Course correction

As the International Monetary Fund joined the ratings downgrade war on Friday by slashing India’s growth forecast for fiscal 2013 to 6 per cent, the next phase of reforms initiated by the UPA government to permit 49 per cent foreign equity holding in India’s $41-billion insurance sector (26 per cent earlier), indicates further progress on the reform front. Overseas companies will now be allowed a share in companies that manage pension funds. These measures now need to be backed by appropriate parliamentary legislations.   However, politically correct turnarounds by the government, which is possible in Parliament in view of opposition by some allies and the Opposition, may not yield the full benefits of liberalisation in these sectors as it would send wrong signals to investors. As the Finance Minister said, the benefits of higher FDI in insurance companies which need huge capital cannot be denied. Most of India’s 24 insurance companies have struggled for working capital for years, hamstrung by restrictions on foreign holdings.

An equally significant measure this week, besides the adoption of the Companies Bill, is the proposed boost to the core sector, largely comprising the infrastructure segment. The creation of an Infrastructure Debt Fund (IDF), structured as a non-banking finance company under RBI supervision, will help free up tight liquidity conditions by enabling long-term infrastructure funding. But, IDF in its present form will refinance only operational infrastructure projects, though even this holds immense potential to reduce downward risks posed by high credit costs through tapping overseas debt. That said, it is important that the new credit enhancement mechanism frees up capital where it is most needed while also helping to reduce the asset-liability mismatches of banks — without being exposed to the latter’s NPAs.

And, lifting the 74 per cent cap on infrastructure-focussed FDI as proposed by the Parekh Committee is no magic pill to reviving investor sentiments. Sovereign wealth funds and overseas debt fund investors have been concerned about the slow pace of public infrastructure projects, either PPP or consortia-based, which continue to overshoot cost targets and timelines. Land acquisition continues to be a dicey proposition for infrastructure companies. These are generic issues which require political and legislative will, not to mention clear regulations and implementation to address.