The fourth edition of Clasis Law's "Doing Business in India" guide is developed to give stakeholders an overview of the legal & regulatory framework in India, the form of business enterprises, funding options and relevant tax regimes in a concise manner.
1. INDIA AT A GLANCE
1.1 Indian Economy
India is known for its rich and diverse cultural heritage having plethora of languages, traditions and beliefs. Indian economy is one of the fastest growing economies in the world and it is expected that it will be ranked amongst the top 3 economic powers of the world in the coming years. It is the 7th largest country by area and the 2nd most populous country having a population of over 1.38 billion.
Over the years, India has adapted itself to the global competitive environment and hence has become an emerging marketplace for strategic investments by international investors. Availability of skilled manpower, lower cost of production due to cheap labour, increase in domestic consumption by growing middle class population, vast range of industries, investment-friendly policies and close proximity to South-East Asia, Middle East and Europe are strong drivers of foreign investments in India. Hence, many global majors are pitching for joint ventures and other collaborations with Indian Companies.
FDI inflow of USD 58,773 million for the financial year 2021-2022 with inflow of USD 22,347 million in the first quarter of FY 2022-23 (that is April 2022 – June 2022) indicates a positive impact of ease of doing business and changes in FDI norms in the economy. During the financial year 2021-22, the services sector (including financial, banking, insurance, nonfinancial outsourcing, research and development, courier, technological testing and analysis and other) attracted the highest FDI equity inflow of USD 7,131 million. The computer software and hardware sector followed by the telecommunications sector took the next two spots amongst the top 3 sectors attracting the highest FDI equity inflows. On the aspect of FDI, India received the highest FDI equity inflow (of USD 5,687 million) from Singapore in the financial year 2022-2023 (April – June).1
GDP is the broadest quantitative measure of a nation's total economic activity and represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time. A rising GDP signifies the progress of the economy of a particular country. Thus, higher the GDP, greater the growth prospects of a country. In India, agriculture plays a vital role in the economy and contributes about 17% to the total GDP and provides employment to over 60% of the population.
Impact of COVID-19 on the Indian economy
With the effects of the COVID-19 pandemic fast disappearing, the economy is steadily getting back on track. Barring the initial lockdown due to the omicron variant in January 2022, the year has gone well so far. India's economy grew by 13.5% in the April-June period this fiscal - the fastest in the last four quarters - on account of better performance by the agriculture and services sectors. India remained the fastest growing major economy as China registered economic growth of 0.4% in the April-June 2022 quarter. The Indian economy grew by 20.1% in AprilJune 2021-22, as per the data released by the National Statistical Office (NSO). The gross domestic product (GDP) expanded by 8.4% in July-September 2021, 5.4% in OctoberDecember 2021 and 4.1% in January-March 2022.2
The Government is targeting making India a USD 5 trillion economy by FY 2024-25 which may take longer due to the slowing down of the global economy owing to the COVID-19 pandemic.
The effects of the pandemic seem to be shrinking and people have resumed operations and returned back to work. Aviation, tourism and hospitality business have come back with a bang as the number of cases lie low and people have begun moving out of their homes to travel, stay and dine out. Start-ups have done well and India appears to have become the unicorns hub with as many as many 20 unicorns and counting in the year 2022 (till now).
Near future endeavours to bolster economic growth
The Government endeavours to attain a USD 5 trillion economy by FY 2024-25 by development in 9 key areas which inter-alia include information technology, healthcare, education, energy and financial services. The Government has already taken initiatives for the growth and progress of the country towards achieving a USD 5 trillion economy. These initiatives include the Make in India initiative and the Digital India initiative which focuses on 3 core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.
To combat the COVID-19 pandemic and its effect on the Indian economy, the Government, has taken various proactive steps and measures such as the special economic relief package, which as per reports is equivalent to 10% of India's GDP, for 'Aatmanirbhar Bharat' or 'SelfReliant India Movement'. The Government has also taken steps to relax timelines for compliances and exempted / reduced penal provisions under various laws so as to get the economy back on its feet as smoothly as possible.
India's real gross value added (GVA) grew by 12.7% to INR 34.41 trillion in April-June this year. The GVA growth in the farm sector is 4.5% in the first quarter compared to 2.2% a year ago. The GVA in the electricity, gas, water supply and other utility services segment grew by 14.7% in the quarter compared to 13.8% a year ago. Public administration, defence and other services posted 26.3% growth against 6.2% in the first quarter of last fiscal.
It is widely reported that the Indian economy has fully recovered to the pre-pandemic real GDP level of 2019-20, according to the provisional estimates of GDP released on May 31, 2022. Real GDP growth in FY 2021-22 stands at 8.7%, which is 1.5% higher than the real GDP in FY 2019-20. These figures are associated with stronger growth momentum, indicating increased economic demand. The investment rate in the fourth quarter increased to its highest level in the previous nine quarters. Moreover, capacity utilisation in the manufacturing sector rose in the fourth quarter, as against the third quarter, implying a build-up in demand, which is consistent with the growth objectives of the Indian economy.
The Prime Minister of India has launched a new initiative by the name of "GatiShakti Master Plan" which shall help the National Highway Network to develop 25,000 km of new highways network, which will be worth INR 20,000 crore (US$ 2.67 billion). In 2022-23, increased government expenditure is expected to attract private investments, with a production-linked incentive scheme providing excellent opportunities. Consistently proactive, graded, and measured policy support is anticipated to boost the Indian economy.3
India is focusing on renewable sources to generate energy. It is planning to achieve 40% of its energy from non-fossil sources by 2030. In line with this, in May 2021, India, along with the UK, jointly launched a 'Roadmap 2030' to collaborate and combat climate change by 2030. At present, India has installed renewable energy projects with 152 gigawatt (GW) capacity in 2022.
India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behaviour and expenditure pattern, according to a Boston Consulting Group (BCG) report. It is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by 2040 as per a report by PricewaterhouseCoopers.4
1.2 Indian Legal System
Indian legal system, being one of the oldest legal systems in the world, is primarily a mix of common law and customary laws. With the invasion of British East India Company, the Indian judiciary was introduced with a new system of law which was based on recorded judicial precedents. Thereafter, common law emerged as one of the sources of law in India. Common law system is primarily based on the decisions of the courts and tribunals. The courts are bound to follow the reasoning used in prior decisions in order to resolve a similar dispute. A majority of judicial framework in India is derived from the British common law system.
Post-independence, the Parliament of India drafted a constitution for the newly independent nation. The Constitution is the main source of law which provides recognition to other statutes, acts and ordinances. Central as well as state governments and local authorities frame rules, regulations and bye-laws subordinate to these laws.
The Constitution guides the 3 pillars of democracy - the legislature, executive, and judiciary. While the legislature is vested with the powers to make laws, the executive is empowered to implement these laws. Parliament is the absolute legislative body of India. The Indian Parliament comprises of the President and the two houses - Rajya Sabha (which represents the council of states) and Lok Sabha (which is the house of the people).
The third pillar of a democratic government is the judiciary. The role of a judiciary is to adjudicate disputes. The Constitution empowers the courts to make decisions, enforce the law and solve the disputes in accordance with these laws. The primary purpose of the Indian judiciary is to protect fundamental rights of the citizens of India. The judiciary comprises of the Supreme Court, the High Courts, the District Courts and the Lok Adalats.
The Supreme Court is the highest judicial body as well as the highest court of appeal in India. It can exercise original, appellate as well as advisory jurisdiction. Every state has its own High Court and the matters at the district level of a state are heard by the District Courts. District Courts are subordinate to High Courts and are established according to the population distribution of the district and the state. Indian judicial system also includes Lok Adalats and mediation centres established for the purpose of amicable settlement of disputes between the parties.
Further, the Constitution provides for the establishment of administrative tribunals to lower the burden on Indian courts by adjudicating quasi-judicial matters. Such tribunals adjudicate disputes related to specific matters such as debt recovery, company law related matters, labour disputes, recovery matters, consumer complaints and insolvency cases. Thus, over the years, the Indian legal system has evolved as one of the essential organs of the world's largest democracy with the objective to secure constitutional rights of every citizen.
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