India - U.S. Economic Relations

1. Introduction
2. U.S. investments in India

-      Foreign Direct Investment

-      Portfolio Investment

3.     India’s investments in USA

4. Institutional Framework for India-US Economic Cooperation

                                  -       US-India Economic Dialogue

5. Prospect for further India-US Economic cooperation

Details of top investing companies of US

United States Fortune-500 investors in India

Contacts for economic issues at the Indian Missions in the US

1.     Introduction

India and the US have multi faceted relations ranging from political, strategic to economic and commercial.  India-US economic relations in the form of bilateral investments and trade constitute important elements in India-US bilateral relations particularly because India is now the second fastest growing economy in the world and USA is the world’s largest economy.
 

Economic Reforms introduced since 1991 have radically changed the course of the Indian economy and led to its gradual integration with the global economy. Benefits of the reform process are visible in the form of better growth rates, higher investment and trade flows and accelerated decline in income poverty.  The effects of these reforms on trade and investment relations with the United States have been profound.  USA is the largest investing country in India in terms of FDI approvals, actual inflows, and portfolio investment. US investments cover almost every sector in India, which is open for private participants.  India’s investments in USA are picking up. USA is also India’s largest trading partner.  By 2003, India became the 24th largest export destination for the US. In terms of exports to the US, India now ranks eighteenth largest country.  Since 2000, the two countries have been making efforts to strengthen institutional structure of bilateral economic relations by means of the “India-US Economic Dialogue” that aims at deepening the Indo-American partnership through regular dialogue and engagement.

2.     U.S. investments in India

Foreign Direct Investment

U.S. is one of the largest foreign direct investors in India.  The stock of actual FDI Inflow increased from U.S. $11.3 million in 1991 to US $4132.8 million as on August 2004 recording an increase at a compound rate of 57.5 percent per annum.  The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.

Share of US FDI in Total – Actual Inflow

*upto August 2004

Source: Data Compiled from SIA Newsletter, Department of Industrial Policy & Promotion, Govt. of India

Though there is a gap between the approval and actual inflow, the ratio of cumulative US FDI inflow to approval has accelerated in the recent years indicating that FDI approved in the past years are materializing now.

Top sectors attracting FDI from USA are: Fuels (Power & Oil Ref.) (35.93%), Telecommunications (radio paging, cellular mobile & basic telephone services (10.56%) Electrical Equipment (including Computer Software & Electronics) (9.50%), Food Processing Industries (Food products & marine products) (9.43%), and Service Sector (Fin. & Non-Fin. Services) (8.28%).

 
Portfolio Investment

In Portfolio Investment also, USA is the leading investor.  Currently, there are 234 US based FIIs and 169 US based sub-accounts registered with SEBI.  As of June 30, 2004, US based FIIs have made a net investment of nearly $ 10.2 billion out of a total of $25.3 billion as on that date in the Indian capital markets, which accounts for about 40.5 percent of the net investments made by the FIIs since 1993.

US companies in India are involved in a broad spectrum of economic activities. From infrastructure to consumer goods, and from information technology to consultancy services, American companies are represented in India as never before.

Year-Wise Foreign Institutional Investments 

* upto June 30, 2004

3.     India’s investments in USA

The policy for Indian direct investment abroad was initiated in 1992.  Streamlining of the procedures and substantial liberalization has been done since 1995.  As of now, Indian corporates/Registered partnership firms are allowed to invest in entities abroad upto 100% of their net worth and are permitted to make overseas investments in any bonafide business activity. The overall annual ceiling on overseas investment and also the requirement of prior approval of RBI for diversification of activity and for transfer by way of sales of shares have been done away with. The basic rationale for opening up the regime of Indian investments overseas has been the need to provide Indian industry access to new markets and technologies with a view to increasing their competitiveness globally and help the country’s export efforts. 

 Since 1996 and upto September 2004, the total approved Indian investment abroad amounts to US $ 11083.11 mln.. of which 60.9% has been the actual outflow.  US share ($ 2080.367 mln.) constitutes 18.77% of the total approval.  Since 1996, USA attracted highest Indian direct investments (US$ 2080.367 mn) followed by Russia (US$ 1751.39 mn), Mauritius  (US$ 948.864 mn) and Sudan (US$ 912.03 mn).  India’s outgoing investments has been largest in the field of manufacturing (54.8%) followed by non-financial services including software development (35.4%).

In the current financial year 2004-05(April- August, 2004) actual outflows from India on account of overseas investment was US$ 575.14 million as compared to US$ 384.49 million in the corresponding period of last year.  In the current year, USA attracted highest Indian direct investments (US$ 125.4 mn) followed by Australia  (US$ 116.33 mn), Kazakistan  (US$ 39.05 mn) and Hongkong (US$ 28.49 mn).  India’s outgoing investments was largest in the field of manufacturing at US$ 279.07 million followed by non-financial services (including software development) at US$ 75.27 million, Others at US$ 61.27 million and Trading Sector at US$ 30.3 million.  The returns on account of repatriation of dividend, royalty, consultancy fee etc. from overseas JV/WOS during April-August, 2004 amounted to US$ 40.87 million. 

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Several of India’s IT companies have offices in US.  In addition, Indian companies have also begun to make investments in other areas including in the manufacture of tractors (Mahindras), pharmaceuticals (Ranbaxy, Dr. Reddys, etc), laminated tubes (Essel Propack), Tea (Tata tea), etc.

 4.     Institutional Framework for India-US Economic Cooperation

 The institutional framework for bilateral economic relations has two streams. One is at government-to-government level and the other is at business-to-business level. Both these streams have regular interactions with each other to promote and strengthen the trade and economic interactions between the two countries.

US-India Economic Dialogue

During the visit of US President Clinton to India in March 2000, a joint statement on “US-India Relations: - A Vision for the 21st Century” was issued by then Prime Minister Vajpayee and President Clinton which pledged to deepen the Indo-American partnership through dialogue and engagement.  It also outlined an architecture of several high level consultations which would institutionalize this dialogue in a separate document  “Agreed Principles: Institutional dialogue between the United States and India”.   This architecture laid out the following framework for the bilateral economic dialogue.

In addition to the above, the Agreed Principles provided for (a) setting up of a Joint Consultative Group on Clean Energy and Environment; and (b) establishing US-India Science and Technology Forum, both of which were strictly not under the rubric of the Economic Dialogue.

Subsequently in 2001, in addition to the three fora under the Economic Dialogue, two additional fora were created to address environment and energy issues under the Economic Dialogue itself.   Besides, following meetings at the level of Prime Minister Vajpayee and President Bush in November 2002, efforts began to develop a “Statement of Principles” on High Technology trade including trade in “dual use” goods and technologies. On February 5, 2003 a “Statement of Principles for India-US High Technology Commerce” was signed in Washington DC.  The basic objectives of HTCG are : (a) to further the objectives specified in the “Statement of Principles” of November 2002  (b) to develop a schedule of meetings and activities for promotion of High Technology commerce (c) to take steps to remove systemic tariff and non-tariff barriers, (d) to identify and generate awareness of market opportunities recognizing the importance of private sector in this endeavour (e) to create appropriate environment for successful High Technology commerce in partnership with private sector and (f) to maintain regular information flow on the changes on respective export control laws, regulations and policies and establishment of mechanism for prompt discussion on any bilateral “dual use” export control issues.  

5.       Prospect for further India-US Economic cooperation

There are several areas where economic cooperation between India and the US can progress further. These include infrastructure, IT, Telecom sector, energy and other knowledge industries such as pharmaceuticals and biotechnology. 

Closer economic ties in infrastructure sector can yield mutual benefits to both the countries. The Government of India is continuously reviewing its policies to create an investor friendly environment in sectors such as roads, ports and airports. Private sector participation in management, BOT projects, green-field airports, terminals and shipping berths and capacity augmentation has been initiated.

The IT sector is India’s fastest growing sectors with over 50 percent average annual compounded growth since 1991. Today, nearly two in five of the Fortune 500 companies outsource their software requirements to India.  Abundant investment opportunities exist for further strengthening Indo-US economic ties in the IT sector, especially, in areas like communication infrastructure, optic fiber cable, gateways, satellite-based communication wireless, IT-enabled services, IT enable education, data centers and server farms, and software development.