Facilitating Overseas Investments

What is the issue?

Given the changing nature of overseas investments, India should have in place overseas strategic fund for potential sectors.

What is the new reality?

Overseas investments in the developing country context are no more a mere expression of financial prowess to explore overseas markets.
Given the evolving geo-economics, the need to secure one’s long-term interest becomes paramount.
These include areas of scarce natural resources like agricultural land, and strategic infrastructure creation in key locations abroad, amongst others.

How are countries performing at this end?

Since the 21st century beginning, the world has witnessed an outward direct investment of $9.7 trillion, with the US leading all.
China aims at occupying the second position which is currently being held by Japan.
China’s cumulative ODI stood at $767 billion during 2000 to 2017.
India’s, on the other hand, was 11 times lower at just $54 billion.
This is equal to just 1% of global investments in these 17 years.
According to the RBI, India’s ODI in 2018 was one of its lowest in recent times.

What is the emerging trend?

Till the middle of the last decade financial institutions supported overseas acquisitions.
However, in recent times, there has been an increasing interest in setting up dedicated funds.
Sovereign entities are undertaking such overseas investments, with most being of a strategic nature.
This trend has led to the proliferation of a host of dedicated funds globally catering to their domestic interest in the short to medium term.

What are China's initiatives in this regard?

Over the years, Chinese financial institutions have been at the forefront to manage multiple funds.
These include China EximBank, China Development Bank, China Investment Corporation - all sovereign entities set up to facilitate Chinese business growth overseas.
Many of these institutions have partnered with the likes of

This is to capitalise on the financing gap and potential in these select geographies.
During the 2003-2018 period, Chinese investments in select strategic sectors have been twice that of India.
In fuel resources and agricultural food, Chinese investments abroad are as high as 4-7 times that of India in the last 15 years.
Symbolising its growing influence, China is also installing alternatives to western development-led finance.
In this line, China has also fronted the likes of NDB, the AIIB and the Silk Road Fund.

How is it elsewhere?

The European Investment Bank has set up the African Lion Mining Fund to invest in early stage equity in mineral resource companies.
In particular, it applies to gold and base metals, besides mineral commodities such as industrial minerals and gemstones.
Besides, KfW (Government of Germany) and Deutsche Bank have also established the Africa Agriculture and Trade Investment Fund to uplift Africa's agricultural potential.
The US in 2018 formed the US International Development Finance Corporation to pursue its strategic interests through its own government’s backing.
This initiative is considered as an effort towards specifically countering China’s influence globally.
It also aims at furthering the US foreign policy goals whilst fostering participation of the private sector abroad.

What should India do?

India today exhibits global aspirations to gain grounds across geographies.
But India lacks any such dedicated fund to realise this.
However, the demand here is not to create a Sovereign Wealth Fund whose objectives are to get better returns from its investments.
The priority in India is for a strategic fund which facilitates India’s investments overseas in critical areas.
India should look at carving a committed fund, given the need for India -

E.g. to reduce imports of electronic items, dedicated overseas strategic fund could be housed and administered by a specialised government financial institution
The fund could be meant for strategic investments by Indian PSUs and quasi-sovereign institutions planning cross border investments of longer tenor.

Source: BusinessLine

Author: Shankar IAS Coaching Center Bangaluru