India's recent fiscal reforms and backing for a new national infrastructure fund should underpin its newfound status as the biggest global magnet for foreign capital. But overseas institutions want to see continued proof of the government’s commitment to facilitating foreign investment flows.

As regional growth has slowed, India's has remained on a strong and steady course, with GDP expanding by 7.5% last year and set to grow by the same rate for the next decade, according to government data.  This helped India to pull in $63 billion of inbound foreign direct investment in 2015, putting it ahead of China (which attracted $56 billion) for the first time as the top global destination for FDI.

The government of prime minister Narendra Modi has been implementing reforms to help maintain this momentum with portfolio investors. Rating agency Moody’s said regulatory changes relating to securitisation and foreign portfolio investors introduced since May would increase the nation's appeal to foreign investors. The changes are designed to ensure the smooth delivery of returns to investors and improve the resolution process in the event of default.

A new tax regime is part of the reform package, that will boost post-tax investment returns from securitisation trusts. There are also new foreign portfolio investor rules that bring India’s market more in line with international norms, and a new bankruptcy code that will reinforce creditors’ rights.

Tax liberalisation and investor-friendly measures in sectors such as renewable energy and infrastructure should lead to further foreign involvement. These reforms appeal to foreign investors as they offer the prospect of avoiding government red tape.

A key priority for Modi in his overseas visits is infrastructure investment. The country’s need here is huge. In late June, finance minister Arun Jaitley said India needed to invest $1.5 trillion in infrastructure over the next 10 years.

India is particularly looking to attract infrastructure investment through the National Investment and Infrastructure Fund (NIIF). Set up in December with an initial Rs40,000 crore (around $6 billion), the institution is designed to form the cornerstone of India’s infrastructure investment.

Sujoy Bose was confirmed this month as chief executive, and one of his first challenges will be to secure capital commitments from foreign partners. While it is considered a sovereign fund, NIIF is owned 49% by the government and 51% privately.

The fund has so far signed memoranda of understanding (MoUs) with Qatar Investment Authority, Abu Dhabi Investment Authority and Russian state private equity vehicle Rusnano. However, there have been no formal announcements of financial commitments from its partners, and there are no indications as to when they might materialise.

Clear goals required

To engender confidence in India’s growth path, Bose will need to articulate a coherent investment strategy for NIIF. There are already problems needing the new CEO's attention. In a statement at the end of last month, the Indian finance ministry said the NIIF would not pump money into stalled or stressed infrastructure projects, but would instead focus on greenfield and brownfield projects in roads and green energy. This reflects concerns raised by foreign investors about the quality of projects being considered under the auspices of the NIIF.

However, these decisions will ultimately require sign-off from Bose, who is still working his notice as global co-head of infrastructure at International Finance Corporation, the private-sector investment arm of the World Bank. Bose, who is expected to start at NIIF in September, told AsianInvestor it was too soon for him to comment on the fund’s investment strategy.

If the Modi government can continue to show that it is reform-minded and keen to invest, India should attract many more billions of dollars of investment. But signs of back-sliding or foot-dragging over its reform and infrastructure investment efforts could cause these fund flows to dry up as quickly as they emerged.