[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. NIIF’s investor base includes sovereign funds from other countries like the ADIA and domestic institutions such as HDFC Bank. The fund’s investment decisions, guided by a Governing Council predominantly comprised of government officials, appear geared more towards achieving self-reliance than ensuring viable returns for the government and partner investors. Notably, the fund explicitly targets “stalled” infrastructure projects, suggesting a willingness to engage with already disputed ventures and, consequently, an increased exposure to risky assets.
NIIF’s independence in choosing investments reportedly faces government roadblocks, leading to public and internal disapproval. Critics argue that NIIF lacks vision, decisiveness, and the ability to attract investors. Despite being established in 2015, the governing council, chaired by India’s finance minister, has met only five times. Questions arose about NIIF’s investments in for-profit businesses, particularly its proposal to acquire a stake in FirstCry.com, an online retailer of baby supplies, which faced government objections and was eventually cancelled. This discord between the investing team and the governing council intensifies scepticism among foreign investors. The high attrition rate, with 15 directors resigning from the NIIF board, signals potential issues for a sovereign fund. The government’s protectionist approach in the investment decisions of the investment team threatens the commercial viability of the quasi-sovereign fund. India’s aggressive pursuit of self-reliance is emerging as a barrier to its perceived liberalism.
Legal Qualms
While the National Infrastructure and Investment Fund (NIIF) holds promise for providing vital long-term capital for essential infrastructure projects in India, several legal concerns arise from its opaque decision-making, strong focus on domestic investments, and alignment with protectionist trade policies.
Firstly, prioritizing domestic projects over foreign investments raises issues concerning India’s commitment to national treatment under WTO rules, potentially violating GATT’s non-discrimination clause. The lack of transparency in NIIF’s governance structure also fuels concerns about discriminatory practices against foreign investors, inviting legal scrutiny. Additionally, recent tariff hikes and limited participation in trade blocs like RCEP indicate a departure from the MFN principle, potentially leading to trade disputes with other WTO members.
Within India’s legal framework, alleged favouritism towards domestic projects could be challenged as discriminatory under Article 14 of the Constitution, guaranteeing equality before the law. Furthermore, if NIIF’s investments prioritize short-term gains over public good or environmental considerations, legal issues may arise based on the principles of public interest and India’s obligations under the Paris Agreement.
While NIIF holds substantial potential for India’s infrastructure development, ensuring legal compliance, transparency, and commitment to open markets is crucial to prevent legal obstacles and ensure its success as a genuinely “quasi-sovereign” entity fostering sustainable growth in a globalized economy.
Conclusion
India is poised to become the world’s third-largest economy by the end of the decade, contingent on its domestic policies. Despite the global trend of declining average tariffs, with a reduction from 6% to approximately 2%, India deviates from this pattern by decreasing its tariff rates by only 1%, resulting in one of the highest tariff rates globally. Over 3,600 out of 5,500 products in the six-digit tariff code have experienced increased customs taxes, with more than 600 goods facing higher tariffs in the 2020–21 Budget alone. The historical failure of overt protectionist acts, like the Smoot-Hawley tariff, underscores the ineffectiveness of protectionism in the 21st-century context of globalization and liberalization.
The Atmanirbhar Bharat initiative should not be synonymous with protectionism. India’s failure to join trade blocs like the European Union, APEC, and RCEP has deprived it of a competitive tariff advantage. Examining the successes of nations like Bangladesh, Vietnam, and Cambodia, which achieved economic growth through pragmatic strategies, prioritization, and well-planned developmental paths, highlights the drawbacks of protectionist policies. The article explores the complex dynamics of NIIF, originally envisioned for infrastructure development and economic progress but now facing scrutiny for perceived protectionist tendencies. While NIIF’s diverse portfolio includes ventures in ports, logistics, and electric vehicles, concerns arise from its strong focus on domestic projects, recent profitability dip, and alleged government interference. India’s broader trade policies, marked by rising tariffs and a “Make in India” focus, reflect a cautious approach to globalization that, if excessive, may impede India’s economic potential by isolating it from the global market.