The government has reportedly begun talks with a host of capital-rich nations like Saudi Arabia, UAE, Japan, South Korea, the US, Australia, among others, to deploy their abundant pools of patient capital to support its infrastructure-led drive to bolster growth. Against a backdrop of a moderation in public capex growth and domestic private investments yet to accelerate, the government is taking a bet on the animal spirits of foreign investors to trigger a virtuous cycle that can enable the Indian economy to remain the fastest growing large economy in the world. The government is expected to play the role of a catalyst-as budgetary resources are constrained-to attract long-term, low-cost capital in the $1.4 trillion pipeline of infrastructure projects, according to a report in FE. The government is confident that it can attract such inflows as FDI amounted to $596.5 billion from FY15 to FY23 from $305.3 billion that came in from FY05 to FY14.
This wager on enhancing FDI inflows, however, is not of recent provenance as it goes back to the Union Budget for 2020-21 and Economic Survey for 2019-20 which expected private investments, especially foreign, to do the heavy-lifting. The government has also liberalised the sectoral caps in various sectors, including defence, to allow a greater amount of investment proposals to go through the automatic route. 100% FDI limits for e-commerce, contract manufacturing, further opening up the coal industry, civil aviation, easing the 30% local sourcing norms for single brand retail exemplify this on-going process of liberalisation. Budget 2020 went further in exempting sovereign wealth funds from taxes on interest, dividends and capital gains if they invested long-term in roads, highways, ports and water supply projects. The government is targeting FDI in the railways and clean energy such as wind power and green hydrogen.
The billion-dollar question is whether foreign investors will be enthused enough to unveil big-ticket investments in the country to boost growth. Investing long-term in infrastructure and green-field projects entail taking huge risks considering the country’s restrictive land acquisition laws and time taken for environment clearances. While ports and airports are attracting private capital as the returns are good, foreign equity inflows have been relatively muted in construction infrastructure and construction development. Tax incentives might not suffice as the investment environment is sensitive to policy and regulatory uncertainty. Above all, foreign investors seek improvements in the ease of doing business on the ground, especially in the various states. They require better enforcement of contracts as there are serious concerns over governments at the state-level reviewing and cancelling deals entered into by the previous regimes.
To become an attractive FDI destination, the momentum needs to pick up on long-pending structural reforms to free up the land and labour markets. To be sure, the government is attempting to simplify labour laws but whether they impart a greater degree of flexibility is a different matter. The initiation of such reforms has a bearing on the government’s intent to spend $1.4 trillion on infrastructure harnessing more FDI. The good news in this regard is the upswing in relations with countries like the UAE, Qatar and Saudi Arabia who are looking to a future beyond oil and gas and are considering deploying their financial clout in India. This augurs well for India to attract pools of capital which seeks stable long-term returns.