By Richard Rossow —
Status: Not Started — With changes to India’s bilateral tax treaties with Mauritius and Singapore, India should be more comfortable outlining the real origins of FDI.
Difficulty Level: Easy, No Legislation & No Opposition — Simply requires the Reserve Bank of India (RBI) and the Department for Promotion of Internal Investment and Trade (DPIIT) to catalogue and present inbound FDI data differently.
This is the second installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.
No previous Indian government has pursued foreign direct investment (FDI) with the vigor of the Modi government. India has removed many existing FDI restrictions while senior cabinet officers — including the prime minister himself — regularly visit foreign capitals to engage business executives. Yet for all this activity, India knows very little about its current patterns of FDI flows—where FDI originates, and which states are attracting FDI. Without knowing these basic facts, the Modi government’s FDI promotion work is flying blind.
India’s foreign investment environment has been on a steady path of liberalization and reform for over 20 years. Although the Modi government’s recent claims of having one of the world’s most open investment regimes is not true given the FDI restrictions in legal services, retail, insurance, pensions, newspapers, and more. There are no restrictions on most forms of manufacturing, infrastructure development, oil and gas, technology services, and other critical sectors. The Modi government has steadily liberalized the sectors from remaining controls, making over 30 positive changes to the foreign investment environment in four years. Some of these changes are more cosmetic, but some are expected to yield meaningful new investments.
However, the reforms and the numbers give only a small sense of the real deal flows. We do not have credible data on the country source of these inflows. We do not know which Indian states are attracting FDI. And we have only broad information as to the specific sectors attracting FDI. Lacking this information prevents a real strategy for attracting fresh investment by targeting top foreign investors as well as host states.
Every quarter India’s Department of Industrial Policy and Promotion (DIPP) releases the most recent statistics on India’s foreign direct investment inflows. It includes the monthly and annual totals, some historical information, the national source of that FDI, and sector-specific information. This “national source” data places the U.S. as the sixth-largest source of FDI inflows. Mauritius and Singapore rank first and second, respectively. While the U.S. may not be first, there is no conceivable way that Mauritius and Singapore (combined population of around seven million people) account for 52 percent of total FDI into India in the last nineteen years. The data is distorted because India looks at the “point of departure” for FDI. Mauritius and Singapore have preferential tax treaties with India, so many foreign investors set up a Mauritian entity to make the investments into India, warping the totals.
A second area of critical weakness is knowing to which states and metropolitan areas the foreign investment inflows are landing. Here again, the government of India publishes data based on the place of applying to the RBI to permit the inflows (also included in the DIPP FDI reports, noted above). However, an investor may submit documentation in Mumbai, where it will be counted—whereas the actual investment could be in another state.
The Modi government will have very little insight as to whether its attempt to attract investment in specific sectors is successful without detailed data, nor whether the central government’s attempt to spur states into creating more favorable business environments has a link to foreign investment inflows. Perhaps the government has better internal data but these are the same numbers Indian officials typically use in presentations when going on international road shows. This lack of critical data can impact India’s ability to attract investment. Many sectors rely on the development of an ecosystem, such as automobile assemblers and their suppliers. Prime Minister Modi has personally engaged in economic diplomacy to key countries such as the United States and Japan—yet has little information to show whether these visits have led to increases in investment from targeted nations.
Good data helps policymakers make smart decisions. The Modi government has taken pains to generate foreign investment, using a mix of reform and personal diplomacy. The government should take time and assess how to create better tracking systems and use that information to further target economic diplomacy going forward.
Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.