Infrastructure Financing Essay

2113 words - 9 pages

An Overview of Infrastructure Financing in India and Future Options

November 17, 2007

Rajiv Lall, Ritu Anand and Nirmal Mohanty Infrastructure Development Finance Company

Think Infrastructure. Think IDFC.

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Introduction
Economic (9% growth per annum) India’s medium-term ambition Political (Inclusive growth) Infrastructure has a significant role to realize both. Government envisages a rise in infra spending from 5.6 % of GDP in 2006/07 to 9.2% in 2011/12 to enable 9 % GDP growth in XI Plan. Two sets of issues are impeding investment in infrastructure: - Sector governance (brief discussion) - Financing system (focus of discussion) Inability to meet the specific requirements of ...view middle of the document...

6 6.0 6.5 7.2 8.1 9.2 GCF in infra (US $ billion) 495 585 56 65 77 94 115 143 Central (% of GDP) 2.6 2.7 2.9 3.1 3.4 State (% of GDP) 1.7 1.9 2.2 2.5 3.0 Private (% of GDP) 1.7 1.9 2.1 2.5 2.8

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Financing pattern projected by the PC for XI Plan
(At current prices; $ billion) Projected investment Center States Private Total projected investment 231 180 174 585 Budgetary resources 57 122 0 179 Internal resources/ equity 52 17 52 122

Debt 122 40 122 284

It has been assumed that budgetary resources would be directed largely towards rural infrastructure and north-east, leaving little room for funding other infrastructure projects

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Who is financing and how, now (2006/07)? Also, PC’s projection for 2011/12 at current prices.
2006/07 % of GDP Central Government and its enterprises State Govts and their enterprises Private sector Total Government borrowing Internal Resources/ equity Private sector Public sector Debt (required) Domestic bank credit NBFCs Insurance companies ECBs Debt shortfall 2.1 2.3 1.2 5.6 2.4 1.2 0.4 0.8 2.0 0.8 0.6 0.2 0.4 0 USD (bn) 21 23 12 56 24 12 4 8 20 8 6 2 4 0 # @ $ 2011/12 % of GDP 3.4 3.0 2.8 9.2 2.8 1.9 0.8 1.1 4.5 2.0 1.1 0.2 0.5 0.5 USD (bn) 67 59 55 181 56 39 17 22 87 40 (32%) 22 (37%) 5 (16 %) 9 (16 %) 11
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According to PC, unfinanced gap is $11billion for 2011/12 and $ 45 billion for XI plan.

What would this entail?

The recent trend of fiscal correction must continue − Higher populist spending can come only at the cost of infrastructure investment in rural areas or economically depressed areas Intermediation of domestic savings must be accelerated − Bulk of incremental savings must go to infrastructure There are limits to bank exposure and by implication NBFCs’ exposure,to infrastructure − A fairly large part of private corporate savings must go to infrastructure There are indications of equity shortfall for private sector If domestic savings cannot be adequately mobilized for infrastructure sector, additional access to foreign savings must be resorted to − But, can we?

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Continued fiscal correction is critical.
(as % of GDP) FRBM targets 2005/06 Consolidated (Centre plus States) Revenue Deficit Fiscal deficit Capital exp + Net lending Of which: on infra 2.7 6.6 3.9 2.0 2.1 6.4 4.3 2.3 1.2 5.6 4.4 2.3 0 6 6 0 6 6 2.7 0 6 6 2.8 0 6 6 2.9 2006/07 (RE) 2007/08 (BE) (2008/09) 2009/10 20010/1 1 2011/1 2

The rest of capital expenditure is on defense (0.9% of GDP), housing, education, health and family welfare etc. If fiscal correction ceases or reverses, capital expenditure on infrastructure would suffer, unless non-infra capital expenditure is squeezed. Financing through larger borrowing would crowd out private investment.
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But, maintaining the same pace of fiscal improvement as in recent past will be difficult
Actual fiscal consolidation has been overstated because of higher off-budget spending − Oil and food bonds, fertilizer subsidy and losses of state utilities amount...

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