Why does India, ranked the fourth largest economy, get such a meagre share of FDI?

Batuk Gathani

in London

A major debate is on in the Euro Zone about ways and means to a) streamline the taxation system, and b) to urge various EU members to reduce the burden of corporate and social welfare taxation, to boost the efficiency and productivity of the manufacturing and service industries. Balanced and reduced taxation, it is argued, would enhance European companies' competitive edge in the global marketplace. This is essential as European companies are facing "stiff" competition from their American and Asian counterparts.

The World Bank, in its recent annual report, stated that Britain could cut `red-tape' to boost jobs and investments. The British tax authority has also stated that the administrative burden of complying with current tax regulations is much higher for small and medium companies. In Germany and the UK, as also in India, such companies mainly family-owned and managed contribute substantially to GDP. The EU governments, led by the UK and Germany, have launched several initiatives to try and cut red-tape for businesses but the feedback is that such efforts as inadequate.

Common rules

A recent bid by the European Commission to unify the tax code has triggered some controversy and, hence, the 25 EU nations now aim to set `common rules' though not one pan-European tax levy. Ireland and Slovakia are rated as `low-tax-level' countries and are yet to synchronise their taxation strategies with `high-tax-level' countries such as Germany, France, Italy and the UK. The current corporate tax levels vary widely within the EU and, hence, the proposed "common rules" would face some opposition from EU member-states. The current rates are: Germany 38.9 per cent, France 35 per cent, Italy 33 per cent, Britain 30 per cent, Slovakia 19 per cent, Hungary 16 per cent and Ireland 12.5 per cent. Ireland is a popular base for transnational and global American and Asian companies.

Volume of FDI

The

Doing Business

report, published annually by the World Bank and the International Finance Corporation, ranked the UK as the sixth easiest country to do business. The UK moved one place from last year, after being overtaken by Hong Kong. The `top' four are Singapore, New Zealand, the US and Canada.

According to a recent OECD report, foreign investment flows into the world's 30 richest countries that are OECD members have risen to the highest level since 2001. The top ten recipients of FDI (Foreign Direct Investment) flows are the UK, at $152 billion plus, and the US, at $100 billion plus, followed by France ($52 billion) and Luxembourg, Holland, Canada, Germany, Belgium, Spain and Italy (all under $50 billion).

According to UBS (Union Bank of Switzerland), Indian equities drew a record $10.6 billion FDI in 2005; only Taiwan was able to better this in Asia, excluding Japan.

The FDI pace this year could slow and the debate in financial circles is by how much and when. Though India is rated the world's fourth largest economy, it gets only 0.8 per cent of global FDI flows and less than 3 per cent of what developing countries receive. China gets 25 per cent of the FDI flows to the developing countries and around 10 per cent of the total global FDI flows.

Perhaps, India lacks some of the crucial factors that determine pace and level of FDI flows such as improved infrastructure, labour reforms and quality of governance.

(This article was published in the Business Line print edition dated September 20, 2006)
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