India’s budget for 2019-20 contains a range of proposals to increase reliance on FDI and portfolio investment inflows to enable the Indian economy to double in size to a $5 trillion economy in five years. In her maiden budget speech, finance minister Nirmala Sitharaman noted that FDI inflows into the country have remained robust despite global headwinds. To build on these gains, the budget announced 100% FDI limits for insurance intermediaries. Further opening up civil aviation, media, insurance and easing the 30% local sourcing norms for single brand retail is also being examined by the government.
Another proposal is to allow higher limits for foreign portfolio investors in listed companies up to the permissible sectoral FDI limits, with the proviso that companies can opt to lower the threshold. To enhance sources of funding for infrastructure, foreign portfolio investors can invest in debt securities issued by the Infrastructure Debt Fund – Non-Bank Finance Companies, which in turn can be sold to domestic investors within a specified lock-in period. Portfolio investors are also permitted to subscribe to debt securities issued by infrastructure investment trusts and real estate investment trusts that have been launched in the past five years.
Investor interest is key to building infrastructure worth $300bn annually for a $5 trillion economy. Railway infrastructure, for example, requires massive investments of $60bn every year to 2030. As current capital spending is only between $21bn and $23bn, this gap is to be met through public-private partnerships for faster development and completion of tracks, rolling stock manufacturing and passenger freight services. To boost the Make in India programme, global companies are being invited to set up to set up mega-manufacturing plants in sunrise and advanced technology areas like semiconductor fabrication and solar photovoltaic cells with tax incentives.
However, foreign investors have signalled their displeasure with the budget by pulling out investments from the stock market. They are upset over the budgetary proposal to tax super-rich individuals with a higher surcharge. As a significant number of foreign portfolio investors are organised as trusts or association of persons – for greater flexibility in operations and tax-efficient repatriation – they face a higher effective tax burden. The finance ministry for now has firmly ruled out any rollback and has suggested that foreign portfolio investors can instead opt for a corporate structure if they do not want to incur the burden of the surcharge.
N Chandra Mohan is an economic and business commentator based in New Delhi.