Investing in 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.  

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