Though the new government is trying to open up India´s infrastructure space for foreign investment, certain deterrents unique to each sector still exist, which may delay fund inflows.
Well-developed infrastructure is very important for the progress of an economy. With the mounting pressures on the Indian government to modernise infrastructure at a speed to match rapid urbanisation and influx of private entities picking up reigns of industry has led to liberalisation of foreign investment in the Indian infrastructure industry. The Indian infrastructure sector primarily includes roads, railways, airports, shipping and electricity which are the foundation on which a growing economy can build its future. As per data released by the Department of Industrial Policy and Promotion (DIPP), the FDI inflows in infrastructure activities during the period April 2000 - March, 2014 stood at $2,575.79 million. In a forecast by the Planning Commission, an investment of $1 trillion is expected to flow in from domestic and foreign sources for the infrastructure sector during the 12th Five-Year Plan of 2012-2017.
In the backdrop of fiscal deficit looming large and private financing having limitations of its own, it is an urgent need of the hour that direct infrastructure investments be routed across sectors to promote the much needed development of roads and railways and their support structures. The role of private concerns is emerging as a key player across various infrastructure segments, ranging from roads and communications to power and airports but owing to fiscal constraints, it shall be a vital step towards fuelling it by opening up channels for foreign financing into the segment.
It is noteworthy that various modifications have been introduced in the foreign policy this year to moderate the effect of rigid norms. ¨FDI¨ Policy issued by the DIPP on April 17, 2014 has permitted 100 per cent FDI in various infrastructure related sectors like airports, port development projects, construction-development, mining and telecom.
In the last few months, India has witnessed key investments and developments in its infrastructure sector. Global players such as Singtel, Singapore Airlines and Etihad have already entered India as the government has opened up more sectors to overseas investment.
The incumbent government at the Centre is also headed in the direction of bringing into India a revolution in infrastructure. With development of infrastructure and manufacturing as its prime focus, the present government has brought in sweeping changes to revitalise the sector. Revamping of current policy framework of infrastructure by providing quick boosters like increase in the FDI limits and cutting down of multilayered consent processes for FDI projects have been received well by the industry.
A major overhaul was provided by the government by approving foreign investment in railway infrastructure. It is proposed that a core group will be constituted with technical and security professionals to examine every FDI proposal. Pursuant to the Cabinet´s proposal on FDI in railways, certain overseas companies such as Canada´s Bombardier, General Electric of the United States of America and Germany-based Siemens are waiting for the formal endorsement before they can dive into the Indian railway sector.
Usually, an FDI proposal in an infrastructure project involves approval from various sectors which are often inter-dependent and lack coordination, thus leading to delay in sanction of such projects as a whole.
A significant move for easing the rigorous and time-consuming approval procedure of FDI pro policies has been made by providing for a simple and quick clearance window for infrastructure projects. This measure is not only expected to save time but also change the face of infrastructure in India by inducing rapid implementation. The Central government has provided for a quicker and focused problem-solving mechanism by shift of powers to bodies like the Cabinet Committee on Economic Affairs for considering FDI proposals involving investment of more than Rs 1200 crore, to Foreign Investment Promotion Board for considering FDI proposals involving investment of less than Rs 1200 crore and to the Reserve Bank of India (RBI) for FDI proposals under the automatic route. It shall also be ensured that such bodies are made up of representatives from the Ministries of Defence, Commerce, Home, Coal, Environment & Forests and Department of Space to employ industry expertise in crucial decision making.
Other initiatives, that are ancillary and encourage FDI in infrastructure, have also been taken to promote infrastructure development in the nature of following:
Real estate, being one of the most cash strained sectors, has also been provided some relief lately. The RBI and the Securities and Exchange Board of India (SEBI) have in a series of reforms eased regulations for bank lending to the infrastructure sector, and attract investors to contribute to the equity of such firms. The development of infrastructure requires debt of longer maturity to supplement the debt funds presently available and ensuring continued long-term availability of funding for infrastructure projects. Addressing this issue, the RBI introduced a lending model to supplement such debt deficit, by allowing banks to issue long-term bonds to raise resources for lending to projects in infrastructure sub-sectors and affordable housing, subject to terms and conditions stated in the July 2014 notification issued by the RBI. This model provides for refinancing of loans and would not demand tough provisioning requirements as applicable under restructuring of loans. Under this model, refinancing may be done by the existing bank or a new set of banks or even via the bond markets, provided conditions attached to such lending are duly met.
Recently, SEBI released draft guidelines for infrastructure investment trusts called the Real Estate Investment Trusts (REITs) which can raise funds via the public issue of units and invest in infrastructure projects, either directly or through SPVs. The REITs will be allowed to raise funds only through an initial offering and units of REITs have to be mandatorily listed on a stock exchange, similar to initial public offerings and listing for equity shares. It will be open for foreign investors to purchase the units of such REITs listed on a stock exchange.
On one hand, the FDI policies framed by the government have been fairly liberalised, but there are still certain strings attached to every sector that impede implementation. The conditions applicable to foreign investment, for example, case-by-case analysis, license requirements, selective routes of investment, issues of control and management under the strict scanner of authorities, plethora of disclosures and close monitoring may act as deterrents for foreign investors.