New Delhi: India continues to be a favourite FDI destination though tax-related concerns remain a deterrent for some foreign investors, an UNCTAD report said today.

It also said that foreign direct investment (FDI) inflows to developing Asia shrank by 15 per cent to USD 443 billion in 2016, the first decline since 2012. This affected three sub-regions, with only South Asia spared. However, UNCTAD's World Investment Report 2017 said an improved economic outlook in major economies, such as ASEAN, China and India, will likely to boost investors' confidence, propping up the region's FDI prospects for 2017.

"The favourite FDI destinations remain the US, China and India," UNCTAD said, adding "Although new liberalisation efforts continue to improve the investment climate in India, tax-related concerns remain a deterrent for some foreign investors".

In South Asia, FDI inflows increased by 6 per cent to USD 54 billion. Flows to India were stagnant at USD 44 billion. FDI inflows to developing Asia are expected to increase by 15 per cent in 2017 to USD 515?billion, as an improved economic outlook in major Asian economies is likely to boost investor confidence.

In major recipients such as China, India and Indonesia, renewed policy efforts to attract FDI could contribute to an increase of inflows in 2017, it said. The foreign outflows from South Asia declined by 29 per cent to only USD 6 billion in 2016, as India's outward FDI dropped by about one third, it added.

Cross-border merger and acquisition deals have become increasingly important for foreign multinational enterprises to enter the rapidly-growing Indian market, the report said.

In 2016, there were a number of significant deals, including the USD 13 billion acquisition of Essar Oil by Rosneft (Russian Federation). The report noted that signing of a tax treaty by India and Mauritius in May 2016 "might have" contributed to reduced round-tripping FDI.

It further noted that despite a historically high number of announced greenfield projects in 2015, FDI flows to India were largely flat at about USD 44 billion in 2016, up only 1 per cent from 2015.

Foreign multinational enterprises (MNEs) are increasingly relying on cross-border M&As to penetrate the rapidly growing Indian market. Pakistan's inflows increased by 56 per cent due to significant investment in infrastructure from China in support of the One Belt One Road initiative. For the first time, China was the world's second-largest investor as FDI outflows surged by 44 per cent to USD 183 billion, a new high.

BRICS - the economic group comprising Brazil, the Russian Federation, India, China and South Africa accounted for 22 per cent of global GDP but received only 11 per cent of global inward FDI stock in 2016. FDI flows to the five BRICS countries last year rose by 7 per cent to USD 277 billion. The increase in inflows to the Russian Federation, India and South Africa more than compensated for the decline of FDI to Brazil and China.