NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, January 23, 2015

This year, India’s medical devices industry will be opened up to 100 percent foreign direct investment (FDI). The move had been in the works for some time – India’s union cabinet met last year to discuss the reform, while the industry’s regulatory framework has been tweaked several times since it was first introduced in 2005.

India presents an attractive market opportunity for global medical device manufacturers, but the country has never been able to tap into its potential as a domestic manufacturing base. Despite having a medical device market that ranks in the world’s top 20, the industry has a long history of being under-resourced.

The new FDI cap will spur foreign investment in India’s domestic medical device industry. However, companies should be careful when planning their entry strategy. The type of entity a firm chooses and the state they choose to locate it in is influential, and a thorough understanding of the industry’s various regulations is absolutely necessary.

Direct Investment

When foreign entities invest in India, their investment will go through one of two FDI routes, which affects the amount they are able to invest and the investment timeline The two routes are:

• The Government Route: For investment in business sectors requiring prior approval from the Foreign Investment Promotion Board (FIPB)
• The Automatic Route: For investment in business sectors that do not require prior approval from the government

India previously permitted 100 percent FDI in its medical devices industry through the government route, which has been widely identified as a key reason for the sector’s poor investment inflows. However, the government has said that India’s domestic firms will not be able to invest the kind of capital that the sector needs. Increased FDI is therefore seen as the primary way to see the industry grow.

The decision to change the investment route had an almost instant impact on the shares of domestic Indian medical device manufacturers. Opto Circuits (India) Ltd saw a sharp rise of 16 percent, while Siemens India rose by 2.2 percent. Local analysts expect this trend to continue.

Although the changes in FDI policy will go some way to improve the sector, there are a number of other problems that could deter foreign investors from manufacturing in India. High tax rates imposed on domestic manufacturers have made investment unappealing to some foreign companies, especially given the comparatively low amount of tax levied on imported medical goods. It is therefore hardly surprising that foreign firms often choose to access India’s medical market without establishing a direct presence – many companies establish factories in neighboring China and export devices into India.