Sovereign Wealth Funds and their Impact - Part 4

 

Part 4 – India as a prominent destination for SWFs

 

“It is not what we have that will make us a great nation; it is the way in which we use it.” - Theodore Roosevelt


India is at a stage in its development cycle where it is hungry for investments. Steady growth over the last 30 years has propelled India to a large economy of USD 2.7 trillion. It is now at par with The UK and France and only Germany, Japan, China and The USA are larger. India is still a low-income country and has considerable headroom for growth. Its demographics are favorable and are expected to be favorable for another 25-30 years as the working-age population is forming a bulge and the elderly are still at about 6.5% of the population.

Many SWFs have already been active in India, either directly or via PE funds. SWFs and PPFs have mostly focused on developed markets and among the Emerging markets, China has been the favored destination for the last 2 decades. However, India has become a major recipient during the last 12-13 years and the allocations to India have been rising fast. On the other hand, China itself generates a lot of money and is crowding out Foreign investments. In addition, there has been a felt need to diversify away from China, which has gathered momentum during the last 4 years. In many ways, 2019 was a tipping point when investments by SWFs into India overtook the investments into China. The trends are shown below –


The figures for CY2020 are as of November 2020.

In 2019, the change happened when sovereign investors and large public pension funds placed heavier bets into India versus China. Political instability in Hong Kong worried Western foreign investors in China, as did trade protectionist policies between The USA and China. India has made inroads in attracting foreign investors, especially in real estate, consumer-focused technology, lending, and infrastructure. The government has also created the National Investment and Infrastructure Fund to attract long-term foreign capital to participate in India’s infrastructure story.

Sovereign funds and public pensions remain bullish on China for the long-term, according to investment patterns observed by SWFI and annual report letters from the CIOs of these organizations. However, the digital and trade conflicts between the US and China has prompted some to slow down money flows into mainland China. Mainland China hasn’t become unattractive; it still draws FDI of the order of USD 140 billion every year. But the inflows may not grow the way they were growing earlier.

Sovereign funds and foreign pensions are increasingly attracted to India’s large market, which appears to have crossed the critical threshold of per capita income. Within the private market sphere, sovereign investors started with traditional infrastructure investments, real estate, and lending companies, moving onto retail companies and betting even more on renewables such as solar power.

It may be noted that the amounts are still quite low compared to the total fund sizes of the SWFs. Further, the fund sizes of the SWFs (and PPFs) are likely to keep growing in the foreseeable future. One can expect that SWFs alone will have an additional USD 2 trillion to invest, during the next 10 years, and the PPFs and SWFs together are likely to be deploying USD 5-6 trillion during the next decade. Given the pressures of low interest rates and returns required by these funds to meet their objectives, an increased allocation towards emerging markets are on the cards. This allocation could be of the order of USD 150-200 billion from the SWFs (USD 500 – 600 billion from SWFs and PPFs together), even in a conservative estimate. India could certainly look for a large slice of this pie. Of course, the economy has to keep performing and the conditions favorable for investments need to be maintained and enhanced.

FDI in India

The long term capital comes to India via the FDI route. Some are direct investments by transnational corporations, some are via private equity funds (many large PE funds tend to have SWFs and PPFs as their investors), and some directly from SWFs and PPFs. As per GoI statistics, 15-35% of all FDI during each of the last 5-6 years have been through the PE route.

Historical trends in FDI

India was not attracting any significant FDI before the economic reforms of 1991. After that it started attracting significant FDI (as % of GDP), but the real momentum came after the economy reached a critical mass. This happened around 2005-2006. Since then the momentum has really picked up and the current year promises to be the biggest in history. In the first 6 months of the current fiscal, India has received USD 30 billion of FDI and the estimate for the year is that it will be of the order of USD 55-60 billion.



During the last 30 years India has received USD 500 billion as FDI. However, the real kick came after 2007, when FDI hit 2% of GDP for the first time. FY2009 saw the peak of 3.62% of GDP. Since then, FDI has in general been between 1.5 and 2% of GDP. Continued growth has seen India attract more FDI –

  • ·         Last 5 years – USD 236 billion
  • ·         Previous 5 years – USD 132 billion
  • ·         Prior 5 years – USD 100 billion

If we assume a moderate GDP growth rate for the next 9 years to FY2030, we are looking at an additional FDI of the order of USD 650 billion (USD 730 billion in a more optimistic scenario, and USD 570 billion in a more pessimistic scenario).


Note – Base scenario is an average FDI of 1.85% of GDP on average, Low 1.65%, High 2.1%

These are not outlandish figures. They are actually somewhat similar to what China was attracting 12-15 years ago, when neither the SWFs nor the PPFs were as large as they are today. For instance, China attracted FDI of USD 136 billion in 2017, 138 billion in 2018 and 141 billion in 2019. The stock of FDI in 2019 reached USD 1, 769 billion, an exponential growth when compared to 2010 when the stock was USD 587 billion (In 9 years China attracted USD 1,182 billion). This is almost twice our base scenario for India during the next 9 years.

SWFs and PPFs will be some of the key sources of FDI during the next 9 years. One can expect these sources to account for something like 1/4th to 1/3rd of the projected investments, which is of the order of USD 150 to 200 billion. As we have seen in the preceding parts of this series, SWFs are increasingly allocating to the following asset classes – equities as a whole, emerging market equities, AIFs. There is sound logic behind this. The last 10-15 years have seen interest rates go to near zero regions. This is not expected to change in the near term. Thus, SWFs have to go out of the comfort zone of risk-free returns in order to meet their target returns. In many ways, this works to India’s advantage in terms of FDI flows.

What is India doing to attract SWFs

There are several steps that India has already taken. What it needs to do now is to make sure that the wheels and engines of the economy remain in motion and do not get upended.

The Budget of 2020 is a significant milestone for SWF investments - “In order to incentivize the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, I propose to grant 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure and other notified sectors before 31st March 2024 and with a minimum lock-in period of 3 years” - Finance Minister in her budget speech.

The ball is rolling and should continue to roll. Some recent SWF related developments are as follows –

  • ·         Singapore’s GIC Private Limited is already an active investor in listed Indian companies and also a major cornerstone investor in IPOs. GIC plans to create an India-dedicated public market fund to tap into India’s growing public equity market, despite recent COVID-19 impact volatility. …. 27th November, 2020
  • ·         The Indian cabinet approved a capital injection of 60 billion rupees (US$ 812 million) as equity by the government in the National Investment and Infrastructure Fund’s (NIIF) new infrastructure debt platform. The capital injection will occur over a period of two years. The Indian cabinet approved 20 billion rupees for this fiscal year ended March 31, 2021. … 25th November, 2020
  • ·         Saudi Arabia’s Public Investment Fund (PIF) acquired a 2.04% stake in Reliance Retail Ventures Limited for Rs 9,555 crore (US$ 1.3 billion USD). Reliance Retail Ventures Limited is a subsidiary of Reliance Industries. … 5th November, 2020
  • ·         Abu Dhabi’s Sovereign Wealth Fund (SWF) – MIC Redwood RSC became the first foreign SWF to be notified and granted 100 percent tax exemption for long-term investments to be made in specified priority sectors in India. As per the Central Board of Direct Taxes (CBDT) notification on November 2, the SWF has gained 100 percent exemption from income tax (I-T) on income from interest, dividend and long-term capital gains as per the Finance Act, 2020.
  • ·         The Abu Dhabi Investment Authority (ADIA) and Saudi Arabia’s Public Investment Fund (PIF) both recently invested in Reliance Retail Ventures, a subsidiary of Reliance Industries. ADIA and PIF have now invested over US$ 1 billion in Reliance Industries’ Digital Fibre Infrastructure Trust. … 1st November, 2020
  • ·         Freshtohome Foods raised around US$ 121 million in a Series C round that was led by Investment Corporation of Dubai (ICD) and Investcorp, a Bahrain-based investor. Other investors in the Series C round include Ascent Capital, the U.S. International Development Finance Corporation (DFC). .. 27th October, 2020
  • ·         Sequoia India, part of Sequoia Capital, and Singapore’s GIC Private Limited led a Series D round for US$ 100 million into Bangalore-headquartered Razorpay. … 12th October, 2020
  • ·         Singapore's GIC sovereign wealth fund and the Abu Dhabi Investment Authority (ADIA) this month agreed to make a further investment of $495 million in renewable energy firm Greenko Energy Holdings, which has wind, solar and hydro projects. India is widening its use of solar and wind energy to help reduce its reliance on fossil fuels.
  • ·         ADIA and India's National Investment & Infrastructure Fund (NIIF) agreed to buy a 49% stake in the airport unit of Indian conglomerate GVK Power & Infrastructure.
  • ·         Temasek has invested 11 billion USD in India over last 15 years
  • ·         ADIA invested a billion dollars in Kotak Mahindra bank; and
  • ·         GIC invested 1662 crores in the latest ICICI bank equity raise
  • ·         As of February 2020, Norway’s Government Pension Fund Global, the biggest sovereign wealth fund in the world, has increased its bets on India by 27.2 per cent to $9.4 billion. The number of equity investments has risen from 253 in 2018 to 317 as of 2019-end.
  • ·         GIC's significant public market investments in India includes mortgage lender HDFC Ltd, ICICI Bank, Bandhan Bank, and Bharti Airtel.

There comes a time in a nation’s journey when opportunities present themselves. Some nations seize the opportunities, some freeze. It remains to be seen what India does with its “moment”. There are challenges to be met and overcome.

“No nation can be really great unless it is great in peace, in industry, integrity, honesty. Skilled intelligence in civic affairs and industrial enterprises alike; the special ability of the artist, the man of letters, the man of science, and the man of business; the rigid determination to wrong no man, and to stand for righteousness-all these are necessary in a great nation.” - Theodore Roosevelt


Part 1 – What are Sovereign Wealth Funds

Part 2 - The story of the Norwegian SWF and The SWF of China

Part 3 – Singapore and a few more prominent SWFs 

Part 4 – India as a prominent destination for SWFs



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