An Introduction to Sourcing from India, Part 2: Exporting from India

December 2, 2014 Posted by India Briefing Reading Time: 5 minutes

In this second excerpt from an article in our latest India Briefing magazine, we take a close look at India’s export industry and discuss why the country is becoming an increasingly popular and efficient destination for companies to source from.

An Increasingly Prosperous Export Industry

Since 2006, the volume of India’s exports has more than tripled. This is largely due to the liberalization of numerous Indian trade laws and policies – a process that is still on-going under the new Modi administration – and a greater number of foreign firms have set up their sourcing or manufacturing operations in India. Here we break down India’s key export sectors:

ASEAN minimum wages

These products are accordingly far easier to source from India. The above graph can therefore be used to inform whether the Indian market is the correct one for a company’s particular sourcing operation.

Special Economic Zones

The government introduced India’s first Special Economic Zones (SEZs) in April 2000. Structured closely on the already successful model of China, they are designed to help stimulate both foreign and domestic investment, boost India’s exports, and create new employment opportunities. Notable zones include Nodia, Chennai, Cochin, and Falta, and the Indian government is now accepting proposals for additional, far smaller SEZs. As of August this year, almost 200 SEZs were in operation and a further 565 were formally approved for operation.

The advantages of setting up a sourcing platform within a SEZ are numerous and include:

• Duty free domestic procurement of goods;
• 100 percent income tax exemption on export income for the first five years and 50 percent for the five years following;
• Exemption from Minimum Alternate Tax, Central Sales Tax, Service
Tax, State Sales Tax, and a number of other taxes usually levied by local governments;
• External commercial borrowing allowed up to US$500 million per year without restriction;
• Permission to manufacture products directly, as long as the goods produced fall within a sector which allows 100 percent FDI.

The impact of India’s new SEZ policy has been massive. Since 2005, exports from the country have almost continually been increasing, as seen below:

ASEAN minimum wages

Conclusion

India’s world image and reputation has often hindered it from directly competing with China as a sourcing destination. Unlike China, whose ‘Open Door’ and investor friendly policies stretch back to the late 1970s, India’s economic reforms only began in the 1990s. Since then, the country has struggled to eliminate some of the problems that have hindered foreign investment; namely, some of its more complex trading regulations were not revamped, its infrastructure remained largely underdeveloped, and corruption went mostly unchallenged.

Modi’s BJP party has already taken steps to eliminate some of the issues companies have had about establishing a sourcing platform in India: money is being invested in the country’s poor infrastructure, allowing for the easier transportation of goods within India’s borders, and the government has raised the cap levels on numerous sectors for foreign direct investment (FDI), including a massive increase in its railway sector from 0 percent to 100 percent. Looking to the future, Modi has said that the government will be introducing new laws to further simplify the process for establishing a foreign presence in India.

India’s cost-effectiveness and policy reforms are what separate it from other sourcing destinations and the India of yesteryear. This has already begun impacting the future of the country’s existing foreign export industries. By 2020, back office service sourcing is estimated to more than double from its current US$23 billion to US$50 billion, and various western companies have announced their intention to increase the amount they source from India in the near future. Whilst it is still a developing sourcing destination, India now presents an exceptionally attractive global sourcing option.

This article is an excerpt from the November issue of India Briefing Magazine, titled “Establishing Your Sourcing Platform in India“. In this issue, we highlight the advantages India possesses as a sourcing option and explore the choices available to foreign companies seeking to create a sourcing presence here. In addition, we examine the relevant procurement, procedural and tax duty concerns involved in sourcing from India, and conclude by investigating the importance of supplier due diligence – a process that, if not conducted correctly, can often prove the undoing of a sourcing venture.”Establishing Your Sourcing Platform in India” is out now and available as a complimentary download in the Asia Briefing Bookstore through the month of November.

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