National Infrastructure and Investment Fund: An extension of the Indian Protectionist Economy
[By Hemant Tewari & Apoorva Singh Rathaur] The authors are students of Dharmashastra National Law University, Lucknow. Introduction Sovereign wealth funds (SWFs) have rekindled discussions about their role amid contemporary challenges like trade tensions and geopolitical unrest. With trillions of dollars at their disposal, these state-backed investment vehicles not only shape markets but also wield potential as instruments of national ambition and protectionist agendas. In 2023, the discourse on SWFs has evolved, intertwining previous concerns about hostile takeovers with new issues such as climate change and ethical considerations. India’s National Investment and Infrastructure Fund (NIIF) exemplifies this duality. Despite its portrayal as a champion of clean energy, skepticism exists about whether it serves as a Trojan horse for protectionism. The aftermath of the 2022 Ukraine invasion has heightened worries about the politicization of SWFs, challenging their purported apolitical stance. In the case of India’s NIIF, despite its emphasis on infrastructure development, its investment decisions reflect a prioritization of national interests over global integration, potentially impeding India’s economic progress. National Infrastructure Investment Fund Established through the 2015 Finance Bill, NIIF occupies a distinctive position in India’s economic landscape. This unique “quasi-sovereign” fund, born as a strategic, non-commodity entity, straddles the boundary between a purely financial institution and a government instrument, prompting questions about its genuine motives and potential ramifications. While its stated objective is to maximize economic impact through national infrastructure investments, with a focus on revitalizing stalled projects and addressing matters of national significance beyond mere infrastructure, its actual actions suggest a more intricate agenda. The ownership structure of NIIF adds another layer of complexity. With the Indian government holding nearly half of the stake (49%), and the remaining shares dispersed among influential international and local investors like Abu Dhabi Investment Authority (ADIA), Temasek, and HDFC Group, a delicate balance must be maintained. The question arises whether NIIF can truly harmonize the potentially divergent interests of commercial viability sought by its private partners with the national ambitions embedded in its government ties. Deeper scrutiny uncovers a potential misalignment between NIIF’s professed objectives and its investment strategies. The pronounced focus on domestic projects, including those considered high-risk by private investors, suggests a prioritization of national interests over pure financial returns. This inward orientation, reflected in India’s broader trade policies marked by escalating tariffs and import restrictions, sparks concern regarding India’s commitment to a globalized economy driven by open markets and competition. NIIF’s expanding capital commitments, now surpassing 5 billion dollars across four distinct funds, underscores its growing influence, emphasizing the critical need to comprehend its true role. NIIF’s structure reveals its distinctive role, initially established as a tax-optimized trust featuring a governing council comprising government officials and financial experts, aiming for a balance between state interests and professional acumen. Despite the autonomy sought by its “arm’s length” investment team and CEO, concerns arise about potential government influence on investment decisions due to its presence. The fund’s inaugural major investment, a collaboration with DP World in ports and logistics, highlights its initial focus on domestic infrastructure. Subsequent ventures, such as partnering with Ather Energy in electric vehicles, demonstrate a broader scope extending to emerging sectors like data centers and airports. However, a recent dip in profitability, with FY-2023 deployment at 43% and profits declining by over 50%, prompts questions about the fund’s financial performance and future direction. India’s extensive infrastructure needs face challenges in securing long-term funding amid potential banking issues. NIIF’s patient capital and capacity to handle riskier projects emerge as a crucial solution, potentially addressing gaps left by cautious banks grappling with non-performing loans and concerns about delays and cost overruns. Protectionist Tendencies India is being positioned as a counterbalance to China in Asia, with the discomfort investors feel towards China’s Maoist ideology and Communist remnants contrasting with India’s pursuit of liberalization and extensive efforts to appease foreign investors. The narrative projected globally emphasizes India as a country welcoming and respecting foreign investors, alleviating concerns about expropriation and undue government interference. However, we assert that India operates fundamentally as a protectionist nation under the guise of liberalization, and the National Infrastructure and Investment Fund (NIIF) is viewed as a recent addition to these deceptive financial strategies. Several incidents highlight India’s protectionist inclinations, with a discernible increase in trade protectionism shaping its economic strategy under Prime Minister Narendra Modi. Tariffs in India have surged by 25% over the past decade, rising from 8.9% in 2010-11 to 11.1% in 2020-21. Concurrently, the proportion of tariff lines exceeding 15% escalated from 11.9% to a noteworthy 25.4%. This trend in trade barriers aligns with the government’s growing reluctance to engage in new trade agreements. A 2019 report from the Office of the United States Trade Representative noted India’s highest average Most Favoured Nation (MFN) tariff rate among major economies, standing at 13.8 percent. Additionally, India amended Section 11(2)(f) of the Customs Act of 1962 in 2019, granting the government authority to restrict the import or export of any commodity to safeguard the economy, extending beyond its initial application to gold and silver, thus deviating from GATT Article XX(c). Masquerading under the banners of “self-reliance” and Prime Minister Modi’s “Make in India” initiative, India promotes trade policies that are often unfavourable and occasionally contradictory. Sovereign Wealth Funds (SWFs) are not immune to such partial decisions, with certain SWFs openly acknowledging the impact of non-financial factors on domestic investments. These factors encompass considerations like local economic progress, job opportunities, and economic diversification. Even renowned entities like the Norwegian Government Pension Fund openly align their investments with political agendas, abstaining from funding companies involved in firearms, alcohol, and tobacco production or those not meeting specific labor relations criteria. The central argument suggesting the protectionist nature of NIIF revolves around its persistent emphasis on investing in domestic infrastructure projects. While most SWFs prioritize securing higher returns than those offered by central banks, India stands out by prioritizing its domestic infrastructure, a sector fraught with challenges and a source of headaches for both foreign and domestic investors.