Millennium Post

FDI scare grips global market

UPA’s desperate attempt to review sectoral caps in foreign direct investment (FDI) has remained a ‘work in progress’ for far too long ever since its second coming in 2000. In recent months such efforts were reinforced by the pronounced slowdown of the economy in the wake of a string of scams and corruption-related issues in the allocation of natural resources, be it spectrum or coal. The foreign institutional investors (FIIs) have not been generous enough to back their bets on India by reducing their exposure to emerging markets like India with the country’s currency bearing the brunt of depreciation. Meanwhile the government continues to marshal its resoluteness and spunk to raise the limits on FDI cap in significant ways from its earlier level of the bottom 26 per cent to 49 per cent. It is against this backdrop that the latest report from the UN Conference on Trade & Development (UNCTAD) on world investment trends needs to be read.

The flagship UN publication has not minced words when it pointedly stated that the road to FDI recovery is ‘bumpy’ as such flows plummeted by 18 per cent to $1.35 trillion in 2012. More significantly, FDI flows to developing sectors of Asia decreased by seven per cent to $407 billion in 2012. This is partly due to decrease across a number of major recipient countries- including India, Pakistan and Sri Lanka. FDI inflows to India fell by 29 per cent to $26 billion. Though India continues to remains the dominant recipient of FDI inflows to South Asia last year, Indian economy experienced its ‘slowest growth’ in a decade and high inflation rate increased risks for both domestic and foreign investors’, UNCTAD noted.

The adverse side of inflows is that FDI outflows from the region also dropped sharply by 29 per cent in 2012 and outflows from India- the region’s largest FDI source, fell to $8 billion albeit being 93 per cent of the regional total, owing to the shrinking value of cross-border merger and acquisitions (M&As) by Indian companies. In stark comparison to their Chinese counterparts, Indian companies seemed much less active in global M&A markets than in the past and increasingly focused on their domestic operations.

Considering the recent past when Indian transnational corporations (TNCs) were pro-active in the developed world and driven by a host of factors, this shrinking role is out of sync with India’s outward orientation to conquer the global market while leveraging its comparative advantages. It needs to be noted that among India’s 18 cross-border M&A deals with investment values of over one billion US dollars since 2005, 13 were in advanced countries with most of them with either the United States (6 deals), the United Kingdom (3 deals) or Australia (3 deals). These mega deals were mainly in extractive industries (oil and gas and metal mining), infrastructure (telecom and transport) and heavy industries (automotive, chemicals and metal production). Most were stitched up during 2007-2008 and none were recorded in 2012 reflecting the slowing down of the ardent zeal to internationalise operations to gain footholds in the overseas markets by domestic companies.
The report also refers to some Indian conglomerates, pulling back from large outbound M&A deals in recent years, owing partly to financial constraints. Companies in telecom and transport services that were active players in global M&A markets during 2010-11 have been focusing on domestic operations more recently. The UNCTAD estimated the the value of cross-border M&As undertaken by Indian companies in 2012 had dropped by nearly three fifths to about $2.65 billion. Thus on counts of both inflows and outflows of FDI, India seems to be at the receiving end in the pejorative sense. This has been partly due to its prolonged spell of policy paralysis and administrative inertia from taking crucial calls during the last couple of years that would have  pepped up investors’ confidence, both domestic and overseas.

The report also makes a reference to the decision by governments all the world over including India to locate investments in economies that host offshore financial centres (OFCs) or tax havens and special purpose entities(SPEs) that are driven by the tax treatment of SPEs and also by double-taxation treaties. In this instance, it cited Mauritius, that recently concluded a double-taxation treaty with India and has attracted foreign firms- especially those owned by non-resident Indians. As a conduit for SPE FDI, Mauritius has become one of the largest FDI sources for India, a state of affairs that has provoked widespread political altercations within the country for quite some time owing to its misuse for tax avoidance purposes.

UNCTAD rightly said that tax avoidance and transparency in global financial transactions are issues of international concern that call for a multi lateral approach. Till date, global efforts on these issues have focused mostly on OFCs, but SPEs are far larger phenomenon. UNCTAD has rightly said that the growing concern about tax evasion requires refocusing international efforts and as a first step it has suggested the establishment of a closed list of ‘benign’ uses of SPEs and OFCs. This would help focus any future measures on combating the malign aspects of tax avoidance and lack of transparency. Being among the largest and controversial beneficiaries of its ties with Mauritius, will the government gather the mettle to work for such an institution of a closed list of benign uses of SPEs and will it be able to free itself from the awkward position of using the Mauritius route for enticing investments and leaving wide latitude for tax avoidance? IPA

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