By Maria Philip —
India watchers are used to repeated assertions by Indian officials, including Prime Minister Narendra Modi, that Mauritius and Singapore are the two largest sources of foreign direct investment (FDI) into India. The idea that two tiny nations with a combined population of just seven million people and a combined gross domestic product of $493 billion in 2015 could out-invest the United States and the United Kingdom seems like a stretch, but it’s backed up by official government statistics from India’s Department of Industrial Policy and Promotion (DIPP).
DIPP’s numbers, however, misrepresent foreign investment in India. They are distorted by procedure. When identifying the source of investment dollars, DIPP looks no further than an investment’s last point of call before entering India. Because India’s tax treaties offer highly favorable treatment to certain nations — particularly Mauritius and Singapore — it makes financial sense for investors in Dubuque, Iowa to route their money through a bank in Port Louis before sending it into India. A review of FDI proposals approved by India’s Foreign Investment Promotion Board (FIPB) from 2013 to 2015 reveals that the United Kingdom was actually the largest investor in India during that period, while the United States was the second-largest.
First, the official numbers: in Fiscal Year 2014-2015, FDI equity inflows into India swelled to $30.9 billion, and the percentage of U.S. FDI increased to 6 percent, or $1.8 billion. U.S. investment appears unimpressive, however, when compared with the $9 billion in FDI from Mauritius and $6.7 billion in FDI from Singapore in the same fiscal year.
Second, the data source: when foreign investors wish to invest in a sector of the Indian economy where foreign investment is restricted, they must first receive approval from the FIPB. The FIPB reviews and approves applications for proposed investment worth up to Rs 3,000 crore ($444 million), while larger proposals must be approved by the Cabinet. (The Reserve Bank of India’s ‘automatic route’ channels FDI into the unrestricted sectors of the economy). The FIPB publishes annual records of approvals that include the name of the company behind the investment, creating an ideal data set for ascertaining the source of investment.
To determine the true origin of FDI in India, the CSIS Wadhwani Chair in U.S.-India Policy Studies examined the FIPB’s 2013 and 2014 reports and investigated the shareholding pattern of all the companies investing from Mauritius and Singapore. Investments made by subsidiaries or shell companies of parent firms based in other countries were counted as coming from the home country of the parent company. Investments by companies whose majority shareholder(s) could not be confidently determined were excluded from the calculations.
DIPP claims that U.S. investment accounted for only 5 percent of India’s total FDI inflows in Fiscal Years 2013-2015. Yet a closer examination of FIPB records shows that from 2013 to 2015, U.S.-based firms in fact invested 19 percent of the total FDI approved by the FIPB, or $2.17 billion. More than half of this money ($1.1 billion) was routed through Mauritius and Singapore. In 2014, for example, the California-based Walt Disney Company invested $180.3 million in India through its subsidiary in Singapore, the Walt Disney Company (Southeast Asia) Pte. Ltd. This research also shows that indigenous Mauritius- and Singapore-based companies contributed a mere 0 percent and 1 percent, respectively, of FIPB-approved FDI over the two years.
Also noteworthy is the fact that Indian companies ‘round-tripped’ an estimated $2.14 billion of investment into India through Mauritius and Singapore in the two years reviewed. This figure, which represents 19 percent of the total FIPB-approved FDI inflows from 2013 to 2015, makes India one of its own largest sources of FDI.
Why do foreign investors route their investments into India through Mauritius or Singapore? Double taxation avoidance agreements (DTAAs) between India and Mauritius, Singapore, and Cyprus provide mandatory relief from Indian capital gains tax, which levies 15 percent on short-term capital gains and 20 percent on long-term capital gains. In contrast, India maintains its right to tax most capital gains in its DTAA with the United States. Moreover, neither Mauritius nor Singapore levy a domestic tax on capital gains.
The 2015-16 Economic Survey offered one of the first official acknowledgements that the FDI numbers are suspect, suggesting that “inflows need … to be examined more closely to determine whether they constitute actual investment or are diversions from other sources to avail of tax benefits under the Double Tax Avoidance Agreement.”
A better understanding of the actual size of U.S. investment in India will help both countries assess their economic relationship and could guide Indian reform of its FDI policy. It may even encourage India to reconsider its stance on a Bilateral Investment Treaty and re-think its policy on DTAAs with the United States.