Why US Businesses Should Consider Investing in India

India’s economic engagement with the United States is steadily growing. Both countries are democracies with diverse market profiles and have close business and trade ties. Bilateral cooperation between the two countries is broad-based and multi-sectoral – covering trade and investment, defense and security, education, science and technology, cybersecurity, high-technology, civil nuclear energy, space technology and applications, clean energy, environment, agriculture, and health. The US is one of India’s top foreign direct investment (FDI) contributors.

Yet, while bilateral trade and investment has expanded – particularly in the last five years – it has essentially shown incremental improvement. The India market should be an exciting prospect for US investors, and there are key sectors where business and trade could flourish, such as in automotive, electronic systems, information technology, business process management and outsourcing, chemicals, food processing, energy, pharmaceuticals, and healthcare etc.

Dustin Daugherty, Head of North America Business Development at Dezan Shira & Associates’ USA Offices notes: “As the world’s two largest democracies, the US and India share some important linkages. Despite these, and the several decades of investment in India by US businesses, the fruits of the relationship have often disappointed, or at least underperformed what one might expect given the synergies offered by each partner on paper. However, over the last few years – and especially since the onset of the US-China trade war and the increased shared concerns both the US and India have about a more assertive China – this dynamic has begun to change.”

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US businesses should note that India is liberalizing its investment regime, actively courting foreign capital, and is intent on building indigenous manufacturing capacity. This is reflected in the country’s latest Consolidated FDI Policy for 2020 – with restrictions targeting only specific, sensitive sectors and predominantly affecting India’s land-bordering neighbors. Moreover, in terms of trade in goods, India is also keen to scale down its market dependency on China.

Parallel to this, India is making it easier to do business in the country. The central government, followed by respective Indian states, have introduced consecutive reforms to simplify setting up in the country, acquiring land in special economic zones, streamlining labor laws, and lowering compliance thresholds. US investors should pay attention to these newly emerging opportunities and choose their investment locations wisely.

In the first article of this two-part series, we briefly look at India’s demographic and economic profile, US-India bilateral trade, and US FDI into India and India’s leading investment segments. This will be followed by a second article that will highlight sector-based investment opportunities in India, attractive locations to set up in the country, tax and other incentives, and what corporate structures and market entry options are available to US investors.

India’s demographic and economic profile: A snapshot

US-India trade relationship

India’s bilateral trade with the US grew from US$104 billion in 2014 to US$146.1 billion in 2019. Total US exports were US$58.6 billion, and imports amounted to US$84.7 billion.

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In terms of goods trade, India was the ninth largest trading partner to the US in 2019; two-way goods trade amounted to US$92 billion – goods exports totaled US$34.3 billion; goods imports totaled US$57.7 billion.

Meanwhile, trade in services with India totaled to about US$54.1 billion in 2019. Service exports amounted to US$24.3 billion and service imports were US$29.7 billion.

The US goods trade deficit with India was US$23.4 billion in 2019, showing an 11 percent increase (US$2.3 billion) over that in 2018. The US services trade deficit was estimated at US$5.4 billion in 2019, down 4.6 percent from 2018.

US-India export profile

India was the 12^th largest goods export market for the US in 2019 and 13^th largest agricultural export market.

US goods exports to India last year were US$34.3 billion, up 3.3 percent (US$1.1 billion) from 2018 and up 108.5 percent from 2009. US total exports of agricultural products to India totaled US$1.8 billion in 2019.

US exports to India accounted for two percent of overall US exports in 2019.

US service exports to India were estimated to be US$24.3 billion in 2019, growing 4.8 percent (US$1.1 billion) over 2018, and 144 percent greater than the exports in 2009. Leading US services exports to India were in the travel, intellectual property (computer software, and audio and visual related products), and transport sectors.

US-India import profile

India was the US’ 10^th largest supplier of goods imports in 2019. US goods imports from India totaled US$57.7 billion in 2019, up 6.3 percent (US$3.4 billion) since the year before, and up 172.6 percent from 2009.

Imports from India accounted for 2.3 percent of overall US imports in 2019. In terms of agricultural imports, India is the 14^th largest supplier to the US and the US imported a total of US$2.6 billion in agricultural products from India in 2019.

US service imports from India were an estimated US$29.7 billion in 2019, showing a three percent (US$864 million) increase over 2018, and 143 percent greater than imports in 2009. India’s service exports to the US were in the telecommunications, computer and information services, research and development, and travel sectors.

US-India FDI flows

Investment growth has been relatively slow paced – US FDI (stock) into India grew to US$45.9 billion in 2019, an increase of 8.1 percent from 2018. US direct investment in India is predominantly in professional, scientific, and technical services, manufacturing, and wholesale trade.

Meanwhile, India’s FDI in the US (stock) was US$5 billion in 2019, down 2.3 percent from 2018. India’s direct investment in the US is predominantly in professional, scientific, and technical services, manufacturing, and depository institutions.

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According to data sourced from the Office of the United States Trade Representative, sales of services in India by majority US-owned affiliates were US$32.1 billion in 2017, while sales of services in the US by majority India-owned companies were US$17.8 billion.

Prominent US investors in India include leading multinationals like Google (with operations set up in Delhi, Hyderabad, Mumbai, Bengaluru, and Gurgaon), Microsoft Corp (Hyderabad), Apple (Hyderabad), Ford Motor Company (Chennai and Sanand), ExxonMobil (Bengaluru, Mumbai, National Capital Region), General Electric, PepsiCo, JP Morgan, Johnson & Johnson, and Citigroup etc.

Recent investments by prominent multinational firms:

• Specialty chemicals provider, the Lubrizol Corporation, has just announced its plans to invest in transportation lubricants, water management systems, and health and hygiene segments in India.
• Microsoft India is in talks to set up a campus in Greater Noida that will facilitate 4,000 employees; a virtual agreement was reached in July this year.
• In October 2019, food and agriculture company Cargill committed to investing US$160 million in the next three years to fund new acquisitions, including acquiring brands and location and product-line expansion.
• In September 2019, Google announced plans to open an AI research lab in Bengaluru.
• Amazon, the online retail giant, invested INR 28 billion (US$378.28 million) into its India operations in 2019, especially to strengthen its Amazon Seller Services.
• Last year, PepsiCo promised to invest US$70 million in Uttar Pradesh to set up a food manufacturing plant and expand capacity to tap into India’s packaged foods market.
• In 2018, Intel invested in a new design house, called SRR4 (that will lead development across hardware and software), in Bengaluru worth INR 11 billion (US$148.61 million).

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