by Moiz Mannan
There is no doubt in anybody’s mind about the vast potential and inherent strengths of the Indian economy. One of the major pull-backs, though, is the country’s poor infrastructure.
It was more than three years ago at the annual conclave of non-resident Indians (NRIs) that the Minister in-charge of Overseas Indians’ Affairs, Vayalar Ravi, and senior minister Kamal Nath, who was looking after roads and highways, had spoken of a major initiative to involve the diaspora in building the country’s infrastructure.
The idea of floating ‘diaspora bonds’ to raise money for many urgently required projects has been on the radar for quite some time. Now, it looks as if the plunging rupee has finally prompted the Indian government to act
on this. Top officials dealing with economic affairs have hinted that an issue of bonds for NRIs may come sooner than later. This is good news for overseas Indians who are already in the midst of reaping the arbitrage benefits of a weak rupee and relatively attractive bank deposit rates. Coupled with this is a yet-to-recover real estate market which is offering excellent long term investment prospects. The stock markets have zoomed by unprecedented margins at the end of the week, spurred by a global risk rally and some unpopular but necessary decisions by the Indian government such as revising gas prices.
Minister Ravi himself has acknowledged the potential of the Indian diaspora which is estimated to generate an annual income equal to about 25 per cent of India’s gross domestic product (GDP). Yet, India’s growth story so far has been driven primarily by the energy and enterprise of its domestic industry. “The role of the Indian diaspora in India’s economic growth holds far greater potential,” the Overseas Indians Affairs Minister was recently quoted as saying. Lauding achievements of about 25 million overseas Indians spread across 130 countries, he said the community can serve as an “important bridge” between the “home” and the world.
As per a World Bank report, India with $69bn topped the list of countries receiving remittances in 2012, followed by China ($60bn). Most of the investments by overseas Indians are by way of portfolio investments of a short-term nature. Indian banks hold around $55bn in NRI deposits under various schemes. In 2011-12, NRIs deposited around $11bn in Indian banks compared with $3bn annually on an average in the previous five years. According to analysts, the NRIs’ appetite for Indian deposits has increased with the financial turmoil in the West.
However, according to official accounts, the cumulative foreign direct investment (FDI) by NRIs is a modest $10bn, constituting less than five per cent of the total FDI in India. The government hopes to correct this situation by offering more opportunities to the diaspora to participate in their homeland’s growth, development and prosperity. The planners say they are seeking lasting, long term engagement with the diaspora.
While agencies such as Bank of Amerca Merill Lynch aver that the proposed bond issue is to arrest rupee depreciation, government officials have maintained that the purpose is not limited to just that. A recent BofAML report noted that the apex Reserve Bank of India (RBI) has a capacity to sell up to $30bn from the foreign exchange reserves and may go for an NRI bond issue of up to $20bn. The report said that report said that five-year money can be raised by issuing the 7 to 9 per cent coupon bonds to stabilise markets, just as it was done in 1998 and 2001. The country’s banks had raised $4.8 bn through the Resurgent India Bonds and $5.5 bn from the India Millennium Deposits targeted at the diaspora during the economic crisis years in 1998 and 2001 respectively. Every round of volatility in the rupee causes a dent of up to $15 bn to the forex reserves, and considering where the reserves stand right now, RBI can sell up to $30 bn, the report said.
Meanwhile, the country’s economic affairs secretary Arvind Mayaram was quoted by the media as saying: “We are not looking at bonds to support the currency. We are looking at bonds for generally raising capital for infrastructure.”
Earlier last week chief economic advisor Raghuram Rajan had hinted that the government might go in for NRI bonds to raise some badly needed foreign exchange. Finance ministry officials were quoted by the media as saying that RBI’s decision to keep interest rates unchanged would help prop up the rupee as well as any bonds issue. The government is unwilling to raise sovereign bonds itself but will prefer the SBI to raise dollars through long-term bonds. The SBI had raised forex earlier, too, through the Resurgent India bonds the India Millennium Bonds.
According to reports, the bonds could be denominated in dollars, pound sterling and the euro. Officials said the difference this time round would be that it would be specifically used for infrastructure building and open to both NRIs and other investors.
The interest on a non-resident on foreign currency denominated long term infrastructure bonds was subject to a concessional tax rate of 5 per cent in last year’s budget.
This year, the budget has proposed to extend such concession even where a non-resident deposits foreign currency in a designated bank account and such money as converted in rupees is utilized for subscription to a long term infrastructure bond issued by an Indian company. This will help a non-resident to subscribe to rupee denominated long term infrastructure bonds issued by an Indian compamny in India.
