Mega push for FDI trillions: State infra to masala bonds

Mega push for FDI trillions: State infra to masala bonds

Gautam Mukherjee | 21 Apr 2017 03:57 PM

Photo: AFP/File

The Union Cabinet decision to allow financially well managed states to  directly borrow funds internationally, counter-guaranteed by the Centre, addresses several objectives at once.

One, obviously, is funding for the $1.5 trillion required over the next ten years for badly needed new infrastructure.

This dynamic move could prove to be something of an open sesame, underscored by the happy fact that the BJP/NDA now rules in 17 out of 29 states.

It is also likely to add more states still to its tally before the general elections of 2019 - which it is poised to win with enhanced majorities.

This new window of opportunity is restricted however to those states which have a healthy state fiscal deficit.

There is a no-questions-asked by New Delhi ceiling of 3%, similar to the central fiscal deficit target. And one stretchable to a many-questions-and-restrictions maximum of 3.5% of state GDP, again in line with the Centre.

The  borrowing states are also expected to settle the debt out of its own revenues.

The first one off the blocks to avail the opportunity to finance the trans-harbour link in Mumbai, pending for at least 50 years, is Maharashtra.

It is going to approach the Japan International Cooperation Agency (JICA) to fund at least Rs. 15,109 crores of the estimated 17,854 crores required.

Another avowedly Central Government objective is to promote greater federalism.

And even to provoke a competitive infrastructure development thrust between first-rank states, and others, less well fiscally managed at present, playing catch up.

The third point to be made is this permission is amongst a cluster of other enabling policy moves, designed for greater  governance efficiency, and to to garner foreign investment.

Reforms range from bank mergers, GST, a bankruptcy code, company law reform, income tax reform, demonetisation, and the digital push.

There are masala bonds being offered abroad, at least $1 billion worth, and being received enthusiastically.

Other bank bonds are also being quickly snapped up domestically.

The Foreign Investment Promotion Board (FIPB) has been scrapped, and further relaxation of the “automatic” investment routes in more sectors is being worked out. This, all the way up to 100% foreign investment is being allowed in many cases. And there are possible waivers of restrictive clauses like the mandatory 30% local sourcing in single brand retail.

There is a never-seen-before push for private and foreign investment into defence manufacturing facilities, and a simultaneous divestment of stake in HAL (of Tejas light combat aircraft notoriety), the Cochin Shipyard (buillding India’s own aircraft carrier), Pawan Hans for helicopters, and so on. India plans to build and buy $250 billion of defence equipment in short order.

There is also a concerted push to revalue the rupee to make foreign investment very much more attractive.

This will improve our sovereign ratings and borrowing terms. The rupee has already appreciated 5% against the US dollar in the first four months of this year.

There is renewed enthusiasm from foreign investors after the huge assembly election successes in February. Gushes of money have come into equity and debt ($8.85 billion FII in March alone).

Domestic institutional and retail investors have also pumped in unprecedented amounts into mutual funds.

Infrastructure development will drive up the GDP growth rates to double digits and provide badly needed and massive employment opportunities.

Because of its downstream/upstream purchases and benefits, it will boost manufacturing and trading in general. It will also revamp the logistical parameters.

Combined with better connectivity and communications via the internet, road, rail, and air, 24x7 power availability, digitisation, bilateral treaties/joint ventures and technology transfers, competitiveness, efficiency and speed will improve.

India is developing a reputation now, given its ongoing reforms, political stability, and the fastest growing major economy tag, as a hot FDI destination.

It is expected to retain its growth lead in percentage terms over China for years going forward.

But India suffers for being thought of as a difficult place to do business.

This major lacuna is being addressed vigorously by the Modi Government at last, because it single handedly can stymie most of the progress.

This despite the massive domestic market, a large, young labour force, relatively low wages, skilled and trained managerial staff, and ample natural resources.

On the other hand, very few countries show India’s potential.

And confidence in India’s future is only growing. This, as the Modi Government grows stronger domestically, and simultaneously reaches out to the world.

(Gautam Mukherjee is a blogger on politics, economics and policy. His twitter handle is @gautammuk)

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