The 3 Strategic Steps India Must Take to Attract FDI

By AltG Investment Research Lab

As global interest rates, particularly in the US, rise, the cost of capital naturally increases, making the competition for investment more intense. To attract Foreign Direct Investment (FDI), India must leverage its growth potential and deliver an irresistible value proposition. The goal is to make India a more attractive investment destination relative to domestic opportunities in developed nations and other high-growth countries. The transformation of India's micro-cap companies into small-cap entities is key, with projections indicating their GDP contribution will grow from 30% today to 60% over the next two decades, according to AltG Investment Research Lab. To achieve this, India needs to focus on the following three strategic steps:

1. Developing IFSC GIFT City as an Asset Financing Hub

Objective: Establish GIFT City as a premier global financial hub to facilitate the flow of capital.

• Action Plan:

• Infrastructure Enhancement: Develop world-class infrastructure to support financial activities.

• Policy Support: Implement regulatory frameworks that are conducive to attracting mid-market private equity, search funds, and other alternate investors from capital-rich nations.

• Ease of Doing Business: Simplify procedures and reduce bureaucratic hurdles to make it easier for international investors to operate in GIFT City.

2. Aligning Private Market Capital Gains with Public Market Capital Gains

Objective: Create a more favorable tax environment for private market investments.

• Action Plan:

• Tax Reduction: Lower the long-term capital gains tax rate for private investments from 20% to 10%.

• Term Adjustment: Reduce the holding period for long-term capital gains eligibility from two years to one year.

• Policy Consistency: Ensure that private market investments are not disadvantaged compared to public market investments, making private equity more attractive.

3. Developing Investment Structures to Tap into India’s Growth Story

Objective: Create flexible and attractive investment vehicles to draw a wide variety of global investors.

• Action Plan:

• Innovative Investment Vehicles: Develop new investment structures that cater to different types of investors.

• Focus on Long-Term Value: Shift the focus from high upfront taxation to long-term value creation, emphasizing the aggregate amount of taxation from a larger pool of capital.

• Competitive Tax Framework: Implement a tax structure that is globally competitive to attract long-term investments, ensuring that taxation policies do not deter potential investors.

Conclusion

India’s economic growth offers substantial opportunities for global capital, but realizing this potential requires strategic reforms and enhancements. By developing GIFT City as a global financial hub, aligning private and public market capital gains taxes, and creating innovative investment structures, India can position itself as a premier destination for FDI. These steps will help transform micro-cap companies into small-cap powerhouses, driving substantial economic growth and making India's investment landscape highly attractive on a global scale.

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