22.09.2025

Domestic Economy and Trade

Context

India’s domestic economy and trade policies are currently shaped by three critical dimensions, Outward Foreign Direct Investment (FDI) trends, the Production Linked Incentive (PLI) scheme, and Goods and Services Tax (GST) challenges. Together, these highlight the interplay of global integration, industrial growth, and taxation bottlenecks in India’s economic development.

Outward Foreign Direct Investment (FDI) and Tax Havens

Data from the Reserve Bank of India (RBI) reveals a growing trend of Indian investments being routed through tax havens.
 Key Insights:

• Key Finding: Over 60% of India’s outward FDI goes to tax haven countries.
   
• Data (2024–25): Outward FDI stood at ₹3,488 crore, with 56% routed through tax havens.
   
• Top Destinations:
   
  • Singapore: 22%
     
  • Mauritius: 10%
     
  • UAE: 9%
     
• Definition: A Tax Haven is a country with low or negligible taxes, making it attractive for investors.
   
• Motivation: Indian investors seek tax relief, easier fund transfers, and reduced compliance burden, avoiding India’s complex tax structure.
   
• Mechanism: Investments are often routed through tax havens using Double Taxation Avoidance Agreements (DTAAs), which minimize the overall tax liability.
   
• Investment Types:
   
  • Outward FDI: Indian residents investing abroad.
     
  • Inward FDI: Foreign investments in India, typically long-term with at least 10% ownership in assets/companies.
     
  • FPI (Foreign Portfolio Investment): Investment in stocks with less than 10% ownership, generally short-term in nature.
     

Production Linked Incentive (PLI) Scheme

The PLI scheme remains central to India’s push for self-reliance and manufacturing growth.
 Key Aspects:

• Recent Development: The government has reopened applications for PLI in the white goods sector (LEDs, air-conditioners, refrigerators, televisions).
   
• Launch and Purpose: Introduced in March 2020 to promote manufacturing and reduce import dependency.
   
• Mechanism: Companies receive financial incentives based on incremental sales compared to previous years.
   
• Coverage: Now extended to 14 key sectors, including electronics, pharma, automobiles, textiles, and renewable energy.
   
• Benefits:
   
  • Boosts domestic production.
     
  • Encourages global and local companies to manufacture in India.
     
  • Generates employment.
     
  • Reduces import dependency.
     
• Success Story: In mobile manufacturing, exports surged from $34 million to $11 billion, largely credited to the PLI scheme.
   
• Eligibility: Both domestic and foreign companies operating in India qualify for the incentives.
   

GST Challenge and Inverted Duty Structure

India’s tax framework under the Goods and Services Tax (GST) continues to face structural issues.
 Key Problem:

• Context: With changes effective September 22, finished textiles attract 5% GST, while raw materials (inputs like PTA, MEG, PET for manmade fibers) are taxed at 18% GST.
   
• Definition: An Inverted Duty Structure (IDS) occurs when the tax rate on inputs is higher than the tax on the finished product.
   
• Impact on Industry:
   
  • Manufacturers face increased input costs.
     
  • Profit margins shrink, discouraging competitiveness.
     
  • Exporters struggle with refunds and working capital blockages.
     
• Sector Affected: The manmade fiber industry, crucial for India’s textile exports, suffers heavily due to this tax anomaly.
   

Conclusion

India’s domestic economy and trade dynamics reflect both progress and persistent challenges. While outward FDI to tax havens reveals loopholes in taxation and regulatory compliance, the PLI scheme demonstrates the potential of policy-driven industrial transformation. However, issues like the inverted duty structure in GST underline the urgent need for structural reforms. To sustain growth, India must ensure a balance between investment incentives, fair taxation, and global competitiveness.