US slams India's 'restrictive' policies in foreign investment, trade

Criticises India's policy in retail trading; insurance, banking, telecom, digital sectors

The United States (US) has slammed India's trade policies for imposing various sorts of barriers, including registration requirements, product approval norms and restrictions on foreign ownership. 

A report on foreign trade barriers by the United States Trade Representative (USTR) came at a time when the country under President Donald Trump is itself facing severe flak for adopting a protectionist stance.

The report criticises restrictions imposed by India on retail trading — either single brand or multi-brand. 

It says India requires government approval for retailers selling a single brand of product if foreign ownership is above 49 per cent. Foreign investments exceeding 51 per cent are also contingent on, among other things, a requirement to source at least 30 per cent of the value of products sold from Indian sources, preferably from small and medium-sized enterprises. Although, The Department of Industrial Policy & Promotion's (DIPP) Press Note 12 issued in 2015 allows the government to relax the local sourcing requirement for “state of the art” or “cutting edge” technology, and where local sourcing is not possible.

India permits up to 51 per cent foreign ownership in companies in the multi-brand retail sector, but leaves to each Indian state the final decision on whether to authorise such foreign direct investment (FDI) in its territory. It, however, did not mention the ruling party's objection to foreign investment in multi-brand retail.

It says Indian states have periodically challenged the activity of direct selling (i.e., the marketing and selling of products to consumers away from fixed locations) as violations of the Prize Chits and Money Circulation Schemes (Banning) Act of 1978 (Prize Chits Act), creating uncertainty for companies operating in this sector. 

The report says though India "ostensibly" liberalised foreign investment regime in the insurance sector by raising a cap to 49 per cent from 26 per cent, the change was accompanied by a new requirement that all insurance companies be Indian “controlled.” 

Foreign investors, it says have expressed concern that the new requirements create a rigid structure that ignores operational realities and will dilute the rights of foreign investors in Indian insurance companies, making additional FDI in the sector unattractive. 

As norms relating to "control" are intended to be applied retroactively, these would apply to existing companies with foreign investment regardless of whether foreign investors plan to increase their equity, in addition to companies planning future investment, the report says. 

It says although India allows privately held banks to operate in the country, the banking system is dominated by state-owned banks, which account for approximately 72 per cent of total market share and 84 per cent of all Indian bank branches. Most of the other banks are Indian-owned, with foreign banks constituting less than one-half of one percent of the total bank branches in India. 

Under India’s branch authorization policy, foreign banks are required to submit their internal branch expansion plans on an annual basis, and their ability to expand is hindered by non-transparent limitations on branch office expansion.

Foreign banks also face restrictions on direct investment in Indian private banks. Unlike domestic banks, foreign banks are not authorised to own more than five percent of an Indian private bank without approval by the Reserve Bank of India (RBI). Total foreign ownership of any private bank from all sources (foreign direct investment, foreign institutional investors, and non-resident Indians) cannot exceed 74 per cent.

The report also flayed India's restrictive policies in relation to downlinking. It points out that the policy says international content providers that transmit programming into India using satellite must establish a registered office in India or designate a local agent. 

US companies have reported that this policy is overly burdensome. 

India also requires that foreign investors having a net worth of Rs 50 million (approximately $800,000), must have an additional Rs 25 million (approximately $400,000) of net worth in order to be allowed to downlink one content channel. 

It says there are also a number of limits on foreign ownership in the audiovisual and media sectors: cable networks (49 per cent); FM radio (26 per cent); headend in the sky (74 per cent); direct-to-home (DTH) broadcasting (74 per cent); teleports (74 per cent); news broadcasting (26 per cent); and newspapers (26 per cent).

The report says foreign accounting firms face obstacles to entering the Indian accounting services sector. Only accounting firms structured as partnerships under Indian law may supply financial auditing services, and only Indian licensed accountants may be equity partners in an Indian accounting firm. 

Also, foreign firms face hurdles in legal services.  At present, membership in the Bar Council of India (BCI), the governing body for the legal profession, is mandatory “to practice law” in India and is limited to Indian citizens. 

It also lambasts  India's policies on architecture. It says although Indian companies continue to demand high quality US design for new buildings and infrastructure development, foreign architecture firms find it difficult to do business in India due to the legal environment. 

An uncertain Indian legal regime for architectural and related services has resulted in court cases against foreign design firms seeking to work in India and harassment of their potential clients, causing significant losses for US companies, it says.

It similarly criticises India's policies in telecom, digitalisation, and equalisation levy which is an additional 6 per cent withholding tax on foreign online advertising platforms.

The other areas of restrictions criticised by the policy include registration requirements for new cosmetics, package and labelling requirements in food, restrictions on food derived from biotechnology crops, restrictions in dairy products,  government procurement policy, import policy and export subsidies. 

India remained on the Priority Watch List in the 2016 Special 301 Report by USTR because of “concerns regarding weak protection and enforcement of intellectual property rights (IPR)." 

While certain administrative decisions in 2016 upheld patent rights, and certain tools and remedies to support patent holders’ rights do exist in India, concerns remain over revocations and other challenges to patents, particularly patents for pharmaceutical products, says the report. 

The US also continues to monitor India’s application of its compulsory licensing law, it says.

The US trade deficit with India was $24.3 billion in 2016, a 4.2 per cent increase ($970 million) over 2015. US goods exports to India were $21.7 billion, up 1.1 per cent ($237 million) from the previous year. 

Corresponding US imports from India were $46.0 billion, up 2.7 per cent. India was US' 18th largest goods export market in 2016.

US exports of services to India were an estimated $18.1 billion in 2015 (latest data available) and US imports were $24.7 billion. Sales of services in India by majority US-owned affiliates were $22.7 billion in 2014 (latest data available), while sales of services in the US by majority India-owned firms were $13.4 billion.

US foreign direct investment (FDI) in India was $28.3 billion in 2015, a 4.4 per cent increase from 2014. US direct investment in India is led by professional, scientific, and technical services, manufacturing, and wholesale trade.