Foreign investors are embroiled into blurred vision with budget declaration. They viewed it a normal budget without any boost to FDI sentiment in the country. Merging of FPI ( Foreign Portfolio Investment ) and FDI and phased reduction in corporate tax from 2016-17 from 30 percent to 25 percent over a period of four years are not the major enthuse for the foreign investors. Foreign investors with a status of domestic companies are already entitled to an effective corporate tax rate of 23 percent after the exemptions. Slash in corporate tax will be accompanied by phasing out of exemptions and increase in surcharges. Budget is yet to announce the road map for phasing out of corporate tax rate oover the four years in conjunction with curbing the exemptions. This led foreign investors in despair with regard to effective tax rate after the phase-out declaration.

Trimming of corporate tax rate is not a bonanza for the foreign investors. China is already granting lower corporate tax. The significance of lower corporate tax rate for the foreign investors also depends upon the currency fluctuations. Higher is the value of the currency of the foreign investors country, lower is the benefit accrued from slashing of corporate tax in investing countries.

FPI is not FDI. The real benefit of FDI is discredited by treating FDI and FPI at par. FDI has more power of resilience than FPI during the economic crisis. It proved during the South East Asia currency turmoil in 1997 -98. Investment through FDI was more stable than FPI and other forms of investment. In sharp contrast to FDI, FPI and debt flows witnessed large outflow from the currency affected countries during the same period. FDI can prove springboard for industrial development and manufacturing sector, particularly in developing countries. FDI allows the transfer of technology, training of workers and ensure the productivity. FDI takes more active involvement in management and long-term interest of the company. Projects under FDI are more efficiently managed. FDI is viewed as “good cholesterol” for industrial development, according to IMF.

The crux of the FDI attraction in the country is not the fiscal incentive only. Land for investment and a proper cooperative federalism between the state and centre are most warranted to stimulate the initiative of foreign investors. FDI initiative is decimated by restrictive policies of land acquisition and multiple clearances required at Centre and State level. About 50 percent of the clearances are in the domain of State government.

Land acquisition has become a nightmare for the investors under the new Land Acquisition Act. It takes five years to acquire a land as compared to three years in the earlier system. Mandatory obligations of 80 percent farmer’s consent, paying out for land four times more than normal value in rural areas and two times more in urban areas, were seen harder than previous policies. Besides, social impact assessment and rehabilitation and resettlement of the farmers have almost made it difficult to acquire land.

China is apprehended to enter deflation with Consumer Price Index (CPI) slipping into just 0.8 percent rise year-on-year in January. Chinese currency appreciated by 32.6 percent against the US dollar since mid-2005. Foreign investors put a break on investment expansion in China and resorting to China+1 strategy. In contrast, India purged a comfortable growth in GDP and inflation which are propitious to investment growth. Time had ripen for budget to give impetus to the foreign investors by a policy breakthrough and by cooperative federalism, particularly in those states which are ruled by BJP. Land is a State subject under the Constitution. Currently, 8 State are under the ruling of BJP party

Budget was silent on any new incentive to attract foreign investment either on technology transfer or displacement of investment from urban to semi-urban areas. China grants special income tax benefit to foreign investors in special economic zones and the foreign manufacturers who bring high tech products in domestic tariff area. In China, the foreign investors, who bring advance technology, enjoy tax holiday for two years and are permitted 50 percent tax exemption for next six years in the domestic tariff area. In India no such tax incentive is available to the foreign investors. In China, foreign investors, who reinvest their profits after operating for 5 years, are entitled to special incentive for refund of 40 percent of their tax paid on the reinvested fund. In India, no incentive is given to the foreign investors for their reinvestment of profits.

On indirect tax, China grants several incentives. Technology Transfer and Technology Development are exempt from value added tax (VAT). Equipment imported for projects in the priority sector are exempt from tariff and import stage VAT.

Make in India remains only a concept. Ease of doing business and corresponding prop up of investment need big ticket reforms. Even though budget enumerated several measures for ease of doing business, such as e-Biz Portal and skill development – a factor to improve productivity, it disappointed foreign investors by neglecting curb on high custom duties in capital goods.

Budget negated retrospective tax terrorism and deferred GARR for two years. These are certainly a step forward to do ease of doing business. But, they are not stimulant to propel up investment sentiment of the foreign investors.

Foreign investors are resorting to China+1 and Thailand+1 strategies. They were pitching for high hopes in India – the only country which is driving a higher economic growth based on domestic demand. Budget should have made a policy breakthrough to reap the benefits emanated from the world under deflation by roping the foreign investors who are looking for China+1 and Thailand+1 strategies. (IPA Service)