European companies are the main source of trade and FDI in India, and European companies make up approximately 50% of multinational companies here. Due to the increased purchasing power, global competitiveness and consumer market, India has become an attractive location for investments. This guide explains why the Indian market is appealing to European investors.
Key takeaways
- Europe is one of India’s largest trading partners, and in 2021, the EU attracted a total of USD 88 billion in FDI inflows.
- The manufacturing sector is one of the fastest-growing sectors in India, and it is aiming to become a manufacturing hub.
- FDI reforms in India have allowed for 74% FDI through the automatic route and 100% through the government route.
- India’s economy is expected to be the world’s third-largest by 2035.
India – EU trade
India and Europe have had strong commercial and trading ties, and the European Union (EU) is India’s third-largest trading partner. In the last two decades, the relationship between India and the EU has attracted a total of USD 88 billion in FDI inflows in 2021 or 10.8% of the total Indian trade. The EU is the second-largest destination for Indian exports after the USA.
The EU relaunched trade negotiations with India, and these negotiations aim to:
- Remove barriers and help EU firms export
- Open services and public procurement markets
- Ensure protection of geographical indications
- Ensure agreed rules are enforceable
There are currently approximately 6,000 European companies in India, and this has directly created 1.7 million jobs.
Working towards a sound, open, transparent, non-discriminatory, predictable regulatory and business environment and protecting investments and intellectual property is the key objective for EU companies when trading with India. The EU works with India through all possible channels to maintain fair market access and promote both the EU’s and India’s compliance with the multilateral obligations under the World Trade Organisation (WTO).
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Manufacturing sector
In 2010, China manufactured one-third of all the products on the plant, which made China the world’s largest economy after the United States. However, due to several events, companies have recently been shifting to India (Also see our guide to setting up a the manufacturing plant in India).
One reason companies chose to relocate is the global supply-chain disturbance caused by Covid-19. Several products have been wiped out from the market due to China’s recent lockdowns, and companies have not been able to meet the global demands. This caused some companies to reconsider their reliance on a single source for a wide range of goods.
The efficiency of the manufacturing sector in India is steadily shifting and is increasingly boosting production. Companies in India can take advantage of raw materials, industrial know-how and entrepreneurship and can also benefit from four market opportunities, which are contract manufacturing, localising imports, increasing internal demand and increasing exports.
The manufacturing sector is one of the highest growth sectors in India and aims to be a manufacturing hub through the Make in India program. The leading manufacturing industries in India include:
- Automobile
- Chemical
- Electronics
- Medical devices
- Textile
Policies to boost FDI from EU
The Indian government has implemented key FDI reforms, such as allowing foreign investors to take direct control of existing Indian businesses and allowing foreign investors to form new companies, also known as Greenfield FDI.
Greenfield investment allows foreign parent companies to build plants, infrastructure and machinery on a field or empty plot of land for its own use. Greenfield projects can receive 100% FDI through the government approval route and 74% through the automatic route, which does not require approval from the Reserve Bank of India (RBI) or the Indian government.
Sectors that are not under the automatic route and require government approval for FDI include:
- Broadcasting
- Civil aviation
- Defense
- Financial services not subject to regulation or subject to more than one regulator or public and private banking
- Mining
- Pharmaceuticals
- Print media
- Private security agencies
- Satellites
- Trading (food products and multi brands)
Sectors that are covered by the automatic route include:
- Agricultural activities
- Automobile manufacturing
- E-commerce activities
- Electronics manufacturing
- Industrial parks
- Power plants
- Real estate projects
- Steel plants
FDI allows investors to enter a new market, and greenfield investment can support multinational companies in meeting business goals, such as increasing profit, expanding market share and obtaining new resources and technology.
Other benefits of the Greenfield investment include:
- No restrictions on planning or execution
- Investors can choose their own location
- Increases business activities and job opportunities
- Offers low maintenance
- Long-term investments
Increasing global competitiveness
India’s economy is one of the world’s fastest-growing, and it is expected to be the world’s third largest by 2035, after China and the United States. As a result of India’s rapid economic growth, employment and business opportunities are expanding, making the country an attractive destination for foreign investors.
As the benefits of growth spread, an increasing number are moving up from the economically disadvantaged class to join the middle class. It is predicted that by 2025, India’s middle class will have grown from 80 million to 580 million people.
According to the World Bank’s Ease of Doing Business Ranking 2020, India jumped 79 positions from 142 in 2014 to 63 in 2019. India simplified the process of forming a company by eliminating filing fees for the SPICe company incorporation form, electronic memorandum of association and articles of association. India also made trading across borders simpler by enabling post-clearance audits, integrating trade stakeholders into a single electronic platform, upgrading port infrastructures and improving the electronic submission of documents.
Based on the IMD’s World Competitiveness Index, India raised five places from 42 in 2021 to 37 in 2022. Three of the four parameters improved:
- The economic performance increased from 37th (2021) to 28th (2022)
- The government efficiency improved from 46th (2021) to 45th (2022)
- The business efficiency improved from 32 in 2021 to 23 in 2022
Increasing purchasing power
The middle class now has more purchasing power due to digitalisation and an increase in income from many sources of employment. Additionally, the government’s regulatory framework is straightforward, which has facilitated the growth of numerous small companies among Indians.
With a share of 7% of the global GDP, India currently has the third-largest economy in the world by purchasing power parity (PPP).
How Acclime can help
India has increasingly become a destination that foreign investors choose for their investments. The Indian government also initiated reforms and policies to attract more foreign investment in the country.
If you find that India is suitable for your business or need more information on setting up a company in India, feel free to contact us.
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