(MENAFN - Arab News) India vowed on Friday to further liberalize foreign direct investments in an attempt to fund a 1 trillion plan to overhaul its dilapidated infrastructure - a vital component to boost economic growth of the country.
India first opened its markets in 1991 and allowed FDI in some sectors. Since then its economy has expanded nearly six times, making the country Asia's third largest economic powerhouse.
"Discussions are under way to liberalize foreign direct investment policy," Indian Finance Minister Pranab Mukherjee said, adding that the country was on track to achieve nine percent growth next year.
"Institutional and policy reforms are necessary for improving productivity and effectiveness of our social development strategy," said Mukherjee, referring to liberalization of FDI policies but stopped short of elaboration.
"We have to ensure that the revival in private investment is sustained and matches the pre-crisis growth rates," said Mukherjee.
India recorded a 22 percent decline in FDI to 21 billion last year as foreign investors remained cautious amid fragile global economic recovery, according to the latest official data.
Another data suggested that overseas portfolio investors pulled out nearly 2 billion from India's stock market in the past two months, reflecting fears of overheating.
To woo more FDI inflow, India on Monday said it will allow foreigners to invest in equity schemes of Indian mutual funds, a move aimed at widening the class of foreign investors in the country's equity market.
Currently, only institutional investors and sub-accounts registered with the Securities and Exchange Board of India (SEBI) and non-resident Indians are allowed to invest in mutual fund schemes.
"To liberalize the portfolio investment route, it has been decided to permit SEBI registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes," said Mukherjee.
"This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market," he added.
In its budget for 2011-2012 fiscal year, the country raised the foreign institutional investors' (FIIs) limit to invest in corporate bonds with residual maturity of over five years issued by companies in infrastructure sector by an additional limit of 20 billion, taking the limit to 25 billion.
"This will raise the total limit available to the FIIs for investment in corporate bonds to 40 billion. Since most of the infrastructure companies are organized in the form of SPVs (special purpose vehicles), FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. However, the FIIs will be allowed to trade amongst themselves during the lock-in period," said Mukherjee.
In a bid to attract foreign funds for the infrastructure financing, the Indian government wants to create SPVs in the form of notified infrastructure debt funds. "I propose to subject interest payment on the borrowings of these funds to a reduced withholding tax rate of five percent instead of the current rate of 20 percent," said Mukherjee, adding that he wants to exempt the income of the fund from tax.
India's infrastructure sector requires an investment of a whopping 1 trillion in the 12th Plan, beginning year 2012-17.
By Walid Mazi