Infrastructure has been a key sector attracting FDI

Devraj Singh, Executive Director – Tax & Regulatory Services, EY India discusses various issues related to FDI in the Indian infrastructure sector.

What has been the trend of FDI inflows into the Indian infrastructure sector in the last decade ?
FDI inflow into Indian infrastructure exhibited inconsistent growth between 2004 and 2008. Just before the global financial crisis, it touched the highest level of $15,573 million in 2008. Post 2008, FDI inflow reduced drastically to $2,874 million in 2009 and since then it has been in the range of $2,300-3,600 million, approximately 80 per cent below the highest level seen in 2008.

What have been the main drivers for FDI inflows into the infrastructure sector?
The following factors have been the main drivers for FDI inflows into infrastructure:
a.Approval of 100 per cent FDI under automatic route in townships, housing, built-up infrastructure and construction-development projects subject to limited conditions
b. Rising infrastructure investment (from 7.6 per cent of GDP in the 11th Five-Year Plan to 10 per cent of GDP in the 12th Five-Year Plan)
c. Increasing share of PPP projects, (from 37 per cent in the 11th Five-Year Plan to 48 per cent in the 12th Five-Year Plan)
d. Rising population, income levels and growing urbanisation generating robust demand
e. Introduction of Infrastructure Debt Funds (IDFs) to channel the flow of long-term funds including foreign funds to the infrastructure sector.

We understand that EY´s 2014 survey indicates that India is one of the top global destinations for foreign investment. Please share some of the highlights of this survey related to infrastructure.
Our survey revealed that infrastructure has been a key sector attracting FDI since 2003. Its share in the overall FDI increased from 10.4 per cent in 2003 to 22.2 per cent in 2008. However, post the global financial crisis, this share came down sharply to 5.2 per cent.

In subsequent years, it improved marginally but re¡mained below 7 per cent till 2012. In 2013, the figure bounced back to 21.2 per cent. During 2003-2013, the top five countries contributing to FDI inflows into infrastructure in India were: UAE ($11.461 million), US ($10,254 million), UK ($5,008 million), France ($4,314 million) and Singapore ($4,139 million).

Which cities in India attracted FDI in infrastructure in the last decade ?
Top cities in India that attracted FDI in infrastructure during 2003-2013 were Bangalore ($7,655 million), Chennai ($5,986 million), Hyderabad ($3,015 million), Mumbai ($1,910 million) and Kochi ($1,907 million).

The FDI inflow in infrastructure has been declining since 2009. What are the reasons behind this trend?
Since 2009, FDI inflow has been trending in the range of $2,300-3,600 million, approximately 80 per cent below the highest level registered in 2008. Some of the reasons have been global financial crisis, domestic economic slowdown, high inflation leading to high cost of funds, rupee depreciation reducing returns for foreign investors, policy paralysis and problems related to regulatory clearances and project executions.

– Janaki Krishnamoorthi