Capital Requirements for India

There are varying estimates of the capital requirements for India’s sustained growth over the next five-to-ten years. By some estimates, India requires over one trillion U.S. dollars of investment in the next five years to continue the annual growth of 8%. While the estimates may vary, there is no dispute that the capital requirements are very significant.

A very important and substantial source of capital is the availability of alternative investments in the form of private equity and hedge funds resources. It is estimated that the available potential private equity capital is well over 750 billion US dollars, and the available hedge funds capital is well over one trillion US dollars.

India has not been a recipient of these alternative investments. While there is much curiosity and interest in Indian markets from the alternative investors, there is also much caution. What is it that India can do to receive a fair share of these investments?

There are three important elements that require action and attention. One, India has to open the Indian markets to ownership by the alternative investors. Without sacrificing India’s national interests and sovereignty, India can and should design appropriate mechanisms and instruments to permit majority ownership by the alternative investors in most attractive, if not all, sectors/domains.

Two, India has to create effective governance mechanism and legal protection for foreign debt investment. Currently, the debt investors are skeptical and worried about protection of their investment, and recovery of their debt.

It is a norm that for every dollar of alternative investment, there would be natural two or three dollars of foreign debt investment. Put it differently, alternative investors would invest only if their investment can be leveraged through debt investment.

If debt investment was impeded, so would alternative investment be. There is a clear synergy between the two – the alternative investment and foreign debt investment. So we need to create institutions and mechanisms to simultaneously encourage and foster alternative investment and foreign debt investment.

It is estimated that with these two reforms – majority ownership and protection of foreign debt – will attract at least 150 U.S. billion dollars of annual alternative investment. With this magnitude of alternative investment, it is expected that additional annual 300-400 billion U.S. dollars of foreign debt investment will be forthcoming. So we can expect a total annual investment of about 450 billion U.S. dollars.

India can further strengthen the confidence in Indian markets with reforms in accounting and reporting processes, procedures and requirements. The foreign capital markets are seeking more clarity and transparency, and this can be easily provided without any detriment to national interests.

Yet another opportunity to attract investment is creation of user- and investor-friendly real estate investment for small and individual investors. There is a huge intent to invest in India’s booming real estate market. But this market is not evidently transparent and friendly for the individual investors – there is too much friction.

Therefore, India should consider creation of Real Estate Investment Trusts (REITs) to encourage and receive the potential monumental individual investment.