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FDI in infrastructure: What's hot, what's not! - Views on News from Equitymaster
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  • Apr 13, 2006

    FDI in infrastructure: What's hot, what's not!

    Since the beginning of the previous decade, foreign direct investment (FDI) has become one of the most important sources of capital for emerging market economies (EMEs). The increasing reliance of EMEs on FDI is often seen as an extremely welcome department. Even the Indian government had allowed FDI in different industries so as to promote greater economic growth. One area where the presence of FDI is really needed is the infrastructure sector. This is because the role of infrastructure in economic development cannot be ignored. In the current scenario, India is witnessing faster development of infrastructure projects (though the pace is slower than what is required) and as such, the industry faces huge requirements of funds. Given that domestic resources (in terms of public and private finances) are inadequate to fund the same, welcoming FDI in no more an option but a necessity.

    Inflow of FDI in the infrastructure sector has brought about a host of changes in the industry, including an end to large number of government regulations and 'birth' of innovative schemes of financing infrastructure projects. India is now the third most favoured destination for FDI, behind China and USA. In fact, the United Nations Conference on Trade and Development (UNCTAD) has said that India is among the 'dominant host countries' for foreign direct investment in the Asia Pacific region. Times have been really changing as far as this theme of foreign participation is concerned. A proactive approach is even been seen on behalf of the government. Allowing 100% FDI in infrastructure sector is just one of the reformed policy changes that we have been witness to. Earlier, the FDI caps for aviation and telecom sectors were hiked to 49% and 74% respectively. According to FICCI, the infrastructure segment alone has the potential to absorb US$ 150 bn (Rs 6,750 bn) of foreign direct investment in the coming five years.

    However, all said and done, unless there are clear policy instructions with respect to the prioritising of infrastructure projects and reform of the supportive institutional framework (basically the law and judiciary), invitation to any kind of capital, especially the one from foreign sources, will be of no use. What we mean here is that the government should take steps to prioritise infrastructure projects based on their respective impact on the overall development of the economy. For instance, development of core projects likes rural and urban housing and sanitation and highways and airways should be given a greater priority over building malls and multiplexes. This prioritising will provide greater visibility for the investor as he is now sure of the government's focus and the concurrent policies.

    Secondly, projects need to be clearly segregated with respect to those that necessarily require private and foreign capital and those where public finances are enough for funding purposes. The government has been practicing this as can be seen from invitation to greater private and foreign capital in areas like telecom and aviation.

    Another critical issue is that of making people pay for using infrastructure services. BOT based road development is one such example. This is the biggest challenge as far as the viability of projects is concerned, as in this case, public attitude has to be changed. In order to make efficient uses of critical utilities like electricity and water supplies, these need to be priced as per the cost of providing these services and not as per political compulsions (provision of free electricity is an example). This can prove to be the biggest attraction for FDI participation in infrastructure in India.


    As can be seen from the recent initiatives of India Inc and government, we surely are moving in the direction of emerging as an economic power in Asia. However, while there might be speed breakers in the way, a world class infrastructure set up can take care of the same. In India, we surely are living in one of the most exciting times ever. Time is changing! In fact, there is no other option. Time has to change and so is India.



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