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The Trillion-Dollar Question

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The much-hyped one-trillion-dollar investment required for infrastructure sector in India has been publicized by the government as a huge investment opportunity. This number looks good on Planning Commission papers and for discussions in conferences. However, little seems to have been done in policy-making circles as to how this number or anything close to it would be realized.

Some basic numbers (as given in the 12th Plan documents) show financing gaps and they seem to remain as "gaps" with no solutions being attempted to fill them. Most people in the government and the industry seem happy talking about "The Debt Gap" rather than addressing the gap. The $1-trillion investment requirement for infrastructure sector in India for the 12th plan corresponds to an approximate debt requirement of $700 billion and the estimated debt gap has been estimated to be about $220 billion. If we try to understand this a bit deeper, the financing gap may be much more as it pre-supposes a reasonable level of equity investment, budget allocations and extra-budgetary resources which may not be there or may be under constraints depending on the fiscal position of the union and states and the prevailing investment climate in India. Approaching the same number from savings side, at an average 35 per cent savings rate and less than 20 per cent as financial savings, a $1.5 trillion GDP/economy could possibly create a total investment of $1.7 trillion from domestic savings in five years assuming a growth rate of 7 per cent. On the debt side, it is unlikely that the infrastructure sector would get the required share of debt in face of increasing demands on credit from other sectors.  It is therefore imperative that new sources need to be found, both domestic and international.

The discussions on issues of financing infrastructure in India is now over five years old and they have focused on lack of long-term finance, asset liability mismatches, and lack of capital/bond market participation. Historically, the government has tried to address access to finance issues for some specific sector by creating dedicated institutions for the sector in question, such as SIDBI, IREDA, and IIFCL and has assumed that the issues would get resolved by these institutions.

Multilateral institutions have found these financial institutions to be convenient channels to lend to with sovereign guarantees, but have not made any attempt to resolve the more fundamental structural issues underlying the credit failures or an increase in the sources of financing. They have merely ring fenced their loans which may have led to some form of refinancing to the concerned sectors, but nothing more. Same has been true for infrastructure financing for many years. The last two years have seen several policy actions that have resulted in more concrete steps such as creating the enabling framework for infrastructure debt funds, dedicated regulatory framework for infrastructure NBFCs, and introducing instruments like take-out financing and bringing some of issues to the discussion table for other policy and institutional interventions.

However, a lot more needs to be done to make the one-trillion dollar investment a reality. We attempt to suggest some interventions, which if carefully implemented could help in bridging the macro-level gap in financing infrastructure in India

  • Create Gold Trading Corporation of India to monetize unproductive physical stock of gold in the country and get that into productive infrastructure investment. It is estimated that overall physical gold in the country is worth $950 billion, and even 10 per cent of this gold, if gainfully deployed could bridge a major share of the infrastructure financing gap. Higher demand for gold as a medium of household savings reduces the available financial savings and also increases current account deficits by way of increased gold imports, so there may be a reason to discourage gold consumption and make available more financial instruments with gold as the underlying such as Gold ETFs.  There is need to think of feasible instruments such as modified gold deposit schemes which return the physical gold (or the market value of gold) plus an additional marginal return to the depositor. The physical gold could then be traded /sold in international markets and the foreign exchange could be channelized to fund infrastructure in India. One of the ways could be to set up a Gold Deposit /Trading Corporation of India for this purpose or use the existing state-owned trading institutions such as STC or MMTC, which would have the required organizational capacity and skills to do so. Besides, there is a need to revisit the earlier Gold Deposit Schemes that did not work very well.

  • Create a state-owned Infrastructure Credit Guarantee Institution outside India to provide large-scale credit guarantee for infrastructure projects in India, especially for foreign debt and help overseas capital pierce the barriers of India' sovereign credit ratings.  One of major constraints to attracting foreign capital into India is the sovereign credit rating ceiling at around BBB levels. While we may argue on India's distorted credit rating levels relative to those of European countries, given the prevailing situation there, it is a reality that we have to live with. On the other hand, there is a pressing need for institutional mechanisms to credit-enhance investments beyond that provided by India's sovereign ratings. For this purpose, the Government has needs to create and structure a credit guarantee institution outside India and held by entities with ratings such as global reinsurance companies and multilateral institutions higher than of India and /or well capitalized to take care of unexpected losses, which could be facilitated by setting aside a portion of India's foreign exchange reserves. (As an example, IIFCL,UK could be redesigned to serve the purpose).This institution would then enable infrastructure funds and finance companies in India to draw upon larger pools of global pension and insurance funds, sovereign wealth funds and access those pools of liquidity at the higher end of global investment grade ratings.

  • Use guarantee products from multilateral institutions instead of borrowing more from them: Multilateral finance available from IBRD and ADB is very small compared to the scale of infrastructure investments required in India. Instead of plain vanilla borrowing, the government and other infrastructure financing institutions can use partial risk guarantee products to leverage sovereign guarantees to borrow on off-budget institutions for large infrastructure investments such as metro railway, power transmission and so on. This would help in increasing the total amount of external financing available for infrastructure by use of limited lending capacity of these institutions.

  • Create appropriate institutions to unlock the land values in many urban areas through initial public investment in urban/social infrastructure:  More institutional structures can be created on the lines of DMIC following up on the National Manufacturing Policy on the NMIZ concept, where public investment through off-budget SPVs in urban infrastructure which would lead to appreciation in land values. Government shareholding in these SPVs can then be divested leading to non-tax inflows to the state exchequer and increased public infrastructure investments in the next round.

  • Create National/Sector-Specific/State-Level Infrastructure Equity Funds: In addition to facilitating project development and execution, infrastructure funds can help in borrowing in both domestic and international markets. Some states have made small attempts by way of trying to structure state urban funds. TNUDF can be followed as an example and suitable modified and improved upon to move these structures towards municipal bond banks which can further help in development domestic capital markets primarily for urban infrastructure.

(The author is President & CEO, Financial Advisory Division, Feedback Infrastructure Services. The views expressed here are personal)