India: A Growth Story - Sitesh Mukherjee May 2012.

India: A Growth Story - Sitesh Mukherjee

May 2012

India since liberalization

Earlier (in 1991) Now

Per capita GDP (PPP) US $ 915.6 US $ 3650

FDI US $ 0.13 billion US $ 44.8 billion (2010)

Market capitalization of listed companies

US $ 47.7 billion US $1,015.37 billion

Foreign exchange reserve US$ 0.8 billion US$ 291.8 billion

Per capita electricity consumption

295.02 kWh 778.91 kWh

Oil imports 1.19 million barrels/day 3.116 million barrels/day

(2010)

Tele-density (telephones per 100 individuals)

0.69 (in 1991)

12 (in 2006)78.66 (168 % in urban areas,

38 % in rural area)

Number of passenger cars 0.18 million 2.9 million (2010-2011)

Pre 1990sPost 1990s

• Post independence – command and control economy -- building large projects

• Steel, mining, telecom, insurance, and electrical plants, among others were effectively nationalized by mid-1950s

• Protectionism with strong emphasis on import substitution

• Hindu rate of growth at 3.6 per cent from 1950 -1980; and 5.6 per cent from 1980-1991

• ‘License Raj’ in core sectors

• Dominant public sector (state monopoly in infrastructure, electricity, telecom)

• High trade barriers

• New Industrial policy – dismantled licence raj

• Constant growth post liberalization (~6.5 % from 1991 to 1999; ~7.45% from 2000-11)

• Allowing entry of private sector (in electricity, infrastructure, etc.)

• Banking sector reforms (entry of private and foreign banks)

• Capital market reforms (SEBI, creating a more liquid market)

• Commencement of dis-investment in PSUs

• Trade liberalization -- tariff and customs duties reduction

• Reducing direct tax rates

• Economy opened up to foreign investment

Investment in India

4

FDI in India Phase 1 (1948-1969): FDI in protected industries (such a fertilisers and

machine tools)

Phase 2 (1969 – 1991): FERA1973 restricting equity to 40% and 74% for technology intensive; export intensive and core sectors

Phase 3 (1991 – 2000): FDI under automatic route (till specified limits) for specified high priority industries such as electrical equipment, pharma, chemicals. Onerous conditions for foreign JVs imposed (press note 18)

Phase 4 (2000 – date): All activities under automatic route except those in negative list (such as atomic energy, railway transport, lottery business) and those for which limits are specified such as defence (26% govt. route); telecom (74 %). FEMA 2000 replaced FERA

FEMA facilitates external trade and payments, vests the RBI and FIPB with the authority to permit FDI through approval route (for those other than under automatic route). Violation under FEMA were civil offences (unlike FERA)

FDI in India (contd.)

India is the 4th largest destination for FDI

Current largest Investors - Mauritius (38%), Singapore (10%), UK (9%), Japan (7%) and US (6%)

Highest inflow sectors: services, telecommunications, power, computer software and hardware and housing and real estate

More Recent Changes

Annual Consolidated FDI Policy

Single brand retail – 100% FDI permitted under Government route

FDI in LLP

Who can Invest? Foreign companies (most common entity structure)/ entities including

individuals and partnerships; Foreign Institutional Investors (FIIs) Foreign Venture Capital Investors (FVCIs) Qualified Foreign Investors (QFIs)

What can you invest in? Indian companies (most common) Partnerships and proprietorships – with prior approval

Permitted Instruments: Equity Shares Compulsorily Convertible Preference Shares (CCPs) Compulsorily Convertible Debentures (CCDs) Share Warrants and Partly Paid Shares - Permitted but with prior

Government (FIPB) approval

Who can invest into India?

7

Governed by RBI's ECB Guidelines

Eligible borrowers - companies registered under Companies Act, 1956

Recognised lenders - international banks, multilateral financial institutions and government owned development financial institutions, shareholders

ECB allowed only for permissible end use such as capital goods and infrastructure projects

Indian companies in infrastructure sector may raise ECBs in Renminibi, subject to annual cap of US$ 1 billion, with prior RBI approval

Maturity term - minimum of 3 years and 5 years for ECBs under US$ 20 million and more than US$ 20 million respectively

All-in-cost includes rate of interest, along with fee and expenses

Enhanced all-in-cost ceilings valid upto 30 September, 2012 350 basis points plus 6 month LIBOR for maturity between 3-5 years 500 basis points plus 6 month LIBOR for maturity term over 5 years

External Commercial Borrowings

8

Telecommunication

One of the fastest growing telecom market in the world

78.66% tele-density

Subscriber base of 951.34 million

FDI in 2011-2012 stood at USD 1,992 million

74 % FDI permitted in telecom services (up to 49% under automatic route)

100 % FDI permitted in telecommunication infrastructure

Circles opened up in 1994, heavily regulated and state monopoly previously

Telecom Regulatory Authority of India (set up in1997) to regulate telecom

services

TDSAT set up in 2000 to adjudicate disputes

National Telecommunication Policy 1999

Migration from fixed license fee to revenue sharing

Multiple fixed line providers permitted in each circle

Developments from 2000 onwards

Policy for additional licenses in basic and mobile services

Ceiling on Domestic and International leased line

Mobile number portability permitted

2G spectrum allocation (and cancellation of licenses by the Supreme Court)

Roll out of 3G and 4G spectrum

Draft National Telecom Policy-2012

Recognises Right to Broadband‘ as basic necessity; spectrum sharing; and to introduce

full mobile number portability

M&A norms relaxed to encourage consolidation

Telecommunication: Regulatory Reforms

Electricity 100 % FDI in electricity sector (except for nuclear generation)

49% FDI permitted in power exchanges

5th largest generation capacity - 201.63 GW (as on may 2012)

Demand to increase by 274% by 2012

Investment of more than $ 200 b required

Significant private participation in generation; Private participation in

transmission and distribution gradually increasing Electricity Act, 2003

Generation de-licensed

Transmission, distribution and trading are licensed

National Electricity Policy and National Tariff Policy

Regulatory Commissions at State and Central level established

Electricity (Contd.)

Conventional energy sources (coal, gas and hydro)

56.4% power reliant on coal based thermal power plants

Move towards competitive bidding

Key concern: coal shortage; gas unavailability

Non-conventional energy sources (solar, wind, bio-power)

MNRE forecasts a 763% growth in the next decade

National scheme for solar power (JNNSM); national scheme for bio-power being

considered; no central scheme for wind yet

Set up under negotiated route (feed-in tariff under state policies) or competitive bidding

Renewable energy certificates

Accelerated depreciation, single window clearance, customs and excise duty exemption

Electricity (Contd.)

Electricity Markets

Open access for consumers above 1 MW

Most electricity purchased under long term PPAs

Short term market being developed -- CERC Power Market Regulations, 2010 sought to promote and regulate inter-state electricity transactions in various contracts, including bilateral contracts and those transacted through traders and exchange

Renewable purchase obligations (RPOs) for discoms and CPPs -- RECs introduced in 2010 to help meet RPOs

Developments

FDI in the nuclear energy sector being contemplated

Off-shore wind energy being considered

Smart Grid Task Force set up in 2010 to co-ordinate smart grid activities in India

Oil & Gas

• 100 % FDI permitted

• Government's Hydrocarbon Vision 2025 – energy security through indigenous

production and investment abroad

• 80 percent of India's oil imported;

• Key players are government companies (ONGC, GAIL), but private presence increasing

• Title over hydrocarbons vests with the Government

Upstream sector – Exploration and Production

• Regulated by Directorate General of Hydrocarbon (under the Petroleum Ministry) -

independent regulator being considered

• Natural gas exploration through the New Exploration and Licensing Policy -- international

competitive bidding (10th round bidding likely in 2012)

Oil & Gas (Contd.)

Upstream sector – Exploration and Production (contd. )

• CBM exploration under the CBM policy though international competitive bidding (similar to

NELP)

• PSC (under NELP and CBM policy):

• Contract based on production sharing and not profit sharing

• Contractor recovers costs from annual production

• Key benefits for gas exploration:

• customs duty exemption;

• no payment of signature, discovery or production bonus;

• no minimum expenditure commitment during the exploration period

• Shale gas – policy for bidding expected in early 2013. Will be followed by first round of

bidding

Oil & Gas (Contd.)Midstream and downstream activities

• GAIL and ONGC own most of the transportation pipelines

• Govt. promoting CGD network on PPP based

• PNGRB regulates refining, processing, storage, transportation, distribution, marketing and

sale

• Open competitive bidding for laying transportation and distribution networks

• Open access to natural gas pipelines (regulations for petroleum pipelines in draft form);

exclusivity period for city gas distribution (open access thereafter)

• LNG imports and gas marketing under open general license

• 0% import duty on LNG imports under consideration

Roads, airports and sea ports

Huge scope for investments in roads, airports and seaports (construction

& modernisation)

100 % FDI permitted in for roads & highways; seaports and airports

Roads Airports Seaports

•100% FDI permitted

•2nd largest road network globally (4.2 million kms)

•NHAI – regulator

•National Highway Development Project-investment of US$ 50 billion to award concessions/contracts by 2012

•PPP models (BOT, Annuity, EPC)

•Viability gap funding scheme

•Jawaharlal Nehru National Urban Renewal Mission

•100% FDI permitted (for brownfield airports - 74% automatic, 26 approval)

•Projected need of 400 airports by 2020 (currently ~90 airports)

•Greenfield policy for new airports

•AERA – regulates tariff for aeronautical services by airports

•PPP projects – competitive bidding – 30+30 years period

•Govt has entered into concession and state support agreement

•100% FDI permitted

•12 major ports and 187 minor ports, 7,517 km long Indian coastline

•TAMP - regulates tariff ceiling for major ports

• Policy for Prevention of Monopoly at Major Ports

•Aimed at increasing capacity from 561 million tonnes (MT) in 2009-10 to 1,215 MT by 2019-20

•Draft Port Regulatory Authority Bill – replace TAMP; bring all ports within its purview; transparent tariff for all ports to enhance competition & efficiency

Anti-corruption trends in India

Rank 95 out of 183 on Transparency International's Corruption Perceptions Index

Prevention of Corruption Act 1988 prohibits: public officials from receiving "any gratification" for performing/ refraining

from any official act any person from receiving/giving "any gratification" for illegally influencing

a public officer to perform /refrain from any official act

Increased focus on anti-corruption activities in India in light of: 2G scam case – high ranking public officials, politicians and industrialists

arrested Commonwealth games Adarsh land scam case Illegal mining cases

Role of the Supreme Court and higher judiciary

Citizen's uprising against corruption -- Lokpal Bill

Lack of transparency

Resource constraints and allocation

Concentration of growth dividend

Populist economics and fiscal imprudence

Policy uncertainty

Inclusive development

Strengthening governance structures

Deficiencies and Challenges

"The present stage of development unfolds a design for tomorrow. The way ahead will not be easy. But the prospect is hopeful."

-- B.G. Verghese, 1964

Thank you

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