DETERMINANTS OF FDI IN INFRASTRUCTURE DEVELOPMENT IN INDIA

Abstract

The state of Infrastructure provision in India is very poor. The dilapidated condition of the existing facilities and the shortfall in the required infrastructure is a major cause of resentment for the business community. In recent years, the country has realized that it is not possible for the Government alone to fund the massive needs of this sector. As an alternative approach, on the lines of many of the Latin American economies, India has gradually liberalized its policies in this sector. The intention was to commercialize the sector, which was otherwise a public good since decades and highly subsidized, with the involvement of the private developers. In order to lure the private investors, both domestic and foreign, Indian Government reformed the sector policies to provide an enabling environment for the private sector. However, this progress in private sector operation has been relatively low specifically in case of foreign participation. Discussions and debates on this subject are ongoing at the national and international forums. These deliberations among the concerned stakeholders have highlighted issues which are specific to this sector. It is important for the Government to identify the obstacles and find an amicable solution to the investor's problem, in order to have an increased private participation in infrastructure building. The case for FDI into the infrastructure development has two rationales. One, infrastructure projects require huge capital investment, and major part of the project cost has to be financed through debt. In India, domestic savings rate is very low and risk-return profile of these projects is very high, as such financial institutions are wary to invest in them. Two, these projects have long gestation period, and return on capital invested in most of the projects is likely to be realized after a specific investment period. This investment period in most of the cases ranges from 3 to 5 years, and in a few projects it may even be more than 5 years. FDI is one of the financing source in which projects do not face the risk of sudden withdrawal of funds. Also, the other positive spillover effect of the FDI is the technological advancement and skills which it brings with it. In this thesis, the researcher has made an attempt to study the localization determinants of FDI, to understand that how India may attract FDI, and acquire capital and technology for the development of infrastructure. The variables, which the researcher has investigated through a questionnaire, are based on previous iv research and studies. Factor Analysis technique is used as a tool to identify the relevant determinants of FDI inflows into the infrastructure sector in India. The general conclusions are that big market size, healthy GDP growth rate, congeniality of the relations between the Central and State Governments, dynamism and transparency in the Government offices, price-stability, tax-environment pertaining to foreign investors in infrastructure projects, applicability and effectiveness of usercharges, and dispute-resolution mechanism are significant for FDI inflows into this sector.