NEW YORK — Citigroup Inc. and
Blackstone Group Holdings LP have launched a $5 billion fund to invest in India’s infrastructure — a positive development for a country that lags behind China in attracting foreign investment, one observer says.
India’s weak infrastructure deters investors and is one reason why its growth rates lag behind China’s, said Stephen Thomsen, author of “Infrastructure and Indian Development: Reform First, Invest Later,” published last month by Chatham House of London, a non-profit organization that researches international issues.
Yet the development of better utilities and roads is in part dependent on foreign investors, added Mr. Thomsen, who is an associate fellow at Chatham House.
Even with the cash infusion, India has a ways to go before it catches up with China. India attracted about $9.5 billion in foreign investment last year, up from $6.6 billion in 2005 and 5.5 billion in 2004, according to a United Nations Conference on Trade and Development report that was released last month.
By contrast, China attracted about $70 billion in foreign direct investment last year alone, according to the Geneva-based group’s data.
This month, Citigroup and Blackstone, both of New York, in conjunction with Chennai, India-based Infrastructure Development Finance Co. Ltd. and New Delhi-based India Infrastructure Finance Co. Ltd., took steps that upped the ante.
“We are excited about this opportunity to make an impact on the development of infrastructure projects, which are critical to the country’s growth prospects, and to be a partner in this important initiative,” Charles Prince, chairman and chief executive of Citigroup, said in a statement.
The India Infrastructure Financing Initiative will spend about $2 billion in equity capital and $3 billion in long-term debt to finance the development of roads, power plants, airports and ports, as well as industrial and commercial infrastructure, according to Citigroup’s statement.
“This initiative sets a new benchmark for collaboration between a domestic partner” and foreign financial institutions with the government of India “to solve infrastructure-financing problems,” Shri Deepak Parekh, chairman of Infrastructure Development Finance, said in the statement.
“These investors are not going to put money in blindly,” which is a good thing for India, Mr. Thomsen said. “Private-equity investors are going to set a lot of conditions when they lend that money” — which could lead to improvements in how state governments assign construction jobs and how they decide where to build, he said.
Currently, state governments often award employment and new utilities in exchange for votes instead of on the basis of qualifications, Mr. Thomsen said.
While joint ventures are a start, real change and more investment will occur only when the central government passes significant legislation, he said.
Before India receives more private money from abroad, it has to convince private investors that it has reformed, Mr. Thomsen said.
Inefficiency is costly
Statistics from India’s Ministry of Finance in New Delhi clarify the necessity for updated infrastructure. India loses 2 percentage points from annual growth because of inadequate power and transportation networks.
It also produces about 8% less electricity than it needs, which cuts gross domestic product by one-tenth, according to Bloomberg News.
India lacks an efficient way to transport goods, Mr. Thomsen said. A focus on infrastructure will lead to more exports and create manufacturing jobs for the country’s poor, as has happened in China, he said.
At least one professor thinks that the emphasis on infrastructure is misplaced.
Yasheng Huang, an associate professor at the Massachusetts Institute of Technology Sloan School of Management in Cambridge, Mass., has argued that China’s growth has occurred because of liberal economic reforms, not investments in infrastructure.
“Academic studies have not produced convincing evidence that [foreign direct investment] is the best path to economic development, compared with responsible economic policies, investment in education, and sound legal and financial institutions,” he wrote in an article in the Financial Times last year. “In this regard, India has done a better job than China,” said Mr. Huang, who is now working on a book-length project on China and India.
