The people of India voted the incumbent Prime Minister Narendra Modi back to power with a thumping mandate in the general elections which concluded this month. The reforms and other initiatives of the current Government are expected to continue and pending legislations such as data privacy law etc. will be taken up more vigorously now. The Government has its task cut out as FDI inflows have fallen for the first time in 6 years and economic growth forecasts have declined.

Fall in FDI InflowsForeign direct investment (FDI) in India declined for the first time in the last six years in 2018-19, falling by 1 per cent to USD 44.37 billion as overseas fund inflows subsided in telecom, pharma and other sectors, official data showed. According to the latest data of the Department for Promotion of Industry and Internal Trade (DPIIT), FDI in 2017-18 was a record USD 44.85 billion. Last time it was in 2012-13 when foreign inflows had registered a contraction of 36 per cent to USD 22.42 billion compared to USD 35.12 billion in 2011-12. Since 2012-13, the inflows had been continuously growing and reached a record high in 2017-18. According to the data, FDI inflows in telecommunication, construction development, pharmaceuticals and power sectors declined significantly in 2018-19. Foreign direct investment in telecommunication dropped to USD 2.67 billion in 2018-19 from USD 6.21 billion in 2017-18, in construction development to USD 213 million (USD 540 million), in pharmaceuticals to USD 266 million (USD 1 billion) and in the power sector to USD 1.1 billion (USD 1.62 billion). Sectors that recorded a growth in FDI includes services (USD 9.15 billion), computer software and hardware (USD 6.41 billion), trading (USD 4.46 billion), and automobile (USD 2.62 billion).

FDI Policy Amendment CheckThe government is examining India’s foreign direct investment policy to look for new areas that can be opened to overseas investors and sectors that face hurdles despite being on the automatic route. “We have started a review and have asked all stakeholders to check for areas that can be opened up and if the automatic route is actually being used in existing sectors,” said an official aware of the development. The exercise comes after FDI equity inflows into India fell in 2018-19, for the first time in six years, with a steep decline in telecom, pharmaceuticals and power.

Singapore is India’s Top FDI SourceForeign direct investment (FDI) inflows from Singapore were twice that from Mauritius during the last financial year as companies opted to route funds into the country via the southeast Asian city-state, instead of the island nation in the Indian Ocean, the most preferred route for overseas flows so far, after the tax treaty with both the countries was reworked. In 2018-19, inflows from Singapore were estimated at $16.2 billion, compared with $8.1 billion from Mauritius, latest data released by the government showed. This is only the third time that inflows from Singapore have topped those from Mauritius with investment advisers attributing the change to the revamped tax treaty. After 33 years, India and Mauritius had agreed to amend the tax treaty, allowing authorities in the country to tax capital gains on transfer of Indian shares acquired from April 2017. A similar amendment was made in the tax treaty with Singapore, which also came into force from April 1, 2017. Unlike the tax treaty with Singapore, the original pact with Mauritius did not require “significant presence”.

As a result, since April 2000, 32% of the inflows have come through Mauritius because investors from the US, the UK and Germany too opted to route their investment via this window. Tax consultants said given the parity in tax treatment now, investors are preferring to route investments via Singapore.

OECD Economic Growth Forecast – In its Economic Outlook May 2019, Organisation for Economic Co-operation and Development (OECD) states with respect to India “Economic growth will regain strength and approach 7½ per cent by 2020. The new income scheme for small farmers will support rural consumption. Investment growth will accelerate as capacity utilisation rises, interest rates decline, and geopolitical tensions and political uncertainty are assumed to wane. Lower oil prices and the recent appreciation of the rupee will reduce pressures on inflation and the current account. Monetary policy could be loosened somewhat as headline inflation remains well below target and inflation expectations are adjusting down. Rising public sector borrowing requirements reflect the implementation of new welfare schemes, sluggish tax revenue, and growing financial needs of public enterprises and banks. Reducing the high public debt-to-GDP ratio would require improving the collection of the Goods and Services Tax and broadening the personal income tax base. Ensuring a swift resolution of bankruptcy processes would help contain non-performing loans and boost productivity by promoting the reallocation of resources to more productive firms and sectors. Improving the quality and timeliness of economic data, in particular on employment and public finances, would help in designing better policies.”

Revised SEZ Policy SoonIndia is set to revamp the special economic zones (SEZs) framework to house a wider range of companies, allow flexible long-term leases and make exits easy to lure investment. Apart from this, non-processing areas in such enclaves can be used to boost exports and employment generation. India had 232 SEZs, of which 25 are multi-product ones and the rest are sector-specific ones, with 5,109 approved units, as of March 31. The sector-specific SEZs are meant for IT and IT-enabled services. Under the proposed policy, these could be opened up to sectors such as tourism and multimedia services. The policy will seek to provide ease of operation and exit, procedural relaxations, and uniformity in administrative and financial matters among all SEZs. It could also provide easier subcontracting for customers outside the zones. The units now need permission to subcontract any part of their production or production process to units in other SEZs.

Posted by Sourish Mohan Mitra

Sourish Mohan Mitra is an India-qualified lawyer from Symbiosis Law School, Pune and currently working as an in-house counsel with a global research firm in Delhi, India; views expressed are personal; he can be reached at sourish24x7@gmail.com; Twitter: @sourish247

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