India Still Attractive to Foreign Investors: Trade Minister

India has diversified its exports to make up for the fall in demand from the developed world since the global financial crisis hit, and the nation remains an attractive destination for foreign investors despite controversy surroundingits recent tax legislation, India’s Minister of Commerce and Industry, Anand Sharma told CNBC on Tuesday.

Bombay Traffic
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Bombay Traffic

Earlier in the day, the Reserve Bank of Indiacut its main interest rate aggressively by 0.5 percentage points to 8 percent, warning that the country's current account deficit of 4.3 percent of gross domestic product was "unsustainable."

Sharma told "European Closing Bell" that India has diversified into new markets such as the rest of Asia-Pacific, Africa and South America.

"That has yielded positive results, because demand is still weak when it comes to the euro zone. Demand has not gone back to the pre-recession levels even in America, even in the UK and elsewhere," he said.

"This year, 2012, the prognosis is not good at all for the global economy," Sharma added.

Also on Tuesday, Vodafone, one of the largest foreign companies that invest in India, said it was considering arbitration proceedings over new tax proposals that could force it to pay tax on a 2007 acquisition of a company doing business in the Indian mobile telephony sector.

India's newly-adopted Finance Bill brings under the country's tax net all cross-border mergers and acquisitions involving Indian assets or businesses since 1962, when the country's tax rules were written.

In January this year, the Indian Supreme Court ruled in favor of Vodafone, saying the company did not have to pay $2.2 billion in taxes over the acquisition of a majority stake in the Indian operations of Hong-Kong-based Hutchison Whampoa in 2007.

Sharma said he’s confident that investors would not see the legislation as a threat.

"There have been other, similar transactions which were found to be taxable by the revenue authorities, and the other companies … accepted that interpretation," he said.

"We have a very stable policy regime," said Sharma, saying that investment decisions also depend on factors other than taxation, such as the business environment, the viability of the business and repatriation of profits.

"India has a very sound track record also when it comes to promotion of investment, protection of investment and profits," he said.

"Investment and partnership, which is there between the country and the investor, is not only restricted to a tax matter,” Sharma said. “It's much bigger than that. India has been and remains an attractive destination for foreign investments."