Why attracting more FDI could prove crucial for India’s post-covid growth story

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NEW DELHI: Prime Minister Narendra Modi will address a Virtual Global Investor Roundtable (VGIR) today at a time India is looking for predictable sources of financing for its growth recovery out of the coronavirus induced recession, with government’s own revenue streams expected to remain significantly constrained in the medium term with rising debt levels.

The meeting that will see participation of 20 global fund managers with total assets under management of about $6 trillion as well as top Indian industrialists is yet another attempt by the government to woo global investors showcasing investment opportunities in Asia’s third largest economy.

“VGIR 2020 will focus on discussions around India’s economic and investment outlook, structural reforms and the government’s vision for the path to a $5 trillion economy. The event will provide an opportunity to leading global investors and Indian business leaders to engage and deliberate with senior policymakers on how to further accelerate the growth of international investments in India,” Prime Minister’s Office said in a statement.

India has rolled out an ambitious plan of 111 trillion investments during 2020-25 to develop social and economic infrastructure under the national infrastructure pipeline (NIP). While initial estimates put 40% of the expected capital expenditure to be contributed by states followed by 39% by the centre and 21% by private sector, those ratios may tilt significantly towards the private sector with significant stress in finances of central and state governments post the coronavirus induced slowdown. With Indian legacy companies highly leveraged, attracting foreign investment is the only viable option for the government to meet its infrastructure and growth deficits.

The government could also push for participation of the sovereign wealth funds and pension funds in the proposed Development Finance Institution for long term infra projects. The finance ministry is currently deliberating its structure and government could explore participation the overseas funds in the new specialized financial institution.

What prove a clincher this time around is government’s decision abolish dividend distribution tax and allowing income tax exemption for sovereign wealth funds for investments in specific infrastructure sectors. UAE’s sovereign wealth fund MIC Redwood 1 RSC Ltd on Tuesday became the first SWF to receive full income tax exemption from the finance ministry on its investments into infrastructure and other priority sectors.

However, to become an attractive investment destination for foreign investors, India needs to improve its business environment doing away with complex red tape and undertaking necessary economic reforms. In a survey conducted by the UKIBC for its annual doing business in India report released last week, most respondents ranked “improving bureaucratic processes with accountability” as the most desired reform followed by increasing regulatory certainty, simplification of the GST processes, improving the quality of infrastructure, effective single window clearance for project approvals, alignment amongst states’ regulations among others.

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