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As a fast-growing nation that also ranks as the world's largest democracy, India is an intriguing market for overseas businesses and investors. In recent years, the country — which has a population of more than a billion — has seen a surge in economic growth and now ranks as the world’s fifth-largest economy by GDP. Indeed, India’s GDP growth is the highest in the world in the past decade, regularly achieving annual growth rates of between 6-7%.
However, very real challenges remain for those seeking to do business in the country.
In order to successfully navigate these challenges, it's essential to plan strategically, perform due diligence, and exhibit patience and commitment to the process.
India’s economic growth has been exceptional in recent years. Buoyed by a robust democracy, key structural reforms, private consumption, and a rise in government investment, India has achieved a high macroeconomic stability ranking (with a score of 90 out of 100 and ranked 41 out of 141 economies) in the World Economic Forum’s (WEF) Global Competitiveness Index.
In a bid to attract foreign investment, the Indian government has eased foreign direct investment (FDI) restrictions, such as raising foreign equity caps for insurance and defense, leading to significant progress in terms of improving its overall business environment. As a result, the country has jumped 14 places to 63rd position on the World Bank's Doing Business 2020 study. New business reforms have also earned India a place among the world’s top ten improvers for the third consecutive year according to the same study.
Junaid Ahmad, World Bank Country Director in India, praised this achievement: “India’s impressive progression in the Doing Business rankings over the past few years is a tremendous achievement, especially for an economy that is as large and complex as India’s. Special focus given by the top leadership of the country, and the persistent efforts made to drive the business reforms agenda, not only at the central level but also at the state level, helped India make significant improvements.”
India has become a powerhouse in terms of technology innovation. High-tech companies in sectors such as telecommunications, information technology, pharmaceuticals, textiles, and engineering are equal in their sophistication and prominence to international counterparts. Indeed, India is now recognized as a major force in global technology innovation alongside the United States and China.
India has a large and healthy middle class, making it an attractive consumer market. Indeed, India is the world’s largest market for manufactured goods and services, and ranks number 3 out of 141 economies for market size according to the WEF’s Global Competitiveness Index.
That market is only anticipated to grow. The WEF estimates that India’s total consumption expenditure will grow to $5.7-6 trillion by 2030.
Though progress has been made, India still lags behind many larger nations in critical metrics such as starting a business, enforcing contracts and registering property. It can take 68 days to register a business at a cost of 7.4% of the property’s value, much longer and costlier than other OECD high-income economies. Should a commercial dispute arise, it can take a staggering 1,445 days for the issue to be resolved through a local court — three times higher than other countries.
India has, however, taken steps to make it easier to start a business by ending filing fees for the SPICe company information form, incorporation form, electronic memorandum of association, and articles of association.
Still, the number of steps required to start a business is quite cumbersome for most entrepreneurs. In the city of Mumbai, 10 steps are required — twice the number than the typical five-step average in high-income OECD nations. It also takes longer to complete the process, roughly double the OECD average (18 days in Mumbai versus 9.2 days for OECD countries).
Despite business reforms and other gestures from the Indian government that point to a free-trade ideology, there are indications of a rise in protectionist policies.
India’s tariffs and trade regulations were already non-transparent and often unpredictable, leaving many U.S. investors and exporters with limited access to the market. The country’s average applied tariff is the highest of any G20 country and among the highest bound tariff rates in the World Trade Organization (WTO). Those barriers to trade have not improved in recent years as the Indian government moves to protect domestic producers.
In fact, India has increased import tariffs to reduce the market for cheap goods from overseas and support small- and medium-sized manufacturers within its own borders. The country has also extricated itself from the world’s biggest regional trade deal, refuses to join the Regional Comprehensive Economic Partnership (RCEP), and the government plans to take measures to ban the import of any products that may be detrimental to domestic industries.
Finally, India has placed limits on foreign ownership of businesses and has stringent local presence requirements for would-be investors.
The sheer size and fragmented nature of the Indian market can also present a challenge for investors and businesses. Indian states are often compared to individual nations, given their size and diversity in language, culture, talent and infrastructure. This creates a considerable variance in business landscapes.
Additionally, regulations, rules, and policies can vary from state to state, as can subjective interpretations of prevailing laws. Cultural differences, too, must be understood and navigated. South India is wealthier and older, for example, while the northern part of the country is younger and poorer. North Indians prefer communicating in Hindi, while southern Indians use English or their respective state language for business transactions.
India is also a vast territory of 3,287,263 square kilometers and is vulnerable to natural disasters that can paralyze segments of the national economy.
Though progress has been made, India’s infrastructure of roads, railroads, airports, seaports, power grids, and telecommunications infrastructure present challenges to its growing economic status and ability to deliver public services. Massive population growth, growing urbanization, and rising incomes put pressure on the government to improve the country’s infrastructure. As such, the government is allocating significant portions of its budget to infrastructure projects.
It's important to understand intellectual property issues within India. Although local laws are thorough and generally compatible with EU and U.S. IP laws, there is some concern about enforcement of these laws.
Bureaucratic delays (IP enforcement cases can take years to wind through the courts) and a general lack of transparency are both areas of concern in terms of protecting sensitive intellectual assets.
The challenges of operating in a new country are often daunting. Regulations are constantly evolving and no business landscape remains static. Without a solid grasp of the issues at hand, businesses are exposed to tax penalties and even the prospect of civil or criminal litigation.
If you are considering entering the Indian market, it is critical to have an experienced partner with a global footprint. CT has a worldwide network of offices and partners who will make sure your local needs are met, accurately and on time. We’ll help to ensure you have the right support tailored to your global needs.
CT helps businesses and law firms expertly manage compliance issues. To learn more about how we can help you better manage your global compliance needs, contact a CT representative at (855) 444-5358 (toll-free U.S.).
1. Why should I consider doing business in India?
India is the fastest-growing trillion-dollar economy in the world and ranks as the fifth overall and offers many advantages for companies seeking expansion opportunities. A stable economy, business reforms designed to drive foreign investment, digital competitiveness, and a massive consumer market make India a lucrative business target for the fintech, services (IT, business outsourcing, software), telecom, and capital markets sector.
2. What challenges should I consider when expanding to India?
Although India is introducing reforms to improve its overall business environment, the country has recently implemented protectionist policies to bolster domestic industry. India also has the high tariffs and prohibitive policies that can make starting and forming a business costly and time-consuming.
3. What are the main legal entity types available in India?
The entity types to choose from include private limited company (must have a board of directors with at least two directors appointed), limited liability partnership (must have at least two partners/owners), and branch office (one director).
4. What is the local tax rate?
The tax rates in India vary by entity types. A private limited company or branch is taxed at 25%, while a limited liability partnership is taxed at 30%. Value-added tax (VAT) is 18%. India also has tax treaties with over 100+ countries for private limited companies and limited liability partnerships.
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