Thursday, September 12, 2013

Infrastructure Financing

Lack of infrastructure has long been cited as the biggest impediment to India's economic growth. Infrastructure includes services such as power, transport, communication, education, health, drinking water supply and sanitation.

The demand for infrastructure has always outpaced its supply ever since Independence. This is mainly on account of the inadequate resources allocated for infrastructure. Infrastructure projects face two big difficulties - a high investment requirement and a long gestation period. As a result, financing these projects has become a major headache for Indian economy.

Why is infrastructure development important?
a) It raises the growth potential of the economy
b) It leads to inclusive growth
c) It can ensure a planned and sustainable urbanization
d) It leads to human development

Traditionally, development of infrastructure has been the prerogative of the public sector but given the increased fund requirements, the public sector is keen to involve the private sector to supplement the efforts of the public sector on the one hand and to bring greater efficiency on the other. This has resulted in formation of Public-Private Partnerships (PPP) for joint development of infrastructure.

The 12th Plan has envisaged a requirement of US$1 trillion for infrastructure development over the period of 2012-17. It also believes that around half of this will come from the private sector.

The government has also permitted setting up of Infrastructure Debt Funds (IDFs) which will use innovative mechanisms to fund infrastructure projects via debt. Besides, India Infrastructure Finance Company Limited (IIFCL) is also expected to support infrastructure projects.

These efforts are in the right direction and they need to be supplemented by some other strategies.

What else can be done for financing infrastructure?

a) Insurance, Provident and Pension Funds need to be mobilized for development of infrastructure. Because of their long horizon, they are the most suitable for financing infrastructure projects. In fact, many developed countries have successfully used these funds for sufficing their infrastructure resource requirements.

b) Consolidation of the banking sector into a three-or-four tiered structure can also prove useful. It may result in the formation of 3-4 large banks at the apex which will have deeper pockets and a wider clientele. These funds can be successfully employed in financing infrastructure projects.

c) Greater resource generation by the public sector is also very important. This will entail reforms in Tax Administration which can raise India's tax-to-GDP ratio.

d) Finally, delay in clearing of infrastructure projects needs to be avoided. It not only raises time and cost requirements, but also depresses investors' sentiments. Delays can lead to a decline in private investment which would be detrimental to India's interests as present.

An all-out effort needs to be made to gather resources for infrastructure development so as to ensure a long-term inclusive growth of the Indian economy.

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