Indian Business Environment

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An analysis on the Indian business environment

An analysis on the Indian business environment


India, with its constant growth rate has great opportunities for foreign and domestic investment. It is the fourth largest economy in the world, the tenth most industrialized country and has a middle class of 300 million people and is currently the second fastest growing economy in the world. India have taken many important initiatives such as industrial liberalization, simplification of procedures investment, enactment of competition law, liberalization of trade policy, the total commitment to safeguard intellectual property rights, financial sector reforms, liberalization of regulations currency, and above all, a liberal, attractive, and favorable for investors.

India is one of the countries with more liberal policies for foreign direct investment (FDI) and to transfer of foreign technology. In most sectors are allowed up to 100% FDI under automatic route. The entry under the automatic route requires notification only after entry and prior authorization Government has always been taken to simplify procedures for obtaining the various licenses. Most policies and procedures governing FDI in India is also available on the Department website. This manual provides a brief description of the procedures and industrial policies and FDI, as well as means to facilitate investment in the country.

Theoretical background

India's inward investment regime went through a series of changes since economic reforms were ushered in two decades back. The expectation of the policy makers was that an “investor friendly” regime will help India establish itself as a preferred destination of foreign investors. These expectations remained largely unfulfilled despite the consistent attempts by the policy makers to increase the attractiveness of India by further changes in policies that included opening up of individual sectors, raising the hitherto existing caps on foreign holding and improving investment procedures. But after 2005-06, official statistics started reporting steep increases in FDI inflows (Berger, 2007).

In most countries, particularly those that have faced chronic current account deficits, obtaining stable long term FDI flows was preferred over volatile portfolio investments. This distinction between long term FDI and the volatile portfolio investments has now been removed in the accepted official definition of FDI. From an analytical point of view, the blurring of the lines between long term FDI and the volatile portfolio investments has meant that the essential characteristics of FDI, especially the positive spill-over's that the long term FDI was seen to result in, are being overlooked.

The net result is that while much of the FDI cannot enhance India's ability to earn foreign exchange through exports of goods and services and thus cover the current account gap on its own strength, large inflows of portfolio capital causes currency appreciation and erodes the competitiveness of domestic players. The falling share of manufacturing and even of IT and ITES means that there is less likelihood of FDI directly contributing to export earnings. India seems to have been caught in a trap wherein large inflows are regularly required in order to finance the current account ...
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