Big Indian bizmen make it abroad
It is good that the government has finally recognised the urgent need for making India a more open FDI destination to attract MNCs to invest in India as Indian businessmen, always looking for a fast buck, are rushing out of the country for a business address elsewhere, including tax havens.
The latest government decision giving red carpet welcome to foreign funds and foreign management control in a host of businesses, including airlines, brown-field airports, food retail, single brand retail for cutting edge technology products, defence, small arms and ammunition manufacture, private security agencies, pharmaceuticals companies, DTH services and cable networks among others have come rather late.
This country has not seen much Indian private investment in large brick and mortar projects in the last 12 years. And, therefore, the government needs to do more to attract large foreign investment fast in a host of other areas, including manufacturing, the core sector, infrastructure such as railways, roads, and sea ports. There is little hope of Indian business houses being prepared to make much investment in these pivotal growth areas with longer gestation period and slower net return on investment.
Thanks to the easy pro-outward investment policy of the Congress-led UPA government between 2004 and 2014, Indian businessmen, including the giant House of Tatas, took millions of dollars out of the country to take over or set up enterprises elsewhere.
The funds were mostly provided by the Reserve Bank, whose foreign exchange reserves come mostly from the country’s exports income, mostly by MSMEs, FDIs, FIIs; remittances by 25 million Indian diaspora abroad; grants from overseas sources and foreign borrowings. The RBI and Commerce Ministry put the figure of FDI inflow into the country – by way of equity plus reinvested earnings and other capital -- between April 2000 and November 2014 at $351 billion.
Over 40 percent of this figure were actually taken out by Indian businessmen as outward FDI during this period.Official estimates put the gross overseas investment by Indian businessmen over a seven-year period between 2004-05 and 2011-12 at $117 billion. The outward FDI steadily moved up from $2 billion in 2004-05 to $30.9 in 20011-12, barring three years between 2008-09 and 2010-11 when outward FDI temporarily slowed down though it remained well above $12-16 billion a year.
Incidentally, most of these Indian companies made little attempt to invest in India, or to “Make in India.” At least some of the corporate barons even chose to leave the country to service their enormous assets transferred abroad and settle down there while doing business in India.
Thus, Narendra Modi’s “Make-in-India” resolve would have remained unrealised if left in the hands of these Indians. Even after the new government came to power two years ago, some of the Indian business houses and enterprises, including Jet Airways, managed to shift their hubs out of the country.
The Tata group, whose steel and automobile plants in the UK are reeling after Brexit and telecom tie-up with Japanese DoCoMo, is in tatters after an international arbitration court slapped a massive damage on the Indian company in favour of DoCoMo. The group plans to establish an international nodal office in Dubai ostensibly to grow faster in West Asia and Africa.
No harm needs to be seen in such proposals of shifting business hubs from India or systematic forex exit from RBI in support of foreign asset acquisition by Indian companies provided that a good number of these Indian investors also made regular repatriation of business profits, technology fees, royalties and head-office expenses to India as their overseas counterparts conducting business in India do every year.
While Indian diaspora working abroad remitted $72.2 billion in 2015, accounting for almost four percent of India’s GDP, the government of India seems to be shy of sharing the negligible dividend and other repatriation figures by Indian businesses abroad. Indian businessmen substantially retain their profits and other financial gains abroad despite an extremely low Indian tax regime on such repatriation.
Unfortunately, the government failed to deal with the issue of income repatriation by Indian enterprises abroad and decided to provide an amnesty to those resident investors who were given access to foreign exchange to acquire assets abroad, but were unwilling to repatriate or bring back any profits earned from such investments and pay small domestic taxes on those earnings.
Surprisingly, this initial “amnesty” offered by the UPA government has since been extended indefinitely year-after-year for “an additional one-year period” in every national budget.
In his 2014 budget speech, Finance Minister Arun Jaitley said: “I propose to continue with this concessional (tax) rate of 15 percent on foreign dividends without any sunset date.” This, in his view, “will ensure stability of taxation policy.”
There is reason to believe that this major tax concession, where profits earned abroad were taxed at 15 percent rather than the regular 30 percent plus applicable surcharges, was an important explanation for the sharp increase in Indian investments abroad for the past several years.
India emerged as one of the strongest performers in the deal-street abroad in mergers and acquisitions. The M&A activity increased in 2014 with deals worth US$ 38.1 billion, compared to US$ 28.2 billion in 2013 and US$ 35.4 billion in 2012. There have been M&A deals worth US$ 28.8 billion in the first 10 months of 2015.
Under the circumstances, the Modi government has little choice but to allow large direct foreign investment in India to bridge the ever increasing investment gap in manufacturing, core sector and infrastructure and to control rising imports. Like the big Japanese participation in the Delhi-Mumbai freight corridor and Mumbai-Ahmedabad bullet train projects, India should aggressively seek selective involvement of other foreign countries to build India’s infrastructure.
While the government must ensure that core sector projects such as South Korean POSCO’s mega steel complex in Odisha don’t face any more obstacles, serious investors from EU and the USA may be provided further FDI concessions to build the economy fast in the absence of genuine participation by Indian investors. The government should also try to restrict easy outflow of hard-earned foreign exchange for the benefit of unreliable Indian investors abroad.
(The views expressed are strictly personal.)