India will not tax foreign funds at their point of entry as the government believes the economy is resilient enough to absorb the dollar deluge. Such a tax on foreign inflows — called the Tobin tax, after its proponent, 1981 Economics Nobel winner James Tobin of the US — is being fiercely advocated by the EU and the UK, while Brazil has already imposed a 2 per cent levy. Finance minister Pranab Mukherjee, however, does not favour a tax on finances entering India. He told Parliament today that “the market mechanisms have sufficient resilience and have been functioning normally”.
However, the finance ministry has set up a committee to review the existing policy on foreign capital inflows.
Top officials said the committee’s recommendations would be considered if the RBI and government see any negative impact on the economy. “Right now, we believe the inflow is manageable and necessary as it provides funds for our industrial recovery.”
India has already attracted some Rs 79,343 crore in foreign institutional investments in the first eight months of this financial year, comprising not only stocks but also debt papers to the tune of nearly Rs 12,000 crore.
The Economic Advisory Council to the Prime Minister has forecast net capital inflows of about $50 billion in this fiscal in foreign institutional investment, foreign direct investment and external commercial borrowing. So far, gross inflows have been $44 billion.
Analysts say the huge surge in inflows has led to the rupee appreciating by some 5 per cent against the dollar, causing problems for exporters who are trying to regain markets lost during global recession.
Foreign capital, including FII funds and foreign direct investment, accounts for about 26 per cent of Indian stocks and over half of the free float. FII holding has been valued at $187 billion, though the peak is much higher at $265 billion in December 2007.
Some analysts are warning that part of the funds are black money which are being shovelled back into the country. Besides, a part of the money can leave the country at the slightest sign of trouble.
The tax haven of Mauritius accounts for 18.74 per cent of the Rs 79,343 crore that the FIIs pumped into the country from April till November.
Finance ministry officials, however, said India had always exercised adequate controls over inflows.
Only on Wednesday, Sebi barred Barclays Bank from issuing offshore derivative instruments because the bank provided misleading data. The case pertains to four derivative instruments issued by Barclays way back in December 2006 with Reliance Communications as the underlying assets.