India is now top 10 destinations for FDI, Make in India to make big difference

Automotive industry may be key to make India world leader, says UN report

GN Bureau | June 25, 2015


#fdi   #india   #foreign direct investment   #china   #us  

For the first time India is one of the top 10 destinations for foreign direct investment (FDI). While acknowledging India’s climb, the United Nations Conference on Trade and Development (Unctad)'s World Investment Report of 2015 appreciates India’s reforms in tax regime.

At number nine position the FDI inflow into India was $34 billion in 2014, up 22% rise from $28 billion in 2013. In fact, Inflows into the country were 83.5% of South Asia's $41.2 billion. India was 15th on the list in 2013.

The Unctad report said India's FDI inflows would continue to rise in 2015 as an expected economic recovery gained ground. "In terms of structural composition, manufacturing is gaining strength, as policy efforts to revitalise the sector are sustained, including, for instance, the launch of the 'Make In India' initiative in mid-2014," the report said.

Under the 'Make In India' initiative, the Narendra Modi government has identified 25 industrial sectors in which India has the potential to be a world leader, including automotives, chemicals, pharmaceutical and textile industries, it said.

Among the top 10, China, Hong Kong and the US accounted for the biggest share. China was at the top spot with FDI of $129 billion in 2014 ($124 billion in 2013). The US share fell from $231 billion in 2013 to $92 billion in 2014. Hong Kong got $103 billion of FDI in 2014.

Others in the top 10 in 2014 were the UK (fourth), Singapore (fifth), Brazil (sixth), Canada (seventh), Australia (eighth) and the Netherlands (10th).

Driven by auto industry
The report said automotive industry, which India opened up to FDI in 1991, was a key part of the Indian economy and had been identified as a key sector in which India could become a world leader.

The country accounted for most of the new investment projects announced by global automobile makers and first-tier parts suppliers in South Asia during 2013 and 2014, including 12 projects above $100 million.

 "Investment from the growing automotive industry in India shows potentials of a positive 'spillover effect' to productive capacity building in South Asia as a whole," the Unctad report said.

Tax law reforms
The Unctad also supported India's plans to replace bilateral investment protection treaties with a new pact that seeks to plug gaps and enhance legal protection of foreign investors in India as well as Indian investments abroad.

"India made available its new draft model, the Bilateral Investment Treaty (BIT). The new model includes several innovative provisions," the report said.

Multinational enterprises employ a range of tax avoidance tools, many of which take advantage of investment structures in these hubs.

"Tax avoidance practices by multinational enterprises are a global problem because investments from offshore hubs are made in developing and developed countries alike," UNCTAD said.

Under the new model of BIT, investors who have substantial business activities in the home state would be protected by the treaty. The proposed BIT would remain in force for 10 years.

The model stipulates that investors must first submit their claim before relevant domestic courts or administrative bodies for the purpose of pursuing domestic remedies, wherever available.

After exhausting all judicial and administrative remedies, if a resolution of the problem remains elusive, the investor may commence proceedings under the investor-state dispute settlement (ISDS) article.

Loss of $100 billion
The report says that developing nations are witnessing annual tax revenue losses to the tune of $100 billion due to entities resorting to offshore hub-based tax avoidance practices.

"Tax avoidance practices are responsible for significant leakages. An estimated $100 billion annual tax revenue loss for developing countries is related to inward investment stocks directly linked to offshore investment hubs," said the Unctad's report.

"... the more investment is routed through offshore hubs, the less taxable profits accrue. On an average, across developing economies, every 10 percentage points of offshore investment is associated with a one percentage point lower rate of return."

Tax avoidance can be tackled while promoting investment in sustainable development, it stressed.

Full Report: click here

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