Modi's two-year regime sees record $40-bn PE investment

The Narendra Modi government's focus on keeping fiscal deficit in check and kick-starting planned expenditure has been helpful in attracting investments

Prime Minister Narendra Modi's myriad foreign visits have often come under criticism. But, it has apparently helped attract a record $40-billion investment by private equity (PE) in India, according to VCCEdge.

The rising significance of PE investments is evident by their contribution to foreign direct investment (FDI) flow into the country. According to Bain & Company, the PE sector contributed $24 billion out of the $37-billion net FDI in 2015. In the previous year, PEs contributed about $15 billion of the $22 billion net FDI. The number of funds participating in India also increased to 240 in 2015 from 193 a year ago, says Bain.

"The focus of the PM and his government on clear communication to the global community, that India means business and wants to attract foreign dollars, has given a strong message to investors - 'invest in India'," says Dhanpal Jhaveri, managing partner, Everstone Capital.

The India-focused fund raised its third fund with the largest $730-million corpus last year, indicating the growing comfort of global investors in India's growth story.

The focus on keeping the fiscal deficit in check and kick-starting planned expenditure have been helpful. Rail, road, shipping and defence ministries now have large spending budgets; so, there is enough economic activity. But, stretched corporate balance sheets have slowed annual credit growth to less than 10 per cent now from 16 per cent at its peak about five years ago. Everstone believes kick-starting the economy is going to happen only if the government starts aggressive planned expenditure, as banks are under pressure, with rising bad debt.

"When you are undertaking structural reforms and moving away from a subsidy regime to a direct benefit regime, and trying to basically convert a cash and partially opaque economy into a more financially transparent one, as this government is aiming to do, there will be short-term challenges to consumption. But, it is more a transition period," says Jhaveri.

He sees green shoots in power sector reform and says the aggressive stance of the government to roll out Goods and Services Tax, besides the Make in India campaign and enabling state governments would bring labour reforms.

This year, Carlyle the world's second largest PE fund, ranked India the most attractive investment destination in the world, by offering the highest expected returns on incremental capital over the next four years.

Carlyle’s director of research, Jason Thomas, says that after India formally assumed the mantle of the world’s fastest growing economy in 2015 from China, the gap between the growth rates of two will widen over time. He has pinned his hope on Modi’s willingness to do structural reforms, which he believes will sustain the growth accelerator.

Prem Watsa, the chairman of Canadian investment firm Fairfax, is another cheer leader for the Modi government. He counted as many as 30 achievements of the Indian PM in the first annual report for Fairfax India Holding Corporation, which he formed after meeting Modi on his visit to Canada in November 2014.

Watsa responded to Modi’s call by raising $1.1 billion on the Toronto Stock Exchange in January 2015 for investments in India. He is close to exhausting this money now with investments including a 33 per cent stake in Bangalore International Airport and an additional 26 percent stake in India Infoline.

According to Bain & Company, India-focused PE firms are carrying approximately $11 billion dry powder or money for investment. This is up from $8 billion in the year-ago period.

“Funds expect that the healthcare, financial services, technology and IT, and services will see the highest investment activity,” says Arpan Sheth, partner, Bain & Company. “Several government initiatives such as the Startup India programme, tax regime rationalisation and Make in India are encouraging these investments,” he adds.

Snapshot of PE deals from June - May
Year	# of deals	Deal value ($ mn)
June 1, 2014 - May 31, 2015	1,323	19,143.76
June 1, 2015 - May 31, 2016	1,557	20,902.18
Total	2,880	40,045.94
Snapshot of PE deals from 2011-2016 YTD
Year	# of deals	Deal value ($ mn)
2011	807	12,834.04
2012	913	11,995.55
2013	950	11,899.69
2014	1,111	14,894.57
2015	1,622	24,162.58
2016 YTD	543	6,187.57
Total	5,946	81,974.0
Source: VCCedge