8 top sectors for foreign direct investment 1.

Automotive components
y India's automotive components industry is the most lucrative sector for foreign direct investments. Hundreds of collaborations foreign direct investments have been made in recent years and there is tremendous potential for more. Markets are huge and growing both within India and overseas. It presently incorporates a total investment of more than US$1.2 billion which is expected to rise to US$2.7 billion by the end of the year 2000. The market is worth US$2.3 billion at present and this is expected to touch US$9.4 billion in 2001. Automotive components manufactured in India are of top quality and used as original components for vehicles made by such top international companies as General Motors, Mercedes, IVECO and Daweoo among others. Automotive products made in India have a huge overseas markets in addition to the dometsic market. The number of vehicles manufactured in India is expected to rise from 3 million annually to 5 million by 2000. This will increase domestic demand for automotive components. Japanese and British component manufacturers are already operating jointventures in India. American companies which have, or are planning to, set up plants in India include Delphi (an automotive components division of General Motors USA), Delco Electronics, Textron and Magna International of Canada. The Automotive Components Manufacturers Association (ACMA) represents this sector in India.

2. Financial services (banking and non-banking)

Promising sub-sectors Capital markets Consumer financing Venture banking Mutual funds

Infrastructure financing

India has one of the most developed financial markets in the developing world. Tremendous scope exists for both banking and non-banking financial institutions

from other countries. The insurance sector, nationalisedsuinmce 1971, has been opened up according to an announcenebt made in November 1998. A legislation to to this effect is expected by early 1999. y Top companies from the United Kingdom and the United States among others are already active in India's financial markets. markets. Some of the big names are: Merrill Lynch, Oppenheimer, J.P. Morgan, Morgan Stanley, Grindlays, Standard Chartered, Hong Kong and Shanghai Banking Corporation among others. Foreign institutional investors (FIIs) have been allowed to invest in the stocks and securities markets with rights of full repatriation and withdrawal. Their presence has added a new dynamism to the market. India already has foreign exchange reserves of US$27 billion which is considered very comfortable, but the country needs to use foreign skills and networks to be able to manage the huge sums for its development needs. Local financial Institutions such as the Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India , Unit Trust of India and the Shipping Credit and Investment Corporation of India have raised billions through the most sophisticated financial instruments including Deep Discount Bonds. Indian firms are showing increasing liking for Global Depository Receipts (GDR) listed in London. American institutions are trying to promote American Depository Receipts (ADR) listed in New York. After much dithering, India has finally opened up the insurance sector to private and foreign investors.

3. Electric power plants

y The power sector is India's top infrastructure priority. Shortage of power has been cited as one main problem of the economy and it is realised that the future is bleak unless enough power is generated for industrial and consumer use. An estimated 70,000-80,000 MW of new capacity is required in the next 10-15 years. At least, US$30 billion is required required over the next 10 years from the private sector and foreign investors for the development of new power projects. Power generation companies are required to supply to state electricity boards (SEBs) who in turn will distribute the power. The government invites competitive bids for new power projects. Some 40 proposals for adding more than 20,000 MW have been obtained through competitive bidding.

A total of some 80 projects for about 38,000 MW of new power have been cleared in principle by the Government, which means that their promoters must file their detailed project reports with the Central Electricity Authority, and outline plans for funding, fuel supplies and power purchase agreements. Private power projects are based on a 16-18 per cent return on equity, so their costs are high. Since they have to sell their power to the financially weak state electricity boards, there were concerns about whether the foreign investors would get their money back. To allay these fears, the government provides guarantees to foreign investors in projects found viable. The World Bank has advised that the state electricity boards be restructured into smaller units. The bank has also recommended creation of smaller units for privatisation. This has been done in Greater Noida in north Indian state of Uttar Pradesh and the general mood is to do the same in parts of the country. These developments have made foreign investors confident of investing in India. A series of approvals are required for power projects. These include 'in principle' endorsement of a project followed by approvals of techno-feasibility reports, funding plans, clearance by environmental authorities, Foreign Investment Promotion Board etc. The first supplies of private power from new projects is likely to be available in the year 2,000.

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4. Coal washeries
y India's total coal reserves are estimated at about 196 billion tonnes (or metric tons). India's annual coal production is around 254 million tonnes per annum (TPA) and more than 85 percent of that is contributed by the seven divisions of state-owned Coal India Limited (CIL). Most of the non-coking coal produced in India has a high ash content (40-45 percent on average). This is why CIL proposes to have coal washeries near the pitheads before it is supplied to the large consumers such as thermal power plants all over India. CIL wants the private sector Indian and foreign companies to set up non-coking coal washeries, on "Build, Own and Operate" basis. CIL will provide land for the washeries near the pit-heads on long lease, but washed coal and washery rejects will remain its property with the private investors allowed to charge a coal beneficiation price. A total of 14 new washeries are to be given to the private sector and/or foreign companies.

5. Coal-bed methane exploration and recovery

y Coal-bed methane (CBM) is a clean burning fuel for domestic and industrial uses, and its extraction reduces explosion hazards in underground coal mines. India is endowed with huge reserves of bituminous coal of Paleozoic and Tertiary ages within the CBM window at depths of nearly 250-1200 metres. Lack of data on producible reserves of CBM, gas content, reservoir saturation and permeability has prevented full exploitation of the resource. India wants foreign and domestic private companies for the exploration and commercial exploitation of CBM resources at some of the underground coal mines. Contracts that will be awarded will be similar to the "concession" concept in oil and gas exploration. Coal-bearing areas will be leased to the successful bidders and they will have to explore and test-drill. If recovery and commercial exploitation of the CBM gas in these areas ultimately prove viable, the exploring firms will be free to construct pipelines and sell the gas to consumers or they may set up gas-based power plants.

6. Telecommunication equipment and services

y India has a mere 1.2 telephones for every 100 of its people. This is way below international standards and is not becoming of a country aspiring to be a major player in the global economy of the 21st century. This means that opportunities for investment in this sector are immense. Basic voice services is the biggest market. Installation of around 25 million direct exchange lines by the year 2001 will require an investment of US$ 22 billion. The cumulative investment up to the year 2001 to meet demand for cellular mobile and radio paging services is estimated at US$ 8 billion and US$ 1 billion respectively. Investment in other Value Added Services (VAS) up to 2001 are estimated at US$ 3.5 billion. The government cannot make investments of this magnitude because of resource limitations. The private sector and foreign companies are therefore welcomed into this sector, both as direct investors and exporters of equipment and technology. VSAT services, though privatised, have not taken off in India. Demand for electronic mail, video-conferencing is not strong enough to justify investment. Besides, licence fees to be paid to the Department of Telecommunications (DoT) are too high given the size of demand.

The telecom sector has witnessed the presence of many leading foreign companies including US companies: AT&T, Motorola, Nynex, US West, Hughes, Harris, Qualcomm, Sprint, Telstra, NTT, Singapore Telecom, Philippine Telecom, Bezeq, Siemens, Ericsson, Nokia, Fujitsu, Alcatel, and Bell Canada among others. The DoT retains its monopoly as of now as the main service provider short- and long-distance basic services. Private operators have to obtain licenses from DoT and work with it on a revenue sharing basis. It has been agreed in principle that private companies will be allowed to establish their own gateways in addition to using the gateways of DoT, VSNL or authorised public\government organisations. But this concept will be put into practice only after security-related issues are looked intoi by a committee that has already been set up. Potential investors should be aware that telecom privatisation has been hit with snags. Cellular phone operators have been taken by unpleasant surprises. Both the bidders and the government had then estimated an average air-time use of 250 minutes per subscriber per month. But the actual use, as at May 1998, was only 140 minutes. Each subscriber now spends an average of Rs.1,100 a month on an average, but the industry needs a per subscriber expenditure of Rs. 1,800 every month to make commercial sense. This situation is building pressure to extend the licenses to 15-year-periods as opposed to the current 10 years. The extension will bring in extra revenue which can help the private operators make some money for themselves and pass a part of it to the customer as well (given the intense competition among the private operators). One possibility is that India may follow the Chinese model of cellular phone services, which is to charge a high monthly rental but low air-time charge. This may reduce the number of subscribers but those who subscribe will have a higher spending power. At present, India charges a monthly rental of only US$4 (compared to US$30 in China) while the average air-time charge in India is 20 US cents (compared to only 5 cents in China). The case for increasing monthly rental is clear: The present monthly rental of US$4 (approx. Rs. 160) for cell-phones is less than the rental for pagers (which is Rs.250): this is clearly an anomalous situation which cannot last long. The profile of the cell-phone owner in India is therefore poised to change towards the better-off classes who can pay higher monthly rental and talk longer on cheaper air-time rates. This will drive out the lower middle classes from the cell-phone circuit, but middle-to-upper middle classes in India are huge enough to make commercial sense for the private operators. It can be expected that responsibility for resolving telecom issues will gradually devolve to the states. Customs duty on parts of telecommunications equipment and sub-assemblies thereof are on the decline and will be ultimately be totally eliminated in accordance with the telecom agreement of the World Trade Organisation. Provision of Internet services has been thrown open to domestic and foreign investors with effect from October 7, 1998.

7. Hospitality industry

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Economic liberalisation has given a new impetus to the hospitality industry. It costs an average of US$50-80 million to set up a five-star hotels with 300 rentable rooms in India. The gestation period is usually between three and four years. Movements in real estate prices have to be watched, though they have stabilised in the past three years or so. Non-five-star hotels are obviously cheaper and have have smaller gestation periods, but international chains are expected to go into the five-star category. The Indian hospitality industry is growing at a rate of 15 percent annually. The current gap between supply (61,000 rooms) and demand (90,000 rooms) is expected to widen further as the economy opens and grows. The government forecasts an additional requirement of 200,000 rooms by the turn of the century. A rapidly growing middle class, the advent of corporate incentive travel and the multinational companies into India has boosted prospects for tourism. India's easy visa rules, public freedoms and its many attractions as an ancient civilisation makes tourism development easier than in many other countries. Many foreign companies have already tied up with prominent Indian companies for setting up new hotels, motels and holiday resorts. The entry of McDonald's, Pepsico's Kentucky Fried Chicken, Domino's and Pizza Hut have given an international glitz to the hospitality sector. Several international chains including Sheraton, Holiday Inn, Intercontinental, Hyatt, Radisson, BestWestern, Days Inn, Hilton, Quality Inn, Ramada Inn, Meridien, Kempenski, Four Seasons Regent, Accor, and Marriott International are entering or expanding their hotel network in India.

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8. Food-processing
Promising sub-sectors Soft-drink bottling Confectionery manufacture Fishing, aquaculture, fish-processing Grain-milling and grain-based products Meat and poultry processing Alcoholic beverages Milk processing Tomato paste Snack food Fast-food Ready-to-eat breakfast cereals Ice-creams Food additives, flavours etc.

Food packaging Refrigerated food handling Supermarkets

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Foreign direct investment of around US$1 billion has already been approved in India's food processing industry since 1991. Changing lifestyles, breakdown of the joint-family system, increasing number of working wives and Western influence (via TV channels) in the urban areas are fuelling a demand for packaged foods. India already has all the requirements for a head-start in the food-processing industry. Basic materials such as foodgrains, pulses, vegetables and meats (nonbeef) can be sourced locally or easily imported if local availability is inadequate. Foreign investors can own 100 per cent equity in plants they set up. However, it is advisable to take a local partner. Many Indian firms are eagerly seeking foreign partners for joint-ventures to avail of their technological advantage. Supermarkets are just beginning to appear in India's big cities and this is the time for international chains to set a foothold. Competition will only increase with time. There has been some civilised resistance from ultra-nationalistic quarters of opinion to foreign food products. This resistance will be less if a local partner is involved. India's liberal intelligentsia is gradually building the opinion that foreign investments in the processed food sector will benefit rural agriculture, thus beating the nationalists with their own slogans. The liberal intelligentsia is gradually prevailing.

Table no. 3: Total FDI inflows in India Sr.No Financial Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Total FDI (Rs. Crore) 18,406 29,235 24,367 19,860 27,188 39,674 103,376 138,276 161,481 Total FDIInflows(US mill 4,029 6,130 5,035 4,322 6,051 8,961 22,826 34,362 35,168 % Growth over previous year +52 -18 -14 +40 +48 +146 +51 +2

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