Why FDI Covets India

AFTER A PERIOD OF economic slumber, the Narendra Modi government is moving up a gear.

- Minhaz Merchant

The decision to allow 100 per cent foreign direct investment (FDI) in single-brand retail and construction will attract significant international funds. Cash-strapped real estate and infrastructure projects will get a boost. Foreign money has few places that offer safe and high returns. China cuts foreign investors down to the bone, leaving global companies with the crumbs. The Middle East is promising but politically volatile.

India’s ramshackle infrastructure – bad roads, poor quality housing, British-era bridges, shambolic small-town airports, decrepit public transportation and a low-tech SME ecosystem – presents a mouth-watering opportunity for FDI. Where else in the world would an American infrastructure or retail company in the Fortune 500 find a country with an aspirational middle class of over 300 million, still poorly served by the latest international high-tech products and services? Where else are returns on investment close to 10 per cent a year? With the rupee stable, even foreign exchange hedging costs have fallen.

What holds foreign investors back are three factors. One, inconsistent tax laws. The retrospective tax legislated by then Finance Minister Pranab Mukherjee and inexplicably kept in place by Finance Minister Arun Jaitley hangs like a sword of Damocles over companies like Vodafone and Cairn, part of the Vedanta group. The odium of this regressive tax has spread far and wide overseas and makes foreign investors wonder if the Indian government’s tax policies can be fully trusted.