INFRASTRUCTURE WINNER IN BUDGET 2009-10

In the Indian Financial Budget announcement for the fiscal year 2009-10, the first budget since the Indian National Congress led United Progressive Alliance (UPA) government won its second consecutive term to power in May this year, the infrastructure sector emerged winner as it was accorded top priority by the Indian Finance Minister.

This reinforces the government’s commitment to augment the antiquated infrastructure of the country, vital to achieve a Gross Domestic Product (GDP) growth of 9% per annum from the current 6.7%. The lack of adequate infrastructure is responsible for pushing back India’s GDP growth by about 2% annually, according to estimates.

The minster responded to an urgent demand for new infrastructure, announcing that 9% of the country’s GDP will be spent on infrastructure by 2014, from the current 5%. Estimates suggest that a third of this investment will come from private companies, paving the way for unprecedented investment opportunity under Public Private Partnership (PPP) model.

“However, the Finance Minister missed this opportunity to address sectoral reforms and liberalization in Foreign Direct Investment (FDI) norms, falling short of the investors’ expectations who sent the Sensex, the benchmark index of the Bombay Stock Exchange down 870 points to 14,043.40 (5.83%) on Monday, the level that it was at in the month of May. The minister further disappointed by not being explicit on the aspect of disinvestment of the Public Sector Undertakings (PSUs).” says Bundeep Singh Rangar, Chairman, IndusView Advisors Ltd, the India-focused cross-border advisory firm.

“India's challenge is not only to augment its antiquated infrastructure, but also to build new infrastructure to keep up with its $1 trillion economy and the aspirations of its 1.2 billion population that grows by 16 million people each year”

“The government’s spotlight on Infrastructure Development heralds the importance it attaches to the sector as a means to counter the prevailing economic woes.” added Rangar

Recognising that good infrastructure are a vital pre-requisite to build a strong nation, infrastructure development had been accorded key priority for the 11th Five-Year-Plan for the years 2007-2012 and the 12th plan period 2012-2017 with projected investment requirement of $500 billion and $1.5 trillion respectively by the Prime Minister's Committee on Infrastructure.

“These initiatives pale when compared to China that spends about 11% of its GDP for infrastructure development, indicative of the scope and extent of scaling up needed in infrastructure development in India to match global standards.” added Rangar

“The Interim Budget for the financial year 2009-10 announced in February by the Finance Minister of the ruling United Progressive Alliance (UPA), focused on infrastructure development, easing of Foreign Direct Investments (FDIs) norms and economic stimulus packages announced last year, had set the ground for how the alliance was approaching the General Elections that took place in May.” said Rangar

The minister was way short of taking the initiative further as various sectors including, pharmaceutical, retail, telecommunication, aviation, insurance, among others keenly awaited reforms to facilitate higher foreign investments. These sectors collectively have the potential to attract more $200 billion worth of investments over a period of five to ten years.


Indian Telecom: Scope of Growth & Investment

“India’s mobile telecommunication services sector has defied the economic recession. The incumbent mobile telecommunication service providers collectively add more than 10 million new subscribers a month, which is more than the population of Finland, home country of largest mobile handset manufacturer Nokia Corp., taking the country’s total tally of wireless subscribers to 400 million.” explains Rangar

To ensure quality service to match the growing subscriber base and achieve the target of 45% tele-density, the telecom sector is estimated to need about $73 billion during the next five years.

The world's fastest-growing mobile telecom services market estimated to reach a subscriber base of more than one billion by 2014, exposes the growth potential in investments that the sector can attract from aspiring global mobile telecom service providers.


Pharmaceutical Sector: Prescription for M&As

The Indian Pharmaceutical sector is positioning itself to be among the top five centres of global innovation as the Department of Pharmaceuticals (DoP), Government of India outlined its roadmap for the sector up to the year 2020 (Vision 2020). It foresees investments of about $2 billion annually, under the public-private partnership model.

“This spells out the scope of growth for global pharmaceutical companies and can fuel the next wave of mergers and acquisitions (M&As) in a market where consumer spending on healthcare increased to 7% in 2007 from 4% of the Gross Domestic Product (GDP) in 1995 and is expected to rise to 13% of GDP by 2015.” says Rangar

India also offers the benefits of low cost research and development (R&D), a domain in which it is estimated to capture about 10%-20% share of the world’s R&D business by 2020 from less than 1% currently.

Expansion by global pharmaceutical companies in to emerging markets like India becomes imperative as about $103 billion worth of patented drugs will go off patent in the next few years.


Retail Sector

“The retail sector in India is witnessing a huge revamp as traditional markets make way for new formats such as departmental stores, hypermarkets, supermarkets and specialty stores. Easing regulations in the sector would help bring the benefits of organised retail to customers.” said Rangar

The overall retail market is expected to grow to more than $1 trillion from $262 billion by 2016, with organised retail at $165 billion, according to the Investment commission of India.


Aviation Sector

India’s aviation sector presents investment opportunities of $110 billion envisaged up to 2020 $80 billion in new aircraft and $30 billion in development of airport infrastructure. The investments will be needed to cater for approximately 300 million passengers that are expected to be airborne by 2020, according to estimates.

“With such sectoral growth indicators, the need of the hour was to take existing initiatives to the next level of implementation and completion, with enough scope of ramping up and innovation. To that extent, the finance minister would have helped by being more generous and explicit in his policy initiatives.” said Rangar

INDIA: A PREFERRED INVESTMENT DESTINATION

• UNCTAD declares India as the second most-preferred global location for foreign investments.
• PwC urges Engineering and Construction companies to look to India for growth.
• Investments of more than $500 billion planned to flow into India's infrastructure by 2012.
• India registered a 45% growth in FDI during April-December 2008

Encouraging Estimates

Money will continue to chase growth prospects and the global investors are realizing the fact that India offers an excellent opportunity for them even at a time of global recession. Apparently that’s the reason why growth/emerging markets such as India and China continue to be the most attractive markets for the European family office investors, according to an informal survey conducted by London-based Somerset Capital, a leading independent private market placement firm.

The survey has also highlighted the fact that 63% of Somerset’s top 50 European family offices are ‘active’ in 2009 making new investments. If we extrapolate the same trend to the entire set of global investors, we get the reason why India continues to attract billion-dollar plus foreign direct investments (FDI) even in the recent months that are marked by heightened economic crisis globally. The invest-worthiness of India has been acknowledged by the United Nations Conference on Trade and Development (UNCTAD), which declared India as the second most-preferred global location for foreign investment in 2008.

A similar view was expressed in a recent report released in Toronto by PricewaterhouseCoopers (PwC), the world’s largest professional services firm, which has urged the Engineering and Construction (E&C) companies to look to India for growth as domestic markets contract. “Foreign companies who do not acknowledge the opportunity now may miss out on a critical opportunity to establish a long-term presence in one of the world's largest growth markets”, warns PwC.

PwC estimates that India will become the world's third largest economy by 2050. Similar projections have earlier been made by Goldman Sachs and CLSA. Despite the recent slowdown, PwC expects the Indian economy to grow at 7%-7.5% annually. The reason why PwC has emphasized on Engineering and construction (E&C) sector is the fact that more than $500 billion worth of investment is expected to flow into India's infrastructure by 2012. Projected spending from now until 2012 is $167 billion in electricity, $92 billion in roads and $65 billion in railways. The liberalization of government regulations and a deliberate strategy on the part of the Indian Government to develop infrastructure and promote foreign direct investment (FDI) spells opportunity for foreign E&C companies, the report says.

Government’s Initiatives

India’s Interim Budget for the Financial Year 2009-10 by the Finance Minister on February 16 informed the parliament that the government has accorded approval to 37 infrastructure projects worth $14.4 billion (Rs.70,000 crore) from August 2008 to January 2009. Under the Public Private Partnership (PPP) mode, in-principle approval has been given to 54 Central sector infrastructure projects with project cost of $14 billion (Rs.67,700 crore) and final approval to 23 projects for viability gap funding amounting to $5.75 billion (Rs.27,900 crore) between August 2008 and January 2009.

Not surprisingly, India received FDI worth $23.3 billion during April-December 2008, registering a growth of 45% when compared to the same period in the previous year. In the fiscal year 2007-08, India’s FDI was a record $32.4 billion. Although the government of India has acknowledged a slowdown in FDI post September 2008, the country is still receiving one billion dollar plus foreign direct investments every month. Considering the global liquidity crunch, this figure is not disappointing. FDI inflows in to India till September 2008 averaged between $2.5 billion and $3 billion a month. Despite the recent slowdown, India is attracting much more FDI compared to a few years back. The country had received $3.13 billion FDI in the entire fiscal year of 2003-04.

Apart from Engineering & Construction (E&C), other sectors such as IT, Telecom and real estate have attracted large investments from the foreign investors. During April-September 2008, FDI inflow in IT sector (including computer software and hardware) has reached $1.4 billion, which is equal to the investments during the whole financial year of 2007-08. The telecommuncation sector has attracted FDI of $5.8 billion in the calendar year 2008.

FDI Guidlines

The Indian government has been actively facilitating the foreign investments with its continuous efforts in policy reforms and simplifying approval routes. Recently, in a welcome move, it has further simplified the rules by restricting the cascading effect of foreign shareholding in an Indian company on its downstream investments. As per the new FDI rules, the foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are ‘owned and controlled’ by resident Indian citizens and/or Indian Companies that are owned and controlled by resident Indian citizens. Certain sectors such as telecom, broadcasting and insurance, however, will continue to be covered under the method of calculation of total foreign investment outlined in their sector-specific regulations.

The Government of India permits FDI up to 100% on the automatic route in most sectors/activities. Some of the sectors such as Defence, Aviation, Print Media and Telecom have been classified as sensitive sectors.

FDI is allowed up to 26% in defence production subject to licensing and certain guidelines. In the aviation sector, FDI up to 49% and investment by Non-resident Indians (NRI) up to 100% is allowed on the automatic route in Domestic Scheduled Passenger Airline Sector, while FDI up to 74% and investment by Non-resident Indians (NRI) up to 100% is allowed on the automatic route in Non Scheduled airlines, Chartered airlines, and Cargo airlines as well as Ground Handling Services. FDI up to 100% is on the automatic route in Maintenance and Repair organizations, flying training institutes, technical training institutions, and helicopter services/seaplane services. Although the foreign airlines are disallowed to participate directly or indirectly in the equity of an Air Service Undertaking, the Indian Minister for Civil Aviation Mr. Prafull Patel has indicated that the government is considering a relaxation on this front.

In the Telecom Sector, 74% foreign investment (Including FDI, Foreign Institutional Investment (FII), Non-Resident Indian (NRI), Foreign Currency Convertible Bond (FCCBs), American Depository Receipt (ADRs), Global Depositary Receipt (GDRs), convertible Preference shares, and proportionate foreign equity in Indian promoters/ Investing Company) is allowed in Basic and cellular services, Unified Access Services, National/International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services. Similarly, 74% FDI is permissible for ISPs with gateways, radio-paging and end-to-end bandwidth, while 100% FDI is allowed for ISPs without gateway and infrastructure companies providing dark fibre, right of way, duct space and tower (Category I). Companies offering electronic mail and voice mail services, and Manufacture of telecom equipments also allowed to have 100% FDI.

Print media has a cap of 26% FDI for publishers of newspaper and periodicals dealing with news and current affairs. Publication of Indian editions of foreign magazines dealing with news & current affairs also has a similar cap of 26% FDI including Investments by NRIs/PIOs/FIIs. The government, however, allows 100% FDI for publishing of facsimile edition of foreign newspapers and scientific magazines/specialty journals/periodicals.

Some of the other sectors, such as Direct-to-Home (DTH) and Insurance have the FDI cap of 49% and 26% respectively.