From promise to action

Foreign capital needs a friendly ecosystem

Prime Minister Narendra Modi, while addressing a group of the world’s largest sovereign and pension funds, has committed to continuing to make India investor-friendly and urged them to set aside more money for investing in India. He said the government would do “whatever it takes to make India the engine of global growth resurgence” in the post-pandemic era. This is an important commitment, and the prime minister’s approach to these large investors — who together have assets under management of about $6 trillion — is to be welcomed. He added that he was “conscious” that such funds, rather than quick risky money, needed safe and long-term returns, and mentioned in this context the attempt to prepare and finalise a National Infrastructure Pipeline that would provide them an avenue for such returns.

Importantly, the prime minister insisted that India would not just return to growth, but that this growth would be green in orientation. This is an important way to distinguish long-term investment in India, including in Indian infrastructure, from those in other geographies where a growth resumption may be far more carbon-intensive than it is in India. For India to have a compelling growth story in 2020 and beyond, it must be different from what it was earlier. It is no longer the absolute speed of growth that matters. The crucial differentiator is the opportunity to invest in stable, socially justifiable, and climate-sensitive projects. Global capital has recognised the importance of climate risk and seeks to minimise its exposure to it. India’s government must calibrate its outreach accordingly.

The target of this outreach is also well chosen. There is a continuing aversion in some quarters in India to foreign investment in India’s economy, born out of the fear that this is “hot money” that would leave at the slightest sign of risk. This might be true of the sort of equity investment that has often dominated capital flows into India. But the PM’s audience on this occasion was the very opposite. Sovereign and pension funds want long-tenor, transparent investments with a clear risk profile and minimum uncertainty. Thus, their demands in terms of policy reform are different. It is not just about ease of doing business reform. What is required is deeper administrative and judicial reform that minimises their chance of catastrophic capital loss or of expropriation by the state or of rule-changes to favour local capital. In other words, they need policy protection over multiple years.

It is in this context that the government should revisit the logic of its recent actions on several fronts. In the digital field, after investments have been made, it has repeatedly changed the rules of the game in a way that leads to capital loss for foreign investors and benefits domestic ones. It has unilaterally exited bilateral investor-protection treaties. It has contested arbitration awards and has taken doubtful tax and levy decisions to the Supreme Court. Every time it takes such a decision it may get closer to some annual revenue target or satisfy some domestic constituency or interest group. But the hidden cost of each such action is that it makes India look like an unsafe place to invest. The trillions of dollars of assets that could flow into India could power its growth for a decade and transform its economy. But that money will not come unless the government stops bullying foreign capital. The PM’s intent must now be translated into action.