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July 28, 2014 at 09:20 PM
For money management firms such as Wilmington Trust Advisors in Baltimore, the most exciting item in the highly anticipated budget recently released by the government of India’s new prime minister, Narendra Modi, is the increase in debt financing that it calls for.
India has not been a huge issuer of bonds and as such, it is a very small part of emerging market indexes. Now that the government not only wants to use more bonds to finance India’s budget deficit, but has also raised the cap on how much of that debt foreign investors are allowed to hold, it’s clear that bond fund managers will be increasing their allocation to India, said Clem Miller, portfolio manager at Wilmington Trust Advisors, not least because “there is a lot of room for India to be able to grow its foreign debt without impinging too much on serving that debt. India has the flexibility to borrow more, and for us, that means there’ll be more opportunities for bond funds like outs to buy Indian bonds.”
Miller isn’t just expecting an increase in Indian government debt. The new budget also has provisions that would increase bond issuance by Indian banks and corporates “so there’s a big future in the Indian debt markets,” he said.
What’s particularly interesting to many investors across the globe is that Indian banks will now be allowed to issue special infrastructure bonds with a minimum seven-year maturity, and these instruments will be exempt from banks’ reserve requirements.
The move creates a real incentive for infrastructure financing, India’s greatest impasse, Miller said, and the albatross that has been hanging around its neck for years now. It’s no secret that India is a real laggard when it comes to infrastructure, and is in serious need of revamping and upgrading just about everything from power grids to bridges, roads and ports.
The government of former Prime Minister Manmohan Singh had greatly disappointed in terms of infrastructure financing and numerous projects were either frozen or shelved. While it’s going to take a while for the new infrastructure bonds to come to market, there’s no doubt that they’re going to be an attractive option to both banks as well as investors, Miller said, and they will start to address the huge infrastructure challenge India faces.
The new budget has also earmarked $25 billion for infrastructure investment across all sectors, an amount “that may seem like a drop in the ocean for such a huge economy as India, but it’s certainly a start and shows that things are clearly moving in the right direction,” Miller said. But even if that’s the case, infrastructure is still a colossal challenge for India, and for investors like Rajeev De Mello, head of Asian fixed income at Schroders in Singapore, the new budget will enable but a tiny improvement, if that at all.
