June 2008 India – Country Presentation

June 2008

India – Country Presentation

by

Claudio Maffioletti, General ManagerTHE INDO-ITALIAN CHAMBER OF COMMERCE AND INDUSTRY

MACROECONOMIC DATA AND

INDO-ITALIAN TRADE RELATIONS

INDIAN ECONOMY: MACRO DATA2nd most populous country (1.2 billion)

Parliamentary democracy

10th most industrialized country

4th largest economy (PPP terms)

GDP: € 515 billion (2005-06)

GDP growth:

•+10% in 2006-07 (forecast)

•+ 8% in the last 4 years

Literacy rate: 65.4% (Mar06)

Forex reserves: € 124 billion (Nov06)

Inflation: + 5.2% (Dec06)

The Indian Growth

Average annual growth rates (1995 - 2005) GDP +6.5% Services +7.8% Industry +6.6% Agriculture +2.1%

An extraordinary sequence of figures: 46% of the population in the age group of 15-44 years.

500 million under 25 years of age.

Large English-speaking middle class.

Over 250 universities.

Over 13,000 higher educational institutions.

2.46 million graduates (300,000 engineers and 150,000 IT professionals) every year.

Demographic Data

Economic Climate

Openness to the market and to investment Infrastructure requirements - € 237 billion

Important liberal economic reforms

Policy of incentives for investment (SEZ – Special Economic Zones)

Huge consumer base

Cost leverage

Vibrant capital market

Close network of economic treaties and trade agreements

Major Indian Imports

Figures in million €

Source: DGCIS, Ministry of Commerce, Government of the Indian Republic

0

5

10

15

20

25

30

35

2005 - 2006 32.96 12.02 9.925 8.815 8.752

2004 - 2005 28.12 10.01 8.98 7.28 8.01

Petroleum and petroleum

Non-electrical machinery

Electronics Gold and SilverPearls-Precious-

Semiprecious

+ 32%

+ 44%

+ 24% + 10% + 9%

Major Indian Exports

0

2

4

6

8

10

12

14

16

18

2005 - 2006 16.15 13.42 12.99 10.81 7.66

2004 - 2005 12.32 10.01 8.98 7.28 8.01

Machinery and instrumental

Diamonds and jewellery

Chemicals and related products

TextilesPetroleum Products

+ 32%+ 19%

+ 18%+ 5.5%

- 4.5%

Figures in million €

Source: DGCIS, Ministry of Commerce, Government of the Indian Republic

Major Italian Exports to India

0.00

100.00

200.00

300.00

400.00

500.00

600.00

Series1 544.10 151.20 106.05 91.49 45.84 43.86 34.24 21.52

Series2 414.09 92.25 78.60 86.54 31.43 34.56 28.84 17.67

Power generation equipment

Electrical products

Iron, steel and by-products

Organic chemicals

Electromedical & optical devices

Plastics Raw hidesVehicles and accessories

+ 31.5%

+ 64%

+ 35% + 6%+ 46%

+ 27%+ 19% + 22%

Figures in million €

Source: DGCIS, Ministry of Commerce, Government of the Indian Republic

Principali prodotti indiani esportati in Italia

0

100

200

300

400

500

2005-06 383.41 198.82 161.43 156.37 126.91

2004-05 291.14 153.44 140.01 292.03 87.61

Clothes and accessories

Vehicles and accessories

Cotton Iron and steelOrganic

chemicals

+ 24%

+ 30% + 15%

- 46%

+ 45%

Figures in million €

Source: DGCIS, Ministry of Commerce, Government of the Indian Republic

Italian Companies in India

More than 100 Italian companies have subsidiaries, joint ventures or a presence in India.

Eight Italian banks are present in India with representative offices handling:

●Correspondent banking and trade finance

●Assistance to Italian companies

Italy ranks 11th for Foreign Direct Investments (FDI) in India accounting for only 1.42% of the total investments.

Trade with Italy accounts for only 3% of India’s international trade.

20% increase in trade between the two countries in 2006.

Challenges 1

Red tape: slows down the liberalization process (India ranks 88th in “Starting a business”, below Russia and above China and Brazil).

Poor infrastructure: airports, power, ports and roads are inadequate and constitute limits to development.

Restrictive labor laws.

Considerable social inequalities.

Uneven geographical development.

Sources: NASCOM, Economist, World Bank – Doing Business 2007; Tata Statistical Outline of India 2005-2006

Challenges 2

Complexity of legal processes: India ranks 33rd in “Protecting investors”, whereas the other BRIC economies are ranked 60th (Brazil), 60th (Russia) and 83rd (China) respectively.

Strong political opposition to privatization is providing a platform for cautious and systematic reforms.

Complex and bureaucratic tax system.

Poverty still high: 19.3% of the Indian population lives below the poverty line.

Sources: NASCOM, Economist, World Bank – Doing Business 2007; Tata Statistical Outline of India 2005-2006

Entry Strategy: Consumer Goods

Products

Importer/ Distributor AgentOwn manufacturing

facility

Retailer / Sub-distributor Retailer / Sub-distributor

Region-wise distributor

Retail outlet

Entry strategy: Industrial Goods

Products

New facility

Importer/Distributor

Ownership of the facility

Agent

Existing facility

Regional distributors

Industrial customer

Business Presence in India

The possible options are:

Liaison or representative office

Branch office

Subsidiary or Joint Venture

Liaison / Representative Office

Carries out promotional activities without performing any trade transaction as the principal party. Cannot earn income in India or carry out any income-earning activity.

Does not pay income tax.

Is legally a part of its parent company.

Branch Office

Can carry out most activities except manufacturing and processing.Can therefore carry out trading activities and earn a profit.

Has to pay income tax on the profit earned as a foreign enterprise.

Foreign enterprises are subject to higher tax rates on their net profit as compared to Indian companies.

Foreign enterprises are not entitled to the tax concessions available to Indian companies – including foreign subsidiaries.

Subsidiary - Joint Venture

Has limited liability.

Is regarded as an Indian company for all regulatory purposes.

Can do whatever an Indian company can.

Pays tax at rates 10% lower than those applicable to foreign enterprises.

Is legally independent of the holding company:

the holding company, therefore, is not liable for the liabilities of the subsidiary

Extent of Holding

In many sectors, a foreign company can hold up to 100% of the share capital of an Indian company.

For some sectors the current regulations provide limits:

● 74% in Banking

● 74% in Telecommunications

● 26% in Defense Production

Production and Marketing 1

A foreign company looking to set up a manufacturing firm can set up a wholly owned subsidiary.

Generally the Automatic Route will apply.

For a foreign company looking to perform a trading operation, FDI is not freely permitted.

Production and Marketing 2

The key elements of the current policy are:

Up to 51% foreign holding is permitted in single-brand retail outlets. This policy is likely to be further liberalized in the future.

For multi-brand outlets foreign holding cannot exceed 49%.

Up to 100% investment under the automatic route is permitted for:

● export-oriented trade

● wholesale/cash-and-carry trade

Royalty, Trademarks and Brands

Royaltyup to € 1.5 million on a lump-sum basis8% on overseas sales5% on domestic sales

The limit applies to the net-of-tax amounts and the percentage to the value (the import component in the product price is not considered)

Trademarks and Brandsup to 2% on overseas sales 1% on domestic sales

Company Structure

Minimum authorized capital requiredINR 100,000 (approx. € 1.750) for a private limited company INR 500,000 (approx. € 8.750) for a public limited company

Minimum number of directors and shareholders

2 shareholders and 2 directors for a private limited company.

7 shareholders and 3 directors for a public limited company.

Repatriability

100% of the Profit or the Capital is repatriable

Taxes 1

Corporate tax

Tax for a company is 33.99%

Tax for a foreign company is 43%

The rate for SME’s (taxable profit less than INR 10.0 million) is 30.90%.

Excise (residual rate 16.0%).

Service tax (prime rate 12.36%).

Benefits

Profits of STPI units (for IT/ITeS companies) presently enjoy tax concessions.

Profits of SEZ units are tax-exempt.

Services exports are exempt from service tax (subject to prescribed conditions).

Exports are exempt from excise, octroi and VAT.

Units set up in backward areas enjoy some income tax and VAT concessions (In these cases, however, the infrastructural limitations present in such areas must be seriously considered).

Suggestions 1

Timing is relative…sooner or later India will be a world power

Time to obtain an internet connection

1 week

Time to have a fully established liaison office

2 months

Meetings take place according to “IST”

Indian Standard Time

Suggestions 2

Be always on the alert, but never too rigid

It is important to explain exactly what you want.

Devote a lot of time to the details during the starting stage.

Maintain your patience, even if a certain degree of pressure is necessary.

Check the progress of the operations at least on a weekly basis.

Constantly discuss the operating procedures.

Insist that the service or the delivery comply with the initially fixed conditions.

Suggestions 3

Your network matters: you need to have strong Indian partners

Without local knowledge and help you can get lost quickly.

To avoid red tape, find a partner who knows the ins and outs.

Professionalism is required in personal relations, although a certain degree of informality is appreciated.

Do not rely only on one partner. Build a network with several players.

Spend most of your time in building long-lasting relationships.

So…is it worthwhile to invest in India?

If one considers that…

Average GDP growth from 1995: + 6.5%

Growth forecast for the next 10 years: + 5.9%

An economy based on fast-growing domestic consumption

Very wide gap between demand (high) and supply (low)

Many similarities (economic, political, geographic and cultural)

…there can only be one answer!

THANK YOU

Claudio MaffiolettiGeneral Manager