[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

REIMAGINING INDIA
2006. Besides, India has also entered
into Bilateral Investment Promotion
and Protection Agreements (BIPAs)
with a number of countries to promote
and protect foreign investment on a reciprocal
basis. All these policy changes
have resulted in an environment conducive
to a rapid expansion of outward
FDI flows from the country.
3. Overseas Investment: Geographical
And Sectoral Patterns
India’s outward FDI has steadily increased
since 1996, both in terms of
number of approvals and value. Indian
investment abroad has gone up from $
557 million (290 approvals) in the financial
year 1996-97 to $2855 million (1395
approvals) in the financial year 2005-06,
representing an increase of 513 percent
in terms of value of investments and 380
percent in terms of the number of approvals
given. In the financial year
2006-07 (for the period April-October
2006), actual FDI outflows stood at $
3320 million as compared to $ 2109 million
in the corresponding period of
2005-06. 9 Before we move on to a discussion
of geographical and sectoral
patterns of FDI outflows from India, we
must pay attention to some of the limitations
of the statistics on FDI outflows:
these statistics relate only to approvals
rather than actual FDI outflows; the
FDI outflow statistics do not include investment
financed by borrowing in international
financial markets through
special purpose vehicles (SPVs); moreover,
the data on sectoral distribution of
outward FDI are not disaggregated
enough 10 . Nonetheless, even the currently
available statistics on outward
FDI from India provide valuable
insights.
3.1 Geographical Patterns
Until mid-1980s, much of the outward
Indian investment abroad has gone up from $557 million
(290 approvals) in the financial year 1996-97 to $2855
million (1395 approvals) in 2005-06, representing an
increase of 513% in terms of value of investments and
380% in terms of the no. of approvals given
FDI from India was concentrated primarily
in a few developing regions of
Africa (Kenya and Nigeria), Southeast
Asia (Malaysia, Indonesia, and Singapore)
and South Asia (Sri Lanka and
Nepal) 11 . In fact, in the 1980s, India had
emerged as the third largest foreign direct
investor among the developing
countries after Hong Kong and Singapore.
12 The geographical pattern of Indian
outward FDI underwent noticeable
changes since early 1990s, when the
outward FDI flows from India (in some
of the sectors, such as software and
pharmaceuticals) started shifting towards
the developed regions, mainly
North America and European Union.
Over the period from April 1996 to
October 2006, the largest recipient of
India’s FDI was Russia with total Indian
outward FDI of $ 2831 million, which
was followed by USA at $ 2768 million,
Mauritius at $ 2151 million, and UK at
$ 2150 million (see Table 1). More recently,
in 2006-07 (during the period
April-October 2006), the top three destinations
of India’s outward FDI were
UK, Netherlands and Mauritius. In
2006-07, India became the second-biggest
source of outward FDI flows to UK.
While most of the investments in USA
and UK have been in IT services and
pharmaceuticals, those in the Russian
Federation and Sudan have been mainly
in oil exploration. 13 A sizable chunk
of Indian outward FDI has been going
to the tax havens or offshore financial
centres, like Mauritius (10 percent),
British Virgin Islands (4.5 percent), and
Bermuda (3 percent). In fact, it has been
observed that the double taxation avoidance
treaty between India and Mauritius
(and other such tax haven countries)
has encouraged Indian firms to ‘round
trip’ investment through Mauritius (and
other tax haven countries) to take advantage
of the tax benefits enjoyed by
overseas investors. 14 Thus, the geographical
spread of Indian outward FDI
has expanded over the last decade,
with a shift towards the developed
countries.
3.2 Sectoral Patterns
It has been highlighted by several ob-
110 THE IIPM THINK TANK