IFC will continue to raise annual India investments: South Asia Director

In a Q&A, Hector Gomez Ang asserts that the institution's India portfolio has delivered strong development and financial returns despite Covid-19

International Finance Corporation (IFC) calls itself the largest global development institution focused exclusively on the private sector in developing countries. India is the biggest investment destination for the World Bank’s investment arm. During CFA Society India 12th India Investment Conference', Hector Gomez Ang, Regional Director, South Asia, IFC explained Samie Modak, IFC’s investment approach. Edited excerpts:

What are the kind of investment commitments IFC has towards India?

India is IFC’s largest portfolio globally. We have an outstanding portfolio of more than $6 billion. This is 10 per cent of the global portfolio. Since 1956, IFC has invested more than $24 billion in more than 500 Indian companies. On average, IFC has invested approximately $2 billion every year between FY18 and FY21. IFC will continue to support India’s development objectives and expect to continue to grow our annual investment in the years to come.

Is IFC satisfied with the returns on its India portfolio? 

Despite a very challenging macroeconomic period due to the Covid-19 pandemic, IFC’s India portfolio has delivered strong development and financial returns. IFC continues to play a countercyclical role in aggressively increasing investments in India during this challenging period.

What is IFC’s investment strategy for India?

IFC’s strategy for India is built on the pillars of climate and inclusion, focusing on innovation to deliver those goals. IFC strives to achieve a country-wide impact by helping create new markets for private investment and provide a meaningful contribution to closing development gaps. In India, IFC has played a crucial role in creating opportunities for the underserved and has focused on inclusive, strong, and sustainable growth by boosting infrastructure, enabling financial inclusion, promoting renewable solutions, and strengthening logistics, among other sectors. Going forward, IFC will continue to focus on growing and diversifying its portfolio in India to maximize IFC’s impact in the region.

How does India compare with other developing markets? 

The country remains a key focus area for IFC as reflected by its number one position in our portfolio. India has shown remarkable economic progress. The Indian economy has expanded at around 7.5 percent per year over the past decade. The country’s rapid growth has transformed the economy and lifted millions of people out of poverty. And, fortunately, we have been able to support the Indian private sector in this journey.  

However, in the last few years, the economy has been slowing down amidst the weakness in India’s financial sector. The pronounced impact of the pandemic exacerbated the slowdown, thereby leading to lower growth in FY21. Steady policy support has helped the economy recover relatively fast and GDP growth is projected to rebound to its historical average in the next two years. Compared to other emerging markets, India offers a unique opportunity for investors with its robust digital adoption and business-friendly regulatory changes.

We continue to remain bullish on India’s position among the emerging markets. India is ground zero to start addressing the world’s most challenging problems such as climate change, women’s participation in the labour force and poverty.

How do you see post-pandemic recovery in India?

The recovery so far has been uneven, and for instance, we have seen private consumption being hit due to income and job losses. Against this, the formal sector large corporates have enjoyed strong profit growth. But we expect the recovery to gain traction and become broad-based in time once the pandemic loses steam. The World Bank estimate for FY22 GDP growth is 8.3 per cent and the medium-term growth forecast path has been upgraded to 8.7 per cent and 6.8 per cent for FY23 and FY24, respectively. The government’s reform momentum has been strong even through the worst of the pandemic and increases in infrastructure spending and incentive schemes like PLI (production linked incentives) will support growth. 

What measures are required by the government to boost growth and corporate earnings?

Large corporates in India managed to raise capital at favourable terms, thanks to substantial policy support, although mostly to refinance the existing debt or reduce leverage, while large capex projects mostly remained on hold. A recovery of private investment will be critical to maintaining growth momentum as well as sustaining the strong earnings that large corporates have witnessed last year. Headwinds include low fiscal space to support growth, tepid private consumption growth and rising inflation. The shift in focus towards long-term structural reforms will create an enabling environment to crowd in private investment in the medium term.

How have post-pandemic stimulus measures benefited IFC’s India investments?

A steady influx of foreign capital has helped India’s digitally enabled and technology-driven sectors to perform very well. Favourable financial conditions and surplus liquidity scenarios have helped IFC’s investment portfolio clients. We, at IFC, have had to adapt to this increased liquidity by allocating capital to sectors that have continued to demand capital and for which our value proposition makes sense. Investments in areas, including healthcare, pharmaceuticals, renewables, edtech, fintech, and manufacturing will help in part to reduce India’s substantial inequalities. 

How do you see monetary tightening impact emerging market India returns?

Globally, inflation has reared its head again and is a cause for serious concern as the spikes seen in developed markets are multi-decade highs. Central banks around the globe are now preparing to roll back their exceptional stimulus measures and some of them have already begun the process. The Federal Reserve’s statement shows its intent to commence rate hikes and balance sheet normalisation over this year is likely to have a substantial impact on emerging market asset classes, which are perceived to be riskier. India has seen significant foreign portfolio outflows in the past few weeks, and domestic interest rates have started rising sharply. Interest rates in the country have bottomed out for now, and the rupee may also witness depreciation bias.

How does IFC approach ESG investing?

ESG is central to IFC’s engagement. We help clients understand and manage the environmental, social, and corporate governance (ESG) risks they face. We partner with industry and other stakeholders to find innovative solutions that open up opportunities for economically, socially and environmentally sustainable private investment—which, in turn, contribute to jobs and inclusive growth. IFC’s performance standards, guidelines, and tools are widely adopted as market standards and embedded in operational policies by corporations, investors, financial intermediaries, stock exchanges, regulators, and countries. This approach helps emerging markets raise their ESG standards and level the playing field.

Which are the sectors that stand to gain from this?

Renewed focus on ESG will support and reward businesses who make conscious decisions to support the local environment and societies in which they operate. So far, companies with a clean energy focus have been a big beneficiary of greater demand and that is expected to remain so. In the coming years, we expect to see more investments flow towards accelerating climate solutions, including water, agriculture, and manufacturing efficiency.