Inbound FDI from tax havens shoot up in FY18

Equity investments from Cayman Islands rise by 1600%, even as inflows from traditional sources fall

Foreign direct investment (FDI) from nations widely regarded as tax havens such as Cayman Islands and Hong Kong jumped in 2017-18, even as overall India-bound investments showed a slower rise, year-on-year (YoY).

Latest government statistics provided by the commerce and industry ministry to Parliament show that the majority of nations from which equity inflows rose at the fastest pace have a curious similarity. They are all small-sized tax jurisdictions with low corporate tax rates preferred by major corporations and individuals alike to park their earnings. 

These include the sunny Cayman Islands and Bahamas, as well as European principalities such as Liechtenstein and Luxembourg. From the Cayman Islands, inflows rose in a single year from a low $71.03 million to a whopping $1.23 billion. 

This was followed by the special administrative region of Hong Kong, under Chinese political authority, which sent over $1.05 billion worth of equity FDI, up from the $176 million a year ago. This represented a nearly 500 per cent rise. Congress parliamentarian M V Rajeev Gowda has demanded a probe into the matter.

On the other hand, the gamut of FDI into India continued to rise in 2017-18, even as the rate of growth fell to 3.17 per cent, from 8.69 per cent the year before.

Experts had earlier warned that a closer scrutiny by the government on traditional FDI source nations may shift the flow of equity investments to other nations. The rate of growth for most of the historically highest FDI sending nations remained stagnant or negative. These are Mauritius, Singapore, Japan, the United Kingdom, and the Netherlands.

FDI from Mauritius, India’s largest source of overseas investments since 2000, saw only a relatively small 1.35 per cent growth. On the other hand, Japan, United Kingdom, and the Netherlands sent lower amounts of FDI in the last financial year. Only the city state of Singapore, known to be yet another nation with a liberal corporate tax regime and home to scores of multinational companies, saw a higher FDI outflow to India in 2017-18.

India’s position as an attractive FDI destination has fallen for the first time over the past four-year tenure of the Modi government. According to the 2018 AT Kearney Foreign Direct Investment Confidence Index, India is now not among the 10 destinations for FDI. The report suggested that investor confidence has received a knock after the country became burdened with the challenge of implementing policy norms after demonetisation and the goods and services tax.

After rising for the past two years, India’s position fell three places in 2018 to the 11th spot. But despite losing its top 10 status for the first time since 2015, India remained the second-highest ranked emerging market (EM).

However, the report mentioned that the “year marks an all-time low for the share of EMs on the Index” which may have a ripple effect on capital markets in the long term. “Just four EMs appear among the top 25 countries for FDI intentions: China, India, Mexico, and Brazil,” it said.

On the other hand, the government on Tuesday announced that the amount of black money stashed by Indian citizens in Swiss bank accounts decreased by around 35 per cent in 2017 YoY, and by 80 per cent since the Narendra Modi government took over in 2014.