Planning Your 2021 Budget: Opportunities in India

Posted by Written by Melissa Cyrill Reading Time: 13 minutes
  • Multinational firms planning their 2021 investment budgets should consider India with its potential for long-term growth.
  • A strong government, competitive labor costs, incentive schemes to push for investment in key sectors, and improving infrastructure make the country an ideal choice for foreign investors.
  • India is also emerging as an ideal alternative manufacturing destination to China for global businesses, given the comparatively lower production costs.

As businesses prepare their 2021 investment budgets, India will appeal to foreign investors looking at Asia. The country’s low-cost business environment, market size, free trade agreements, proximity to key emerging African markets, the Middle East, ASEAN countries, and the East Asian economies of China, Japan, and South Korea, are among some of the leading reasons why.

In fact, India witnessed a 16 percent year-on-year rise in foreign direct investment (FDI) to US$27.1 billion during April-August this year despite the COVID-19 pandemic. Over the same period in 2019, India had received FDI worth US$23.35 billion. Total FDI inflow to India has grown by 55 percent from US$231.37 billion in 2008-14 to US$358.29 billion in 2014-20.

Moreover, to tide over the economic fall out of the pandemic and meet its growth objectives, India is offering incentives in key sectors and preferential treatment in key economic zones in some states. In October, India released its Consolidated FDI Policy, 2020, in effect from October 15, 2020, which sees investment liberalization in several sectors, except those regarded as sensitive due to their critical value or impact on national security.

The competition for businesses looking to complement their China operations by relocating to lower cost destinations is fierce – and India is actively pitching some of its unique advantages, including market size, infrastructure and land availability, and labor pool.

WEBINAR – Understanding India’s Manufacturing Sector – Market Entry, COVID-19 Updates, and Investment Opportunities (December 15, 2020)

Join us in this webinar as we discuss the impact of COVID-19 on India’s manufacturing sector, incentives offered by the government for manufacturers, and the post-COVID-19 manufacturing scenario in India.


India’s business environment

Competitive labor costs

India offers the most competitive labor costs in Asia, with the national-level minimum wage at around INR 176 (US$2.80) per day, which works out to INR 4,576 (US$62) per month. This is a national floor-level wage – and will vary depending on geographical areas and other criteria. More broadly, a global ranking of average wages recently prepared by showed that India had an average monthly wage of INR 32,800 (US$437). Further, some state governments, like Andhra Pradesh, offer tax breaks for companies generating local employment.

It must be noted that India’s minimum wage and salary structure differs based on the following factors: state, area within the state based on development level (zone), industry, occupation, and skill-level. This offers foreign investors a range of options when choosing where to locate their set up.

India uses a complex method of setting minimum wages that defines nearly 2,000 different types of jobs for unskilled workers and over 400 categories of employment, with a minimum daily wage for each type of job. The monthly minimum wage calculation includes the variable dearness allowance (VDA) component, which accounts for inflationary trends, that is, the increase or decrease in the Consumer Price Index (CPI), and where applicable, the house rent allowance (HRA).

Below we share minimum wage rates across Delhi, Maharashtra, and Gujarat – to illustrate how they vary across India.

Delhi-minimum-wageGujarat minimum wageMaharashtra minimum wage

Corporate income tax incentive

Last year, the Indian government slashed corporate tax rates for domestic companies (companies incorporated in India) and new domestic manufacturing companies to promote growth and investment.

Domestic companies can choose to pay income tax at the rate of 22 percent subject to condition that they will not avail any exemption/incentive. The effective tax rate for these companies shall be 25.17 percent inclusive of surcharge and cess. Also, such companies shall not be required to pay minimum alternate tax (MAT). MAT is the minimum amount of tax that a company is obliged to pay in case its normal tax liability after claiming deductions falls below a certain threshold.

Any new domestic company incorporated on or after October 1, 2019 and making fresh investment in manufacturing, can opt to pay income tax at the rate of 15 percent. This benefit is available to companies that do not avail any exemption/incentive and commence their production on or before March 31, 2023. The effective tax rate for these companies shall be 17.01 percent inclusive of surcharge and cess. Also, such companies shall not be required to pay MAT.

A company that does not opt for the concessional tax regime and avails the usual tax exemptions/incentives shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period. However, once the company chooses the new tax rate – they cannot subsequently opt out.

Personal income tax incentive

As per India’s income tax laws, the income tax rate on resident individuals varies based on their age. Also, the tax slabs applicable to individuals may change over different financial years if changes to the tax regime are introduced through the union budget.

For example, India’s taxpayers were given the option to transition to a new tax regime from FY2020-21 onward.

As per this new tax regime, the following income tax rates would apply to respective income tax slabs:

  • Nil – income up to INR 250,000 (US$3,351.77)
  • Five percent (tax rebate of INR 12,500 (US$167.59) available under Section 87A of Income Tax Act, 1961) – income between INR 250,000 (US$3,351.77) and INR 500,000 (US$6,703.53)
  • 10 percent – income between INR 500,000 (US$6,703.53) and INR 750,000 (US$10,055.30)
  • 15 percent – income between INR 750,000 (US$10,055.30) and INR 1 million (US$13,407.07)
  • 20 percent – income between INR 1 million (US$13,407.07) and INR 1.25 million (US$16,758.84)
  • 25 percent – income between INR 1.25 million (US$16,758.84) and INR 1.5 million (US$20,110.60)
  • 30 percent – income of INR 1.5 million (US$20,110.60) and above

(US$1=INR 74.59)

Production-linked incentives

India has extended the production-linked incentive (PLI) scheme to 10 sectors, besides the existing beneficiaries – mobile phones and specified electronic components; critical key starting materials and APIs in the pharmaceutical industry; and medical devices.

Beneficiaries of the PLI scheme will receive a financial subsidy payment, whose scope is determined by the disadvantages or disability faced by the respective sector.

The PLI schemes want to make manufacturing in India globally competitive, create economies of scale, promote export-oriented manufacturing, expand investment in core manufacturing and cutting-edge technology, and make India part of the global supply chain.

Key economic regions

Every state in India has a unique economic profile that presents challenges and opportunities to any foreign investor examining the country for expansion.

Within these states are special economic zones (SEZs) that offer incentives to resident businesses. SEZs typically offer competitive infrastructure, duty free exports, tax incentives, and other measures designed to make it easier to conduct business. SEZs in India are a popular investment destination for many multinationals, particularly exporters. (See here for the state-wise and sector-based distribution of SEZs in India.)

In the map below, we provide a bird’s eye view of the economic features of the country’s top investment destinations and their major industries/sectors: 

Free trade agreements

India has 42 trade agreements (including preferential agreements) that are either in effect or signed or under negotiation or proposed. Out of this, 13 agreements are in effect, one is signed but not yet implemented, 16 are under negotiation, and 12 are at the proposal/under consultation/study stage. Most of India’s existing FTAs are with Asian countries that are quite different from each other in terms of their respective levels of economic development and market diversification.

The major free trade agreements (FTAs) that India has so far signed and implemented include the South Asia Free Trade Agreement (SAFTA), India-ASEAN Comprehensive Economic Cooperation Agreement (CECA), Asia Pacific Trade Agreement (APTA), India-Korea Comprehensive Economic Partnership Agreement (CEPA), and India-Japan CEPA.

While India refused to join the Regional Comprehensive Economic Partnership (RCEP) trade agreement due to grievances over fair market access, the RCEP members have left the door open for New Delhi to join later. RCEP includes the 10 ASEAN states and Japan, China, South Korea, Australia, and New Zealand; it will cover 30 percent of the global GDP and trade.

Below we briefly highlight India’s key trade agreements:

ASEAN-India Free Trade Area

The ASEAN-India Free Trade Area (AIFTA) was signed in 2009, resulting in one of the world’s largest FTAs. The agreement has seen tariffs eliminated for 90 percent of products traded between the two regions, including for products like palm oil, pepper, tea, and coffee.

Asia Pacific Trade Agreement

The Asia Pacific Trade Agreement (APTA), also known as the Bangkok Agreement, came into effect in 1976. Members of the agreement include Bangladesh, India, Lao, China, Mongolia, South Korea, and Sri Lanka.

APTA’s key objective is to hasten economic development among the participating countries opting trade and investment liberalization measures that will contribute to intra-regional trade and economic strengthening through the coverage of merchandise goods and services.

India-Japan Comprehensive Economic Partnership Agreement

The India-Japan Comprehensive Economic Partnership Agreement (CEPA) was implemented in 2011, and is considered one of the most comprehensive trade agreements India has entered into with any country.

The agreement removes duties on almost 90 percent products traded between the two countries. Sectors that have benefited from the lower duties include textiles, pharmaceuticals, agricultural products, tea, petrochemical and chemical products, cement, and jewelry.

India-Republic of Korea Comprehensive Economic Partnership Agreement

The comprehensive trade agreement between India and Republic of Korea (South Korea) came into effect in 2010. South Korea reduced tariff on 17 Indian products, while India reduced import tariffs on 11 items.

The agreement also eases restrictions on foreign direct investments for both the countries, and will provide better access for the Indian service industry such as IT, engineering, and finance in South Korea.

India-Singapore Comprehensive Economic Partnership Agreement

The trade agreement between India and Singapore was first signed in 2005, and the second review of the agreement was signed in 2018.

The two countries have reduced or eliminate tariffs on several items. The trade agreement also eliminates tariff barriers, double taxation, duplicate processes and regulations, and provide unhindered access and collaboration between the financial institutions of Singapore and India.

South Asian Free Trade Area

South Asian Free Trade Area (SAFTA) came into effect in 2006 with a purpose to reduce custom duties of all traded goods to zero. The member countries include Afghanistan, Bangladesh, Bhutan, India, Nepal, Sri Lanka, Pakistan, and Maldives.

SAFTA reduced tariff rates to 20 percent in the first phase by 2007, followed by zero in the second phase on annual basis till 2012, in case of India, Pakistan, and Sri Lanka. The rest of the members were given three years to reduce their tariffs to zero.

What sectors show the greatest potential for foreign investors?

Electric components manufacturing industry

The Indian electronic components market is set to grow exponentially – facilitated by its low-cost manufacturing base, huge local demand, and a rapidly developing electronics ecosystem. Domestic electronics production in the country increased from US$11 billion in FY 2009-10 to US$20.8 billion in FY 2018-19, with a year-on-year growth of seven percent (excluding the assembly of imported printed circuit boards).

In recent years, the Make in India and Digital India initiatives have unveiled various schemes targeting this industry and propelling its market growth. For example, out of the domestic electronic components worth US$9.9 billion produced in 2018-19, components worth US$2.2 billion were exported.

Overall, the electronic components manufacturing industry provides employment to over 2 million people, out of which mobile phone manufacturing accounts for 600,000 jobs.

Below, we briefly explain three incentive schemes introduced by the government to boost local manufacturing, advance and expand India’s electronics ecosystem, and support export-led production.

Scheme I: Production linked incentive scheme (PLI) for large scale electronics manufacturing

This scheme offers a financial incentive to increase domestic production and boost large investments for electronics, including mobile phones, electronic components, and assembly, testing, marking, and packaging (ATMP) units.

The tenure of the scheme is five years after the base year as defined (FY 2019-20). It provides an incentive of four to six percent on incremental sales (over base year) of goods manufactured in India. The target segments are mobile phones and specified electric components and eligibility will be subject to thresholds of incremental investment and incremental sales of manufactured goods.

Scheme II: Promotion of manufacturing of electronic components and semiconductors (SPECS)

This scheme aims to strengthen the domestic electronics supply chain of components.

The scheme will open for applications for three years. Investments made within five years from the date of acknowledgement are eligible for receiving incentives. An incentive of 25 percent will be provided on capital expenditure pertaining to plant, machinery, equipment, and associated utilities and technology, including research & development, on reimbursement basis. The scheme’s target beneficiaries are electronic components, semiconductors, specialized sub-assemblies, and capital goods for these items. Eligibility is applicable to investments in new units and expansion of existing units.

Scheme III: Modified electronics manufacturing clusters scheme (EMC 2.0)

This scheme aims to strengthen the existing infrastructure for the electronics industry and establish facilities for large manufacturers and value chain companies.

Its objectives include the development of industry-specific facilities like common facility centers, ready built factory, sheds/plug and play facilities to strengthen supply chain responsiveness and promote the consolidation of suppliers. These developments will also decrease the time-to-market and lower logistics costs. EMC 2.0, therefore, provides financial incentives for creating quality infrastructure as well as common facilities and amenities for electronics manufacturers.

The scheme will be open for applications for three years. A further period of five years will be available for disbursement of funds. Financial incentives of up to 50 percent of project cost will be awarded, subject to a ceiling of INR 700 million (US$9.36 million) for every 100 acres of land.


  • Requirement of anchor units
  • Purchase/lease at least 20 percent of the land area
  • A minimum investment commitment of INR 3 billion (US$40.25 million)
  • Expansion related projects
  • Minimum land area of 100 acres
  • 80 percent of saleable/leasable land should be allotted to EDSM units
  • At least 50 percent of land allotted should have started production activity
  • Common facility centers (CFC)
  • 75 percent of the project cost will be awarded, subject to a ceiling of INR 750 million (US$10.05 million)
  • Five electronics manufacturing units identified as users

Medical devices manufacturing sector

India is currently the fourth largest market of medical devices in Asia. There is a heavy reliance on imports but recently exports have seen a surge and India now wants to establish itself as a global manufacturing hub of medical devices.

To achieve this, the below schemes have been designed to incentivize and build large-scale manufacturing capacity.

Scheme I: Production linked incentive scheme for promoting domestic manufacturing of medical devices

Large investments are needed to be able to produce medical devices needed for the purposes of radiology, imaging, implants, anesthetic devices, and cancer care services.

The tenure of this scheme is from FY 2020-21 to 2026-27. It offers an incentive of five percent on incremental sales (over base year FY 2019-20) of goods manufactured in India. There is a broad range of target segments, including capital equipment, implants, and consumables. Eligibility of the beneficiaries is subject to meeting the incremental investment and incremental sales threshold.

Other eligibility criteria include:

  • Support to be provided to companies registered and manufacturing of target segments in India and having net worth (of applicant company including that of group companies) greater than INR 180 million (US$24.12 million)
  • Scheme exclusive to greenfield projects defined under the guideline
  • Applicant should not have been declared as bankrupt or defaulter or reported as fraud by any financial institution
  • Eligibility under the PLI scheme will not affect eligibility under any other scheme and vice-versa

Scheme II: Promotion of medical device parks

The scheme aims to strengthen and develop a robust domestic infrastructure and ecosystem for medical devices. Grants under this scheme seek to achieve the creation of world-class infrastructure facilities for domestic production and deepening the value chain of medical devices. This is also expected to lower the cost of domestic manufacturing and, ultimately, better accessibility to medical devices.

The tenure of this scheme is from FY 2020-21 to FY 2024-25. The financial incentive is a grant of up to INR 1 billion (US$13.40 million) per park and the government has set aside an outlay of INR 4 billion (US$53.60 million) to provide financial assistance for building common infrastructure for four medical parks to be set up across four states.

Food processing industry

India is the world’s largest processor, producer, consumer, and exporter of cashew nuts, spices, food grains, fruits, and vegetables. It is the sixth largest food and grocery market in the world and accounts for 65 percent of India’s total retail market.

India’s food ecosystem offers attractive fiscal incentives and favorable economic policies for foreign investors. From April 2000 till June 2020, the total FDI inflows into the food processing industry amounted to US$10.1 billion. India permits 100 percent FDI in this industry under the automatic route.

On November 11, the government announced that its production-linked incentive (PLI) scheme would benefit food products, with an outlay worth INR 109 billion (US$14.59 billion), earmarked for a five-year period. Specific product lines showing high growth potential and able to generate medium- to large-scale employment will be supported under this scheme. The product lines are: ready to eat (RTE) and ready to cook (RTC), marine products, fruits and vegetables, honey, desi ghee, mozzarella cheese, organic eggs, and poultry meat.

The processed food market is expected to grow to US$543 billion by the end of 2020. Currently, the industry employs 1.85 million people and puts out an aggregate output worth US$158.69 billion.

Research and development

India is seeking greater investment into its research and development ecosystem. Presently, out of 26 Indian companies in the global list of top research and development spenders, 19 companies belonged to the pharmaceuticals, automobiles, and software sectors. India now wants to expand this R&D focus to other sectors.

India is an attractive destination for foreign investors in its R&D sector due to its:

  • Massive startup ecosystem that hosts the largest number of startups in the world;
  • Low cost in hiring researchers. The cost of hiring a researcher in India is 1/5th of hiring one in the US;
  • Robust research and academic infrastructure, which is home to 1,140 research centers that hire over 9,000 professionals; and
  • Advantages of frugal innovation. To illustrate, Siemens, the German industrial manufacturing conglomerate has successfully produced power generation equipment that enables solar power plants to make maximum use of every single sun beam.

The maximum number of research institutions are in Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh, and Gujarat. Leading institutions include the Automotive Research Institute and Armament Research and Development Establishment. India’s R&D sector has a large MNC presence. Around 60 percent of new multinational companies have established in-house R&D centers. From among the top 100 global R&D spenders, 83 percent are present in India.

Examples of leading companies engaged in R&D in India include General Electric, Schneider Electric SC, Foxconn, and Huawei. Both General Electric and Schneider Electric SC are set up in Bengaluru and have the highest number of employees from India. Foxconn has set up an R&D and semiconductor facility in Maharashtra. Huawei is ready to set up telecom manufacturing plant in Chennai.

The most promising sectors to invest in are healthcare, automotive, and software. In all three of them R&D expenditure has increased. The key focus states for investments in R&D include Karnataka, Tamil Nadu, Telangana, Maharashtra, Gujarat, Rajasthan, Haryana, and Uttar Pradesh.

Existing international collaborations offer incentives to encourage foreign investments. Examples of these are ASEAN-India Science & Technology Collaboration, Indo-German Science & Technology Centre, and the Indo-French Centre for Promotion of Advanced Research (IFCPAR).

For more information and advice for foreign investors on doing business in India, please feel free to email us at

About Us

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to for business support in India.