CII calls for FDI reforms after Obama criticised India's investment climate

India News Bulletin Desk
Barack Obama & Adi Godrej
Image: Wikimedia Commons (Elizabeth Cromwell & World Economic Forum)

Just days after US President Barack Obama expressed his concerns on India’s investment climate, the Confederation of Indian Industry (CII) has called on the Indian government to announce confidence building reform measures.

The CII has urged the government to take confidence boosting measures such as increasing FDI (foreign direct investment) caps in civil aviation, defence production and opening of FDI for multi brand retail.

“These will go a long way in correcting the perception about India globally,” said Adi Godrej, president of CII and chairman of The Godrej Group.

The global investors’ perception on India has been affected due to the recent developments in Indian policy making, according to Godrej.

The introduction of GAAR -- which was intended to plug taxation loopholes-- and the announcement on retrospective amendments to income tax law by the government had affected business sentiments and investors’ confidence globally, Godrej said.  

Investors have been demanding for India to raise FDI cap in the defence production from 26% to 49%.

Earlier in July, in an interview with the Press Trust of India, President Obama said that American investors think investment in India is still too difficult. He expressed his concerns about the worsening investment climate in India.

According to the US president, India limits foreign investment across many sectors including retail sector. He added that such foreign investment is crucial in creating jobs in both the countries and is necessary for India to maintain its growth.

Obama’s comments come at a time when India has been struggling to cope with a slowing economy, reducing output from manufacturing sector, low consumer confidence, depreciating rupee, as well as portfolio investors’ lack of confidence.

In the quarter ended March 2012, India’s economic growth plunged to a nine-year low of 5.3%. The country’s GDP growth also fell to 6.5% in 2011-12 as against the 8.4% GDP growth in the previous year.

The Time magazine’s Asian edition, which called Prime Minister Manmohan Singh an “underachiever” noted that the government is failing to act when the country's economic growth was slowing down.

The CII said it acknowledged the concerns raised by the US president and strongly feels that now is the time to announce investment-friendly measures.  

What is GAAR

GAAR (General Anti-Avoidance Rules) is a set of rules aimed at ensuring that organisations do not take advantage of tax provisions in India.

With GAAR, government can stop arrangements where the sole purpose is to avoid tax. One example of such tax avoidance is when organisations route investments from countries such as Mauritius with whom India has a double taxation treaty.

Under GAAR, routing transaction via such offshore entities to avoid capital gains tax -- without legitimately having a presence there or having an investment arm offshore -- can be disallowed.

However, one drawback of GAAR is that it can easily be extended to all types of tax-savings schemes employed by FIIs and other investors. This has caused some panic among institutional investors recently, leading them to believe that India’s investment climate isn’t friendly.


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