A Roadmap for Boosting India’s Financing Footprint in the Neighborhood

16 Sep 2019

The developing world is hungry for construction financing – roads, railways, highways, ports, airports, as well as natural resource extraction and development, energy projects, telecommunications – no matter the sector, there is tremendous need for funding support. According to a G20 backed study, by 2040, US $54 trillion in infrastructure spending is needed in Asia alone. 

Even as other countries have stepped in to fill this financing void, especially in countries which have been traditionally strong partners for India – Sri Lanka, Nepal, and Myanmar for example, India’s own financing footprint has lagged behind. For example, India’s grant assistance and Lines of Credit commitment to Sri Lanka stands at $2.6 billion, in Myanmar it is pegged at $1.7 billion and in Nepal, it is estimated to be $1.07 billion (with multiple lines of credit extended over the years). In contrast, per the American Enterprise Institute’s data, China’s construction financing footprint in Myanmar stands at $2.7 billion, Nepal at $4.4 billion and over $11 billion in Sri Lanka. 

There are now fears that recipient countries are becoming indebted for projects that are unviable and whose costs cannot be recouped easily. This has significant strategic and foreign policy implications for India’s regional security as well. 

CII’s research shows that foreign financing has flowed into sectors like oil and gas, hydro-electric power, railways and real estate in Myanmar; in ports, airports, roads and real estate in Sri Lanka; and in hydro-electric power, roads and airports in Nepal. 

Even as domestic development imperatives remain center stage (and rightly so), it is imperative that ramping up engagement and financing in neighboring countries be a priority for the new Indian government. India may not be able to match financing dollar to dollar, but a strategic attempt can be made to determine projects that are commercially viable, serve the recipient country’s developmental objectives, fit into India’s own strategic approach and also enhance exports from India. India’s vibrant private sector and its notable success in responsible corporate practices in overseas investments (such as in African and Latin American nations) serves as a great differentiator and can be leveraged to further strategic priorities.

While the Indian private sector does have access to some credit and financing for foreign construction and infrastructure activities, notably through the Export Import Bank of India and the Export Credit Guarantee Corporation (ECGC), the government could help further boost this arsenal of tools.

For one, while export promotion is certainly the ultimate objective of the Exim Bank of India, in light of strategic considerations, 50% sourcing from India (as against the currently mandated 65-75%) should be considered under the Buyer’s Credit scheme through National Export insurance Account (NEIA)/ECGC. The balance 50% sourcing can come from domestic sources which would in turn help with local job creation and boost the economy in the recipient country. 

Two, it might be worthwhile for the Indian government to expand the capitalization of large PSU Banks and Exim Bank of India to support credit growth in developing markets. This could potentially also be done through suitable lines of credit extended on a Government-to-Government level through PSU Banks – for example, this has been done in the case of the NTPC run power project in Bangladesh, which is financed through Export Import Bank of India (under the Concessional Financing Scheme specifically created for strategically important projects).

Three, a mechanism like Viability Gap Funding, which helps enable private companies to undertake infrastructure projects through the public-private partnership (PPP) model in areas and sectors where commercial viability is not guaranteed, should be looked at overseas strategic overseas financing. So far this tool is only available for domestic projects. 

Four, the government must also look at ways to deepen collaborations with multi-lateral agencies like World Bank’s Multilateral Investment Guarantee Agency (MIGA), Asian Development Bank etc as well as with other like-minded nations to be able to access a collective pool of resources for overseas financing. The recently announced US-Japan-Sri Lanka partnership for development of a container terminal port at the Port of Columbo is a good example of such efforts.

Five, a deeper dialogue with Indian private players already operating in the specified countries is needed to further identify bottlenecks and challenges firms may be facing on the ground.

India’s long-term national interests in the neighborhood can be met by devising engagement that has positive outcomes for the partner country while meeting our own trade and export priorities. Win-win arrangements that serve the larger developmental goals of both nations would make for better public optics and would be more sustainable in the long run.

India can play a leading role in its neighborhood and beyond – to enable our critical partner countries to execute projects in ways that are environmentally sound, socially acceptable and financially viable. Standards, governance and viability will hence need to be paramount factors to consider in this endeavor.