India-U.S. Financial and Economic Partnership Launched

India and the United States launched the “India-U.S. Financial and Economic Partnership,” in New Delhi on Tuesday to help ease the entry of foreign capital into both countries.

The initiative is aimed at encouraging more trade, investment and job creation by improving macroeconomic policy, financial sector reforms and infrastructure financing. Specific details of the deal are slated to be discussed during the partnership’s next cabinet-level meeting in Washington.

Union Finance Minister Pranab Mukherjee said that immediate-term changes could open up the possibility of attracting more funds for the Indian infrastructure sector which requires over US$600 billion in the next five years. “Details will be discussed at the official level. We also emphasized on the public-private partnership,” he said.

Explaining America’s stance on the matter, U.S. Treasury Secretary Timothy F. Geithner said the Obama administration wanted other countries to step up their internal consumption and increase opportunities for the U.S. corporate sector.

“The critical challenge as the United States moves away from consumption financed by borrowing is that we want to see broader reforms and changes outside…this requires changes in rest of the world,” Geithner added.

India’s Public Private Partnerships
The Indian government has announced a series of measures aimed at attracting foreign investment into the Indian economy and assisting with the restructuring of the nation’s somewhat decrepit infrastructure architecture.

To this end, the government has provided mechanisms that allow for private investment in public schemes, and has advised that the government will participate in the financing of these, typically to the tune of about 30 percent of the required investment, with the balance expected to be generated by the private sector. For the first time, the government has included private investment as a key source of infrastructure financing, as described in India’s 11th Five Year Plan.

The Indian government invested US$218 billion in infrastructure during the five year period of 2002 to 2007. This represented a spending equivalent of about 3 percent of India’s GDP. From 2009 to 2012, the government intends to spend about US$514 billion on infrastructure, and assuming a GDP growth rate of around 9 percent during this period, the government will invest 9 percent of its GDP in its infrastructure. This will effectively triple its fiscal spending. That amount, even if spent well, is not enough to satisfy the nation’s needs. To combat this problem, the government has identified the private sector as the majority participant in India’s redevelopment.

This is a quite different model from China, which ensured in most cases that infrastructure projects were state financed, retaining control of infrastructure ownership, thus limiting the opportunities for foreign investors. This forced many of them into long-term joint ventures with unwanted or unnecessary state-owned partners, while the state later added additional tax and employment burdens to foreign investors. In China, investors got into infrastructure development projects because of government.

In India, investors should be getting into infrastructure projects because of the government involvement is being decreased. It is not necessary to partner with an Indian state-owned enterprise.

In this way, the Indian government has finally made the problem of its infrastructure an opportunity for foreign investors. The scale of the projects is massive.

FDI POLICY SIMPLIFIED

Indian government has simplified some foreign direct investment policies that affect investment coming into the country. These are largely to be welcomed.
Here we highlight the items that are likely to affect the majority of foreign investors into India.

The general sectors now included in the 100 percent FDI automatic route are:

  • •    Advertising
  • •    Film industry (financing, production, distribution, exhibition, marketing, allied activities)
  • •    Health and medical services
  • •    Data processing, including software development, computer consultancy, software supply, business and management consultancy, market research, technical testing and analysis
  • •    Research and development services (excluding awarding of certificates)
  • •    The infrastructure sector will permit 100 percent FDI automatic route in the following areas:
  • •    Construction and maintenance of roads, rail-beds, bridges, tunnels, pipelines, rope ways, runways, waterways and reservoirs, hydroelectric plants, power plants, industrial plants
  • •    Roads and highways on BOT and toll collection models; rural drinking water supply projects, package water treatment plants, rain and rain water harvesting, waste water recycling and re-use facilities
  • •    Ports and harbor construction and maintenance of container terminals, bulk-break and specialized cargo berths, warehousing, container freight stations, storage facilities and tanks, captive power plants, dry docking and ship repair, and captive facilities for port-based facilities

Power sector is also permitting 100 percent FDI automatic route in the following:

  1. Generation and transmission of electrical energy produced via hydroelectric, coal-ignition, thermal, oil based and gas based power plants
  2. Non-conventional energy generation and distribution
  3. Distribution of electricity to households and industrial and commercial users and power trading

For professional advice and assistance with foreign direct investment matters, incorporation, tax accounting, due diligence, payroll or audit services in India is available from Dezan Shira & Associates at india@dezshira.com or visit www.dezshira.com

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Journalist, South Asian Analyst