By Taponeel Mukherjee
Current global macro-economic news has two key trends that stand out: Monetary policy tightening and fiscal policy expansion. Hawkish commentary by global central banks regarding rate hikes and balance sheet reduction has started to hit the newswires with regularity. On the fiscal policy side, tax cuts in the US have made news.
Regardless of the result, the main takeaway is that as monetary policy becomes tighter, fiscal policy might be used to boost consumption. India needs to ensure that investment opportunities in the country remain attractive — relative to global opportunities.
Central bank meetings globally, from the US Federal Reserve to the Bank of England, have admitted to tight labour markets, wage pressure to the upside and inflationary concerns. As rate hikes and balance sheet reductions are priced in, liquidity will be withdrawn from the system. Not only will this lead to asset price volatility, but the market will pay a lot more attention to the quality of assets.
When money supply gets reduced, assets globally will have to compete that much harder to attract capital. India needs to ensure that its assets remain competitive at a global level on a relative basis even as global central bank balance sheets shrink.
The US tax cuts have been a hotly debated topic. Regardless of the long-term ramifications for the economy and for the government debt-to-GDP ratio, the fact of the matter is that corporate tax rates today are extremely competitive in the US compared to other countries.
Germany just reported a public finance surplus for the year 2017, prompting debate around tax cuts to pass on some of the government surplus to the consumer. As countries globally adopt and explore expansionary fiscal policy, it is important for Indian policymakers to ensure that investment opportunities remain attractive at a global level, and the country remains an attractive destination for foreign capital, especially with a view to bridging the infrastructure gap.
India has certain fundamental advantages that stand out. It has an infrastructure deficit and a growing economy that can use newly-created infrastructure. Hence there is natural demand for an asset in a large economy such as India. Essentially, India has both the need and the required market size to deploy large pools of global capital. But given the “competition” for the global capital pool, the country needs to build on the fundamental strengths to attract the necessary capital.
Any investment at a basic level has a “financial” attractiveness and a “regulatory” attractiveness. As global yields head higher and tax breaks kick in, Indian assets will have to compete even harder on the “financial” aspect. However, this is the time to push ahead with changes that can help boost the “regulatory” attractiveness of Indian assets.
While the bankruptcy resolution mechanism under the Insolvency and Bankruptcy Code (IBC) has been a step in the right direction, greater clarity is needed around Public Private Partnership (PPP) agreements and irrevocability of offtake agreements such as Power Purchase Agreements (PPAs) is essential to provide Indian infrastructure investments a regulatory boost.
PPPs have been used to deliver valuable projects in India, but in many instances they have been mired in problems. We think clarity at the beginning and a more detailed analysis and allocation of risk is essential to ensure that PPPs are successful. The PPP model needs attention because a large part of much-needed infrastructure will have to come through this route. Irrevocability of offtake agreements from infrastructure projects is non-negotiable.
For investors to have faith in the contract to make capital-intensive, long-dated investments, offtake agreements such as PPAs must be respected and honoured. “Bankability” of infrastructure projects can only go up when global investors have greater faith in contract enforceability in the country.
It is thus important for policymakers and the industry in India to be cognizant of global changes and macro-economic moves. Nations always have, and will rightly continue to, compete for much needed capital. India is a compelling investment opportunity, but must build on its inherent strengths to attract the best of global capital.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views are personal. He can be contacted at firstname.lastname@example.org or @Taponeel on Twitter)