Rising appetite for Islamic Finance and a strong home-bias is making gulf investors introvert. Its time India tap into Islamic Finance to meet her infra ambitions
Two primary themes are dominating the gulf investment funds; a renewed push toward Islamic Finance and a strong home-bias in terms of investment mandates. While the Eurozone debt misadventure sapped liquidity and increased volatility in conventional financial assets, thus raising the appeal of Islamic Finance, Arab Spring has coerced the gulf states to invest in a web of high-profile local infra projects.
Yesterday Saudi Arabia and India formally unveiled the $750 million Saudi-Indian investment fund. The Gulf region houses one of the world’s 10 biggest Sovereign Wealth Funds (SWF) with a market value of $1.7 trillion accounting for 30% of global SWF pie. Undoubtedly, the size of Saudi-Indian investment fund pales in comparison to their gigantic financial muscle power, however, the development has massive symbolic importance.
India’s twelfth five year plan projected $1 trillion in investments to perk up India’s sub-standard infrastructure. As an investment scarce country India is highly unlikely to meet this funding alone. As a result of which over the past few years India has been convincing the gulf SWFs to invest in Indian infra story. Apart from their eye-popping financial war chest the extensive experience in holding and successfully managing portfolios of infrastructure assets globally makes them a worthy participant in India’s infrastructure story.
However, the gulf SWFs, who were once known for their headline-grabbing investment deals globally, are growing introvert with their investment goals. The Eurozone debt misadventure followed by Arab Spring has transpired the once flamboyant globe-trotter gulf SWFs into local and regional investors. While Eurozone crisis markedly increased volatility and sapped liquidity the Arab Spring coerced the gulf monarchies to cater to the severely underfunded sectors like education, housing, healthcare, and public infrastructure with strong focus on unemployment. The Gulf states have, thus, planned to spend $142 billion in rail and road infrastructure over the coming years. As a result of which gulf SWFs are investing more either locally or regionally.
Traditionally, gulf SWFs have preferred investing in real assets like real estate, commodities, and infrastructure than fictitious assets like equities or bonds. Although, India last year threw the Indian equity and government bond markets open to gulf investors the response has been lukewarm. Gulf investors prefer a share of profits in a project or venture than receive interest-bearing returns, in compliance with the Sharia law.
In an environment where gulf SWFs are investing locally India could possibly make reforms that would make a part of India’s financial system resemble their home markets. Setting up of Sharia-compliant infrastructure investment trusts targeting gulf SWFs would be a good starting point toward funneling gulf petrodollars in India infra projects.
India is perhaps not too far from taking the first concrete steps toward Islamic Finance. Meeting infrastructure investment goals would be more than just investor roadshows and bilateral-trade pacts. The sheer size of funding needed would make the government imaginative in identifying potential investors and create investment products with whom the investors could relate to.
Incidentally, the Indian laws perceives interest-free investment products unconstitutional, the pressing need to plug the funding gap, would motivate the lawmakers in initiating constructive experiments to create investor-friendly solutions. Sharia-driven Islamic Finance would link gulf petrodollars with a portion of India’s infra story, thus helping India realize her petrodollar ambitions.
