Economic
Highlights
New Delhi, 26 June 2015
FDI Inflows Rise
YET, MNCs DODGE TAXES
By Shivaji Sarkar
India leads regional FDI (foreign
direct investment) inflows to South Asia which
rose to $ 41 billion, even as global FDI fell by 16 per cent in 2014 to $ 1.23
trillion. The FDI inflows surged by 22 per cent to about $ 34 billion while
nine other developing economies, including Brazil,
China, Hong Kong and Singapore attracted
$ 681 billion.
Importantly, India improved
its position to rank ninth for FDI last year after trailing at Number 15 in
2013, according to the UN Conference on Trade and Development (UNCTAD)’s World
Investment Report 2015 (WIR). Besides, it was also an investor in outward FDI
with 9.8 billion, marking an increase of 486 per cent over 2013. However, it
does not figure in the first top 20 countries for FDI outflows.
Further, the WIR is
hopeful that FDI inflows to India
are likely to maintain an upward trend in the current year as economic recovery
gains ground. This observation is in sync with the latest assertions of Union
Finance Minister Arun Jaitley during his recent US visit.
The report adds that in
terms of the sectoral composition of FDI inflows, manufacturing is likely to
gain strength, as policy efforts to revitalize the industrial sector are
sustained to boost the Make in India
initiative.
Asserts UNCTAD, India remains
the most promising economies, among the top seven, for investors vis-à-vis
outward FDI and third prospective home economies. It noted Prime Minister
Modi’s policy initiative during the last one year in increasing FDI cap, 47
liberalisation moves alongside 16 other steps as giving boost to not only the Indian
economy but to the entire region.
Indeed, India can be
top favourite if it could be free of corruption, politicking on economic issues
and provided Centre-State disputes are reduced for a clear investment path.
Specially, against the backdrop of the fragility of global economy, policy
uncertainty for investors and geo-political risks, particularly in the Euro
zone.
Additionally, new
investments were also offset by some large disinvestments in the developed
world. One of the biggest disinvestments was by Vodafone Wireless in the US. And China became the largest recipient of world FDI
at whopping $ 129 billion followed by Hong Kong
$ 103 billion and the US $ 92 billion.
The WIR also highlights
the risks for India,
particularly from China,
which is increasing investments in Pakistan. Chinese companies will
invest $ 45.6 billion in Pakistan
in electricity and transport infrastructure projects which would give access to
mainland China right up to the
Arabian Sea and Indian borders.
Further, China has become the largest source of FDI to Sri Lanka as
well. A joint venture between two Lankan companies and China Merchants Holdings
has invested $ 500 million in the Colombo
container terminal. A China-Sri Lanka free trade agreement is ready to be
signed. This would open up Sri Lankan business to exploit the Chinese market.
As it stands, trade
between the two countries has reached $ 3.6 billion. With Chinese efforts at
building the Maritime Silk Route
more Chinese investments will flow into large infrastructure projects.
Pertinently, the strong
balance sheets of local enterprises allow China’s capital markets to have a
steady source of funds and help keep the Yuan’s exchange rate stable. Something
India
and its corporate have to learn to strengthen rupee.
The WIR identified the automotive
industry as one of the key industries to spur Indian growth as the country bagged
a majority of greenfield investment projects by
global automakers and first-tier spare parts suppliers in South
Asia during 2013-14, including 12 projects above $ 100 million.
Also, inward FDI has led
to the emergence of a number of industrial clusters, including those around Delhi, Mumbai, Chennai
and Bengaluru. Despite difference in the pattern of development, this opens possibilities
of new FDI.
On a smaller but
significant scale, Bangladesh,
Nepal, Pakistan and Sri
Lanka too recorded greenfield
investments. India’s growing
automotive industry shows potential of a positive “spill-over effect” to
productive capacity building in South Asia whereby India
could become an investment source for South Asia
and create a regional market. Already, auto maker Mahindra & Mahindra is
investing $ 200 million in light commercial vehicles plant in Bangladesh.
Despite, foreign sales
and assets of multi-nationals globally expanding faster than their domestic
units, it generated added value of about $ 7.9 trillion. But there is a catch
to this as it also caused immense losses to developing economies. Wherein, MNCs
shifted out profits affecting sustainable development of developing countries.
Notably, many tax havens
like Mauritius, Luxemburg
and British Virgin Islands accounted for 30
per cent FDIs. Recently, Mauritius
has agreed to exchange information from 2017. Yet, this remains a concern for India
along-with other countries as globally developing economies lose about $ 100
billion as taxes to offshore hubs.
The report underscored
wide tax evasion practices by MNCs which needed to be checked vigorously
through international efforts. Notwithstanding, MNCs foreign affiliates
contributing about $ 730 billion in taxes, royalty, and licence payments. Out
of which, roughly 50 per cent of the outgo was for corporate income tax,
customs duties and labour costs.
Significantly, manufacturing
worldwide has received less attention wherein services accounted for 63 per
cent of global FDI, twice the share of manufacturing at 26 per cent since 2012.
Clearly, this remains a challenge for Make in India and needs to be corrected. The path is not easy given open global trade
and some manufacturing hubs in China
and the East meeting most global needs.
Undeniably, this requires
incentivizing localized manufacturing. Despite India’s moves being lauded, they are
not considered sufficient.
In sum, overall the
investment climate is improving and the world economy is trying to come out of its
worst recession of 2008. The FDI inflows are projected to grow by 11 per cent
to $ 1.4 trillion in 2015 and to $ 1.7 trillion in 2017. Developed countries
are to see increases of 3 per cent annually.
India too would see expansion
of its economy. Its FDI flow may touch $ 50 billion a year in the next two
years ---- something to rejoice in an intensely competitive world. -----INFA
(Copyright India News & Feature Alliance)
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