Investors question credibility of India’s infrastructure plans

Asset owners and infrastructure experts applauded India’s latest budget for offering incentives to attract foreign capital into the $1.5 trillion-worth of projects within its new National Infrastructure Pipeline. But investment experts question how successful these inducements will be, given previous failures by New Delhi to deliver on promises to foreign investors.

The latest budget was unveiled on February 1 by finance minister Nirmala Sitharaman, who outlined several incentives for foreign asset owners and funds that invest in NIP projects. It contains several proposed measures (see box), including a relaxation of conditions under which foreign sovereign wealth funds and pension funds can receive a 100% tax exemption on income from infrastructure investments.

The exemption had first been announced in India's 2020 budget, but it contained strict conditions, such as prohibiting any commercial activity within or outside India that limited its effectiveness. Abu Dhabi sovereign wealth fund MIC Redwood 1 RSC Limited is one of the few investors to receive a full income tax exemption on investments.

The latest infrastructure plans and budget incentives have gained the attention of institutional investors, including Canadian pension fund Caisse de dépôt et placement du Québec.

“The various infrastructure development and financing related announcements in the budget provide ongoing evidence of the productive engagement the government is having with investors,” Saurabh Agarwal, managing director of infrastructure for South Asia told AsianInvestor. CPDQ is one of several international asset owners that have been increasing their investments into the world’s third-largest economy.

However, India economic experts say New Delhi will only gain investment support in large volumes if it can improve on a track record for implementing reforms that sits well behind other countries.

“Sometimes we find that execution or implementation falls short of intent,” said Rajat Kathuria, chief executive of the think-tank, Indian Council for Research on International Economic Relations (ICRIER.

BETTER EXECUTION NEEDED

One common failing has been a failure by the government to follow new foreign investor incentive announcements with rapid policy execution.

Yamini Aiyar, chief executive of New Delhi-based Centre for Policy Research, says the government has historically tended to either over- or under-regulate, and it struggles with enforcement.

Yamini Aiyar

She points to the Insolvency and Bankruptcy Code (IBC) introduced in 2016: “The IBC was a step in the right direction, but implementation is faltering.”

This failure is partly down to an obsession among the country’s ministries to fully control projects, along with a dearth of commercially minded civil servants, said Shekhar Shah, director general of the National Council of Applied Economic Research.

“A lot resides in the hands of extremely smart government officers who are often constrained from taking independent business-like decisions,” he told AsianInvestor. “We will need a reasonable firewall between the normal functioning of government and a much more market-facing functioning of the government.”

Would-be foreign infrastructure investors will also need to take into account the risk of political and economic shocks. This includes the ongoing farmers’ revolt, along with political rhetoric that appears at odds with the latest budget. Prime minister Narendra Modi has employed increasingly protectionist language when discussing India’s economy. 

NEW MEASURES

Given the government’s notoriety for bureacracy wrangling and delay, it would be well advised to announce specific project and tax exemption details to maximise foreign investor interest.

Key to this could be the establishment of a new $2.75 billion development finance institution (DFI), which was announced in the budget. The planned organisation would provide new forms of long-term financing not currently available in India’s financial market.

Shekhar Shah

The establishment of a DFI is also a well-trodden path for New Delhi. It previously established DFIs such as ICICI and IDBI, but these pivoted to become commercial banks or completely disbanded after a series of financial reforms in the 1990s exposed structural issues. 

Observers say the new DFI will only succeed if it is independent from the government and installs the right management team. "Genuinely functional institutions and a predictable and credible regulatory environment is something that investors look for – and currently remains India’s Achilles heel,” said Aiyar. 

The government has not yet offered any details on who will lead the DFI or when it will begin operations.

The launch of the DFI will need to be accompanied by a deepening of the country’s shallow corporate bond market if it is to succeed, note experts. As of August 2020, India's corporate bond market was just 16% of GDP, compared to 43% in Malaysia and 73% in South Korea.

“Deepening the corporate bond market in India is almost a necessary condition for a DFI to succeed,” said Shah. “It is a gap in our financial sector that will need addressing.”

Despite these challenges, Kathuria is relatively optimistic about the prospects for a new DFI. “At the time when [the last] DFIs were present there was a lot of what economists call financial repression and lazy banking. But the system now is different and I think we should give it a chance.”

Abhishek Poddar

Other plans announced under the budget to attract capital for infrastructure spending includes the creation of a national asset monetisation pipeline and the launch of new government-sponsored infrastructure development trusts (InvITs). The latter would let individual and institutional investors earn dividends from investing in assets such as power plants and highways.

Abhishek Poddar, managing director at Macquarie Infrastructure and Real Assets in India sees this as positive development. “For players like us, these vehicles provide a means of exit as well as new investment opportunities.”

He believes the trusts will attract interest from pension funds and other sources of patient capital in seek of stable yield. Kavita Saha, head of infrastructure for India at the Canada Pension Plan Investment Board, agrees.

“We believe the InvIT is a good route to monetise government-owned assets and attract long-term, patient private capital,” she told AsianInvestor.