions including Afghanistan, Bhutan, Ecuador, Singapore, Malaysia, Sri Lanka, Nepal, Korea, Chile, Japan, Africa, the ASEAN and the MERCOSUR (Brazil, Argentina, Uruguay and Paraguay). India also engages in the Agreement of South Asia Free Trade Area (SAFTA), and the Asia Pacific Trade Agreement (APTA). Currently, India is negotiating FTAs with Australia, Canada, Egypt, Indonesia, Israel, New Zealand, Thailand, the Gulf Cooperation Council (GCC) and the EU. India also participates in the negotiation of Regional Comprehensive Economic Partnership (RCEP).

India is a member of the BRICS Summit (with other members including Brazil, Russia, China and South Africa). The 9th BRICS Summit was held in Xiamen from 3-5 September, with China being the rotation chair in 2017, and this is the second time that China has hosted the Summit after the one in 2011.

Double Taxation Agreements

Hong Kong and India concluded an air services agreement in 1996. A comprehensive double taxation treaty between Hong Kong and India, however, is still under negotiation.

Hong Kong's Trade with India

India was the third largest export market for Hong Kong in the first seven months of 2017. Hong Kong’s total exports to India experienced strong growth of 40.2% YOY to US$11.9 billion during this period. Major export items included pearls, precious and semi-precious stones (US$5,474 million, 46% share, +50.2% YOY), telecom equipment & parts (US$3,361 million, 28.3% share, +12.9% YOY), silver & platinum (US$1,198 million, 10.1% share, +366.7% YOY), parts & accessories for office machines/computers (US$205 million, 1.7% share, +136% YOY) and computers (US$192 million, 1.6% share, -13.1% YOY).

On the other hand, India was Hong Kong's seventh largest source of imports in the first seven months of 2017. Hong Kong's imports from India expanded 23.3% YOY to US$8.4 billion for the period. Major import items included pearls, precious & semi-precious stones (US$5,168 million, 61.2% share, +14% YOY), jewellery (US$2,587 million, 30.6% share, +52.9% YOY),  petroleum oils (other than crude) (US$130 million, 1.5% share, +39.2% YOY), leather (US$111 million, 1.3% share, -15.6% YOY) and telecom equipment & parts (US$67 million, 0.8% share, +36.2% YOY).

Table: Hong Kong Trade with India
Table: Hong Kong Trade with India

India's Economic Involvement in Hong Kong

Many Indian companies have established offices in Hong Kong. As of June 2016, there were 12 Indian companies with regional headquarters in Hong Kong, 15 with regional offices, and 37 with local offices. The range of businesses includes trading, banking, IT and logistics.

Tourists from India to Hong Kong fell 20% YOY to 207,133 in the first half of 2017, accounting for 0.7% of total visitors to Hong Kong in that period.

More Information

More information on the Belt and Road countries’ economic and investment environment, tax and other subjects that are important in considering investment and doing business are available in The Belt and Road Initiative: Country Business Guides.

Content provided by Picture: Kenix Lee