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If India indeed is global favourite, where has FDI gone?
Nearly half the FDI is essentially Indian money parked abroad. This is the infamous black money that rich Indians send to Mauritius, Singapore and Dubai and get it back legitimately as FDI

Saturday December 17, 2016 9:40 PM, Dr Amir Ullah Khan,

Amir Ullah Khan

Dr Amir Ullah Khan

FDI in India
[The money is parked in countries that India has tax avoidance agreements with and cannot do anything much to get money stashed there.]

We have been hearing that India has become the world’s favourite destination for foreign investment and that a number of firms have been investing in India over the last two years. The 'Make in India' scheme was announced with much fanfare by the Prime Minister and was declared successful by some who pointed out that a large amount of foreign direct investment (FDI) had come in soon after. If this was true, it should have reflected in some increase in jobs and in production.

India received 44 billion dollars in 2015 through the FDI route. The US was on top, with 380 billion dollars invested in its economy by various foreign investors. Hong Kong came second with 175 and China third with 136 billion dollars. Ireland, Netherlands, Switzerland and Singapore come next in that order. All these are very small countries but each of them receives more than twice the investment that comes to India. In the 8th position is Brazil that received 65 billion dollars at a time when its economy is slated to be doing really badly. And immediately above India on the 9th position is Canada that got 49 billion dollars last year.

In India, the three top sectors that received foreign direct investment in 2015 were the services sectors (that include finance, banking and insurance), computer hardware and software and the trading segment. These sectors obtained a third of the total FDI last year, a little more than $16 billion. Additionally, three of the large manufacturing sectors where most jobs are traditionally generated - construction, automobiles and pharmaceuticals, have actually seen a decline in FDI inflows during the last year.

However, the employment scenario continues to be dismal. This is largely because most of the significant share of the record FDI equity that came in was for the services sector. In 2015-16, a total of $41 billion dollars came to the Indian economy and that resulted in job growth in the IT, computer hardware, finance and banking sectors. However most of the sectors in manufacturing, that was at the heart of the 'Make in India' campaign diminished continuously.

Construction has been the second largest FDI earner after services, but fell sharply by 85 per cent in FDI inflows over the previous year. It continues to do badly and does not look like recovering soon. As a result, employment growth is likely to be sluggish next year too. Tourism is another sector that could have benefitted with foreign investment but has been hit badly. With tourist numbers falling, it is unlikely that there would be much by way of foreign investment in this sector too, leading to further shrinking of employment growth.

It is also interesting to look at where FDI to India comes from. The top two countries investing in India are Mauritius and Singapore. More than 34 per cent of India’s FDI comes from Mauritius while a little more than 15 per cent comes from Singapore. The other half comes from all other sources like the US, Japan, UK and other major economies. What this basically means is that nearly half the FDI is essentially Indian money parked abroad. This is the infamous black money that rich Indians send to Mauritius, Singapore and Dubai and get it back legitimately as FDI

The reason Mauritius has been a favourite destination is because India has a tax avoidance treaty with it. Mauritius is a tax haven that means it has an almost zero tax regime. Just like Monaco, Bahamas, Luxemburg, Dubai, Cayman Islands etc. So anyone who keeps money there and uses it to then invest abroad pays hardly any tax. In addition, the double tax avoidance agreements mean that an investor based in Mauritius only has to pay tax there and not in India. Large investments to India, in the airline sector and in the construction sector have come through this route

After the new government announced its intentions to trace and bring back black money kept abroad, quite a few people started moving away from Mauritius to safer places like Singapore and Dubai. The money is parked in countries that India has tax avoidance agreements with and cannot do anything much to get money stashed there. As a result, the government has been unable to make good its promise of bringing back black money stashed abroad. Demonetisation, for all its promises, clearly does nothing to this cash stashed abroad. Neither is it able to prevent this money coming back almost at will.

The fact of the matter therefore is that despite such major measures taken as opening up the most critical and most sensitive sectors the government hasn’t been able to attract investment. The BJP government opened up the Insurance sector completely, the Pensions sector and even the Defense sector. However, most investment has come only in services where it was bound to come in any case given the market size. Manufacturing that is key to employment growth continues to remain poorly funded, inefficiently run with its high costs of land acquisition, electricity charges and wage labour.

[Dr. Amir Ullah Khan is a development economist and Research Director at Aequitas. He is also Visiting professor at the ISB in Hyderabad.]


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