Question

Which of the following countries is the top source of FDI inflows into India at present?

• A. Singapore
• B. USA
• C. UK
• D. Mauritius

Hint:

Think about which country's tax treaty with India made it a favourite route for investment, not which country is economically biggest.

Answer 1

The Correct Option is D

Step 1: Understanding the Question.
The question asks which country, as of the time this paper was written, sent in the largest share of Foreign Direct Investment into India.

Step 2: Key Fact.
For many years leading up to 2007, Mauritius was the single largest source of FDI inflows into India, not because of the size of its own economy, but because of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

Step 3: Detailed Explanation.
Under this treaty, capital gains earned by an investor routed through Mauritius were taxed in Mauritius rather than in India, and Mauritius levied little to no capital gains tax at that time.
This made Mauritius a preferred route for both foreign and even round-tripped Indian money to enter India, inflating its share of recorded FDI far beyond what its small economy would suggest.
Singapore also became a major channel for similar treaty benefits, but its share stayed behind that of Mauritius during this period.
The USA and UK are large investors in India in absolute economic terms, but a much smaller part of their investment was structured to flow in as classified FDI, so their official FDI shares were smaller than Mauritius's.

Step 4: Final Answer.
The top source of FDI into India at that time was Mauritius, so option (D) is correct.