MoU with U.S. Set to Boost Investment in India’s Infrastructure

By Nishant Maddineni 

India and the U.S. have signed a Memorandum of Understanding (MoU) to set up an Infrastructure Collaboration Platform (ICP), under which both governments intend to facilitate U.S. industry participation in Indian infrastructure projects.

The MoU follows a Joint Statement made by Indian Prime Minister Modi and American President Obama in September 2014. It was signed between the Department of Economic Affairs (DEA) and Ministry of Finance for India, and the Department of Commerce for the U.S.

In a public statement, the U.S. said: “India Infrastructure Platform (ICP) is a collaborative effort between the United States and India that is anchored by the two governments and operated in concert with our private sectors to promote U.S. private sector engagement in India’s infrastructure growth and modernization.  It will provide a platform to assist US investors in infrastructure in navigating Indian regulatory and procedural hurdles.”

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The ICP will be co-chaired by the International Trade Administration (ITA) and the Indian Ministry of Finance. It will enable U.S. industries to sell technologies and services across India, which should help develop concrete business opportunities and help meet India’s infrastructure needs.

U.S. small and medium-sized enterprises (SMEs) will have significant opportunities through the ICP.  They will be able to participate in the global supply chain by learning of opportunities earlier, and will subsequently be able to decide whether to partner with larger U.S. firms as they bid for new Indian government contracts.

In addition, the ICP may allow U.S. firms to be a lead partner in developing “smart cities” in Ajmer in Rajasthan, Allahabad in Uttar Pradesh, and Visakhapatnam in Andhra Pradesh. Smart cities leverage information, communication and sustainable physical technologies to optimize quality of life at reduced costs and increased efficiency. Building them requires major technological and physical infrastructure deployment, which many U.S. businesses possess.

US-India Bilateral Trade

Two-way trade between the U.S. and India has increased fivefold since 2001 to nearly US $100 billion. By 2012, U.S. investment into India was upwards of US $28 billion, while cumulative Indian investment in the U.S. totaled US $9 billion. A survey indicated that U.S. investment supports half a million jobs, while American exports to India totaled US $35 billion in 2013 and created an estimated 168,000 jobs.

These figures show the growing economic activity between the two countries. The U.S. is now India’s largest investment partner and there have already been notable investments in India’s power generation, telecommunications, ports, and roads.

However, India is still a lesser trade partner to the US compared to many other Asian countries. For example, despite having a GDP 60 percent of India’s in 2013, South Korea still had a similar level of goods trade with the U.S. This is partly due to India’s lower level of intellectual property protection and enforcement. Moreover, India is not part of several of the large regional trade negotiations that include the U.S., such as the Trans-Pacific Partnership (TPP) and the Asia-Pacific Economic Cooperation (APEC).

A large part of the bilateral trade that does occur between India and the U.S. is in the services sector.  India’s services exports to the U.S. has increased over 900 percent since 2003, rising from US $2 billion to over US $19 billion. This has led India to be one of the few countries that the U.S. has a services trade deficit with.

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India’s Infrastructure

One of the biggest obstacles to Indian economic growth is its poor infrastructure. This extends from its ageing roads and railways to include unreliable power and poor sanitation facilities.

India’s poor infrastructure can be attributed to a broad range of reasons, such as resource shortages, corruption, retreating investors, and pressure created by the demands of a large and growing population.

While this infrastructure gap has attracted interest from foreign companies in the infrastructure business, India’s difficult business environment has prevented investment from being as high as it could be. Unpredictable regulations, bureaucratic delays in approving projects, struggles to secure land rights, and the government’s previous stalled attempts at reform have steered investors away from what is an otherwise intriguing market.

That being said, new policies introduced under the new Narendra Modi administration suggest that it may become easier for foreign companies to invest in India. For example, companies now need a minimum project-size of 20,000 square meters to invite overseas investors instead of the earlier mandated 50,000 square meters. In addition, a previous condition on the minimum size of plots for housing construction has been removed, and the paid-up capital requirement for projects has been halved to US $5 million. Other business friendly developments include scrapping subsidies on diesel fuel and moving toward ending a 40-year state monopoly on mining and selling coal.

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Modi has indicated that he will seek long-term funds for India’s US $1 trillion infrastructure development plans. The government wants private companies to contribute half of 2017’s investment target, which will mostly be used to alleviate clogged-up roads and end electricity blackouts. Modi has already had relative success with using public-private partnerships when he was Chief Minister of his native state of Gujurat, which he turned into India’s first state with almost universal 24 hour electricity.

The emphasis on bringing in private funding is part of Modi’s overall message of India being “open for business”.  However, some US businesses will inevitably remain skeptical about increasing investment and will expect a strong and stable macroeconomic framework before they do so in. Indeed, while the Indian government has taken steps to encourage investment, it remains to be seen exactly how effective its new policies will be.

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