Current Economic Situation

Domestic economy

India's real GDP in first three quarters in 2008 recorded a year-on-year (YoY) growth of 8.3%, or an 11.1% annualised growth, after growing 9.3% in 2007. However, with the global economic downturn, its growth in 2009 is expected by the IMF to slow to 5.1%, slashing an earlier forecast of a 6.9% growth.

India is less export-reliant compared to many other Asian economies, with private consumption contributing some 60% of the GDP. However, India is not entirely immune from the global economic downturn, and its manufacturing sector was under some pressure. Industrial output shrank by 0.3% in October 2008, the first contraction in 15 years. India's manufacturing sector accounts for some 25% of GDP, while its services sector contributes around 60%. Nonetheless, its service sector, including outsourcing services, is also under pressure.

India holds a dominant share of the global offshore IT and ITES (IT-enabled services) market, of which about 65% is in IT and 46% is in ITES. Together, they contributed to about 5% of India's GDP. The export of IT/ITES services is mainly to the US and the UK. India's economy depends heavily on service industries for expansion and though IT/ITES constitutes only a relatively small share, it has been India's fastest growing sector for the past few years.

India is riding on a retail boom bolstered by its fast expanding middle class and young consumers, which is expected to grow from an estimated US$333 billion in 2007 to reach US$453 billion by 2010. With the world's second largest population (over 1.1 billion), India has a very huge consumer base with increasing discretionary spending. A study by McKinsey suggested the economic boom in recent years had created a massive middle class centred in the cities. India is expected to become the world's fifth largest consumer economy by 2025.

Over 95% of India's retail sector is unorganised and consists predominantly of small retailers. The retail market situation is changing in favour of more organised retail, with many malls being built. Organized retail accounts for about 5% of the total market and is expected to grow at a compound annual growth rate (CAGR) of 40% as India's indigenous retailers race to increase the number of stores. International retailers such as Walmart and Carrefour are joining forces with local partners to capture the market. Under India's current laws, single-brand retailers can own a 51% majority stake in a joint venture with an Indian partner and 100% foreign ownership is allowed only under the cash-and-carry wholesale model, as in the case of German wholesaler Metro.

To shore up economic growth, India's government has unveiled a series of stimulus packages. Measures are undertaken to ease the flow of credit, raise the credit targets of Public Sector Banks, increase the loan guarantee cover to small companies, recapitalize state-run banks by providing Rs200 billion (US$4.2 billion) to support credit growth, and generate additional infrastructure investment of Rs750 billion (US$15.6 billion) by issuing debt.


External trade

With slowing global demand, India's exports experienced the first decline in seven years in October 2008, falling 12.1% YoY. Exports continued to fall in November and December 2008, respectively, by 9.9% and 1.1%. Nevertheless, India's exports in 2008 totalled US$178.7 billion (up 21.6% YoY) and imports amounted to US$292.6 billion (up 35% YoY).

India's major import items included (1) petroleum and related products (US$ 79.6 billion; 33.4% of total), (2) capital goods (US$ 37.3 billion; 15.6%), (3) electronic goods (US$ 20.3 billion; 8.5%), and (4) chemicals (US$ 18.6 billion; 7.8%), while major export items included (1) engineering goods (US$36.6 billion; 23% of total), (2) petroleum products (US$24.9 billion; 15.7%), (3) gems and jewellery (US$19.7 billion; 12.4%), and (4) textiles and clothing (US$19 billion; 11.9%).


Foreign direct investment (FDI)

During April-November in Financial Year 2008-09, India's FDI inflow amounted to US$19.8 billion, up 78% from the same period in 2007. The inflow was mainly from Mauritius (US$8.1 billion; 44% of total), Singapore (US$2 billion; 8%), and the US (US$ 1.3 billion; 8%). The services sector attracted the highest FDI inflow, followed by computer software and hardware, and telecommunications.

Hong Kong's share in India's total FDI inflow was paltry, ranging at 0.4-0.6% between 2004 and 2008, and Hong Kong companies operating in India include CLP, Li & Fung, PCCW, Esprit, and Giordano.

India's economic policies are designed to attract significant capital inflows into the country on a sustained basis and to encourage technology collaboration between Indian and foreign firms. Almost all sectors are opened to foreign investment with varying percentage of foreign ownership allowed, except for atomic energy, lottery business, gambling and betting, and some forms of retail trading. Under India's foreign investment policy, two routes are available for foreign investors, depending upon the industry and the levels of investment contemplated:

1) Automatic Route

Foreign investment proposals under the automatic route will not be subject to any government approval, provided the requisite documents are filed with the Reserve Bank of India within 30 days of receipt of funds. Qualified sectoral investment includes hotels & tourism, and courier services, etc.

2) Foreign Investment Promotion Board (FIPB)

All other proposals for foreign investment, which are not covered under the automatic approval route, are considered for approval, on merits, by the FIPB.


Special Economic Zones (SEZs)

Inida's government implemented the SEZs Policy in 2000, and passed the SEZ Act, 2005 to facilitate the establishment of SEZs in selected areas. Within these SEZs, special incentives, such as market access, tax exemptions and fast-track single window clearance are provided to investors. As of December 2008, more than 270 SEZs had been approved and notified, with some of them in operation and increasingly developed by the private sector. The exports from the functioning SEZs amounted to Rs 66,638 crore (US$15.9 billion) in 2008, up 92% YoY.


Trade Policy

India's government has embarked on economic liberalisation since 1991 and continued to work towards a more open trade regime. There has been elimination of quantitative restrictions, simplification of import licence application and reduction of import tariffs. Since 1992, the government has loosened the licensing requirement for imports of capital goods. In March 2001, the government abolished the system of special import licences and the restricted list of imports, leaving only a small negative import list.

The Foreign Trade Policy 2004-09 is the major policy governing foreign trade in India. In general, no restriction is imposed on the import and export of most products except for those on the small negative import list. Nevertheless, all second hand products except for second hand capital goods shall be subject to licences, certificates, permits or authorization for import as stated in the Trade Policy.

Nonetheless, India's government banned Chinese toy imports for six months starting from February 2009, on grounds of "public health and safety". Chinese toys have seized about 60% of India's toy market.


Hong Kong's Trade with India

India is Hong Kong's 8th largest trading partner. In 2008, India-Hong Kong bilateral trade amounted to US$14.1 billion, up 34% compared to 2007. Specifically, Hong Kong exported US$6.7 billion (up 50% YoY) worth of goods to India during 2008, accounting for 1.8% of Hong Kong exports to the world.

Major export categories from Hong Kong in 2008 were (1) pearls, precious & semi-precious stones (US$4,019 million; 60% of total), (2) telecommunications equipment and parts (US$884 million; 13.2%), (3) silver and platinum (US$208 million; 3.1%), and (4) computers (US$141 million; 2.1%).

Hong Kong's exports to India have been growing substantially in recent years. Despite the weakening external demand, Hong Kong's products to India like pearls, precious & semi-precious stones, telecommunications equipment and parts, and computers grew some 60% YoY in 2008. In contrast, China's exports to India grew by a CAGR of 52% during 2005-2008 to US$31.5 billion in 2008.


India's Economic Involvement in Hong Kong

Many Indian companies have established offices in Hong Kong. As of 2 June 2008, there were 6 Indian companies with regional headquarters in Hong Kong, 16 with regional offices, and 22 with local offices. The range of businesses includes trading, banking, IT and logistics.

The Union Bank of India, one of the largest state-owned banks in India, inaugurated its first full-service branch in Hong Kong in August 2008 to take advantage of the growing trade between India and the Chinese mainland.

Other Indian companies in Hong Kong include Infosys Technology, Air India, GATI and Globe7. GATI is the first Indian logistics company that set a foothold in Hong Kong in 2005 and aimed to seize the opportunities to establish its gateway to Southern China and transshipment hub between China and India through its Hong Kong operation. Globe7, a subsidiary of the Indian-based Northgate Technologies which specializes in digital information and online communication, has set up office in Hong Kong's Cyberport to bring cutting edge global communications technologies and consumer products to the region. Many Hong Kong-based Indian firms also act as intermediaries for trade between the Chinese mainland and the Middle East and African countries.

Tourists from India to Hong Kong grew by 10.4% YoY to 350,674 in 2008, accounting for 1.2% of the total visitors to Hong Kong.