India’s demand for infrastructure finance cannot be met by local sources alone, but new restrictions on foreign borrowing are creating huge problems
Policy paralysis, corruption, languishing rural markets and over-population: these factors are often cited as the biggest threats to India’s rise as a global superpower.
Wrong. For decades, successive administrations have skirted around the topic, but finally in September, a government-appointed panel tackled the issue of infrastructure head-on. It estimated that a total of $475 million of infrastructure investment over the next five years is needed to maintain the country’s 9% growth rate. The committee argues that project-financing should be raised from 4.6% of GDP to 8%, with $49 billion to upgrade, service and build highways, $66 billion for railways, $11 billion for ports and $6 billion for airports.
International investors are certainly keen to become involved, seduced by lucrative returns and encouraged by improvements in India’s regulatory environment. Early in September, ICICI Bank unveiled a new $2 billion fund, with equity commitments from international investors only.
“We enjoy a lead in this business due to our roots as a project finance institution, with a strong team on the ground and a deep understanding of the dynamics of the business,” CFO Vishakha Mulye tells Emerging Markets. She explains that this is part of a growing trend of foreign capital finding its way into India.
Indeed, just a month earlier, 3i Group announced it would invest $250 million into a newly created unlisted fund worth $1 billion. But the largest fund to date came in January, with Blackstone, Citigroup, India Infrastructure Finance Corporation and the Indian Development Finance Corporation pooling $5 billion.
Staying away
Notwithstanding these headline announcements, India’s courtship of the international financial community is having limited success, according to a managing director of one of India’s largest funds. “Many foreign investors have come sniffing around, but the risks are still on their mind. We have not seen the big money coming in from such investors as the government has been trying to attract,” he tells Emerging Markets.
For the big players like Macquarie, the risk profile of some of these operations may seem excessive, since 90% of investable projects in India are in the construction phase, rather than the operating stage. Furthermore, “It is very difficult to get controlling stakes in many assets in India. You might get 30–40%, but this takes a long while, and full control is very rare. So investors, especially private equity players, do not really want to get involved,” he explains.
India has seen a surge in foreign equity this year, but foreign debt is unlikely to play a key role in financing infrastructure, especially after the central bank imposed restrictions on external commercial borrowing (ECB) in August. It limited foreign loans to $20 million unless otherwise approved by the central bank, in an attempt to curb rupee appreciation. Some bankers say this is just a temporary measure, and some officials suggest that this may be relaxed in the future, but it has already undermined investor confidence.
“This is a massive pain in the neck. It has made things very challenging, and we now need to structure things very differently,” Sean Wallace, senior managing director for Asia Pacific at Darby Overseas Investments tells Emerging Markets. Furthermore, the authorities’ reluctance to allow dollar debt means that refinancing of existing ECB is also now forbidden, creating significant currency risks for international banks.
As a result, infrastructure projects are unlikely to be financed by foreign debt. But as one Indian banker says: “Clearly all this demand cannot be met by domestic sources; we need reasonable chunks of foreign debt and equity.” In fact, the government’s own advisory panel explains that, in the last five years, Indian institutions have already increased their infrastructure exposure by 57%. This suggests that India’s booming banking sector may not be able to meet all the demand without redoubled efforts to develop local capital markets in the country, and guarantee India’s graduation into a global market player. —S.V.