Foreign Direct Investment Opportunities in Infrastructure Development: A Study on India

Foreign Direct Investment Opportunities in Infrastructure Development: A Study on India

Madhuri Malhotra (Loyola Institute of Business Administration, India)
DOI: 10.4018/978-1-5225-2361-1.ch015
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Abstract

India's rising growth trajectory requires rapidly expanding infrastructure facilities to support it. The availability of efficient infrastructure services is an important determinant of the pace of market development and output growth. Access to affordable infrastructure services for consumption purposes serves to improve household welfare, particularly among the poor. The potential contribution of infrastructure to economic growth and poverty reduction has not been fully realized, and existing infrastructure stock and services fall far short of the requirements. The Government recognises the fact that domestic resources alone may not be adequate to sustain the required expansion in infrastructure, and hence it has followed a strategy to create incentives for Foreign Direct Investment in infrastructure sector. This study examines the current state of infrastructure in emerging India, use of FDI is infrastructure sector and policy measures to be taken up to speed up infrastructure growth in India.
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Introduction

Infrastructure sector is a one of the key drivers of Indian economy. The sector is highly responsible for propelling India’s overall development. A country’s economic development is directly related to its infrastructural development. Infrastructure of a country can be divided into two parts- primarily as physical and social infrastructure. Social infrastructure consists of better education facility, better health services availability etc. The Reserve Bank of India has defined infrastructure sector as power, telecommunications, railways, roads including bridges, sea port and airport, industrial parks, urban infrastructure (water supply, sanitation and sewage projects), mining, exploration and refining, cold storage and cold room facility, including for farm level pre-cooling for preservation or storage of agricultural and allied produce, marine products and meat. The physical infrastructure facilities in India are not adequate to meet the increased demand at present. In most cases, India's infrastructure is of poor quality, by world standards. Traditionally, infrastructure was the exclusive province of the public sector, with large, state-owned enterprises (SOEs) being responsible for investment and service delivery. These entities were costly and inefficient providers of infrastructure services. International organisations such as World Bank, has encouraged privatization which has been a major component of the economic reform programmes pursued by many developing countries over the past two decades. Privatization is perceived to provide better use of resources, more efficient operations, reduced financial burden on government and increase in the level of foreign and domestic private investment (World Bank, 1995). Private sector has become increasingly involved in the financing and delivery of infrastructure services. A large number of developing countries have introduced private participation into their infrastructure industries. Of the total quantum of FDI flows across the globe, a large fraction has gone into infrastructure projects. Growing pressures on Government budgets and a general concern about the quality of service provision by incumbent entities saw an explosion of private sector FDI into infrastructure, particularly in the developing countries. Between 1990 and 1998, infrastructure projects in the developing countries attracted about US$ 63 billion through the following routes: Privatisation sales, Concessions, Leases and other contractual agreements, new capacity creation through build-operate-transfer (BOT) Agreements. The bulk of infrastructure FDI in terms of quantum of investment has flowed into the telecom and power sectors. There are two routes available for foreign direct investment in India: (i) Automatic route under which companies receiving Foreign Direct Investment need to inform the Reserve Bank of India within 30 days of receipt of funds and issuance of shares to the foreign investor (ii) For sectors that are not covered under the automatic route, prior approval is needed from the Foreign Investment Promotion Board (FIPB). The Table below lists the FDI ceiling under automatic route in India.

Table 1.
FDI Ceiling under automatic route
SectorPercent
1Telecom49
2Electricity generation, transmission and distribution (except nuclear power) 100100
3Roads and Highways100
5ports and harbours100
6Civil Aviation100

Source: Department of Industrial Policy and Promotion, Government of India. www.dipp.nic.in

Key Terms in this Chapter

Social Infrastructure: Social Infrastructure is a subset of the infrastructure sector and includes assets that accommodate social services.

Emerging Market: An emerging market is a country that has some characteristics of a developed market, but does not meet standards to be a developed market. This includes countries that may become developed markets in the future or were in the past.

Economic Growth: Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms.

Infrastructure: basic physical and organizational structures and facilities (e.g. buildings, roads, and power supplies) needed for the operation of a society or enterprise.

Financial Sector Reforms: Financial sector is the backbone of any economy and it plays a crucial role in the mobilisation and allocation of resources. The main objectives of the financial sector reforms are to allocate the resources efficiently, increasing the return on investment and accelerated growth of the real sectors in the economy.

Foreign Direct Investment: Foreign direct investment (FDI) is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased.

Physical Infrastructure: Physical infrastructure refers to the basic physical structures required for an economy to function and survive, such as transportation networks, a power grid and sewerage and waste disposal systems.

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