The Hindu Business Line : Easing inflows

It is commendable that the Finance Ministry has liberalised the ECB norms at a time when world trade is slowing and capital inflow is likely to be affected.

The Finance Ministry has brought some cheer to the industry in the gloomy aftermath of last week’s spectacular events on Wall Street. The liberalisation of External Commercial Borrowings (ECB) limits for infrastructure projects from $100 to $500 million marks a bold leap into a global churn that will take some time to settle. Even after global markets find their equilibrium, attracting capital on shore will be challenging. Right now the problem is liquidity. Credit e ven for the most worthy borrowers in the West has dried up or is in hiding. The proposed US Fed bailout of $700 billion should help first and foremost the more creditable but highly leveraged firms get back on their feet. That means recapitalisation; so in the short term India should not expect funds to come rushing into a sector with long gestation periods. But India can look elsewhere. China, the East Asian economies and West Asia, with their vast reserves, should find India’s liberalisation an attractive proposition given the increasing depreciation of erstwhile lucrative financial assets in the west. The world does not have many economic growth centres at the moment and India’s infrastructure funding need of $320 billion over the next five years appears an assured bet. Or so it seems from a distance.

In reality much more needs to be done before an increasingly picky global investor puts his money in the sector. The Finance Ministry can revisit the Deepak Parekh Committee’s suggestion of changes in the existing pattern of infrastructure holding companies that are treated as regular non-banking finance companies (NBFCs) and thus subject to limits on bank loans and FDI, among others. The holding company in which developers house their investments should be treated as separate NBFCs that can raise FDI for instance through the automatic route. But critically, the government must clear the air of the tensions that currently mark land transfers and the mining sector. The troubles at Singur have attracted world attention and the idea of capital forced out of a site by disgruntled stakeholders is not appealing to investors. States, as it is, are vying for investments on the basis of tax breaks and tangled land transfers will only exacerbate a beggar-thy-neighbour policy that will increase regional infrastructure disparities as investors rush to the most favourable regions on the basis of perverse incentives.

It is commendable that the Finance Ministry has liberalised the ECB norms at a time when world trade is slowing and capital inflow is likely to be affected. But such a proactive and necessary measure has to be matched by a commitment to clear contentious issues that could put paid to all the best intentions if not attended to.

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