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FDI Inflows Rise: YET, MNCs DODGE TAXES, By Shivaji Sarkar, 26 June, 2015 Print E-mail

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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