Relevance: GS-3: Indian Economy and Infrastructure: Energy, Ports, Roads, Airports and Railways etc.

Key phrases: Infrastructure project, Public partnership model, government financing, capital investment

Why in News?

India ranks low in most global rankings on infrastructure. Poor infrastructure remains the biggest hurdle to sustaining a fast pace of economic growth and job creation in the future.

Infrastructure sector in India:

• The infrastructure sector has become the biggest focus area for the Government of India. India plans to spend US$ 1.4 trillion on infrastructure during 2019-23 to have a sustainable development of the country. The Government has suggested investment of Rs. 5,000,000 crore (US$ 750 billion) for railways infrastructure from 2018-30.
• India’s biggest challenge is the huge infrastructure financing gap, which is estimated to be more than 5 per cent of GDP.

Reasons for lack of financing in Infrastructure project in India:

• Firstly, infrastructure projects are often complex and involve a large number of parties. Infrastructure often comprises natural monopolies such as highways or water supply, and hence governments want to retain the ultimate control to prevent an abuse of monopoly power. This requires complex legal arrangements to ensure proper distribution of payoffs and risk-sharing to align the incentives of all parties involved.
• Secondly, infrastructure projects are long term and are therefore subject to various risks including those due to changes in policies, delays in clearances, etc. Every event that delays the implementation of a project leads to cost and time overruns that in turn have a bearing on the techno-economic viability of the project or would necessitate revision in the price of the end-product. Very often the infrastructure products are meant to serve public good which imposes a limitation on ability to determine their price.
• Thirdly, where debt financing is dominated by the banking system, the fundamental problem posed by the asset-liability mismatch is critical. In India, the dominance of PSBs may partly offset this risk because the perceived assurance of government backing provides the requisite flow of deposits.

What can be done to cover this huge infrastructure financing gap?

• There are many instruments that can be used, including new sources of financing, scaling up public-private partnerships, improving the credibility of the regulatory regime, and introducing second generation infrastructure projects to promote fast growing cities and sectors.
• Global investors have started to view India as one of their top destinations for infrastructure projects. India offers a higher rate of return on infrastructure projects, given its youth bulge, rise of the middle class, and a huge domestic market. India needs to take advantage of the global investors, especially in projects that will bring new construction material, clean energy, new modes of transport, digital technologies, and much more.
• India needs to diversify the sources of infrastructure financing. Unlike other emerging markets, India has relied primarily on the government budget for financing infrastructure projects, with nearly 70 per cent of funding coming from government budget. The financing mix of infrastructure projects needs to change to scale up the contribution of the private sector to increase to nearly 50 per cent of financing of infrastructure projects.
• Private investments: There exists a tool to attract private investments in infrastructure projects through public-private-partnerships (PPPs). It offers the efficiency incentives for alternative sources of financing through competition for a contract. India has made progress towards promoting PPPs, especially in electricity and road sectors. This can be scaled up to other sectors, including ports, railways, water and sanitation, and social sectors.
• Private investors need a credible regulatory and institutional regime, and contract management, that reduces the time taken for market assessment, socioeconomic impact, affordability, bankability of projects, and future negotiations. Improved institutional capacity will improve the underlying relationships on PPPs, help to make more informed decisions, and reduce the possibilities of renegotiations in the future on PPPs.
• Fiscal management of PPPs, and the consistency of PPP projects with development priorities, are the two means for ensuring that infrastructure projects are fiscally sustainable, rather than a means of savings through off-budget reporting. India needs to make greater effort towards improved competitive risk allocation in PPP projects.
• Fiscal reforms will reduce contingent liabilities, and also generate more revenues to bridge the infrastructure financing gap. Policymakers will also need to avoid the potential for currency mismatches from borrowing in foreign currency for projects that generate revenues largely in local currency. Domestic capital markets, especially green local currency bond markets, will play a critical long-term source of financing for infrastructure projects.

Way forward:

• Most economists agree that infrastructure investments are a key driver of economic growth leading finally to inclusive development.
• India’s investment in the Golden Quadrilateral Highway project is a great example of how infrastructure investments promoted entrepreneurship, economic growth and job creation.

Source: The Hindu BL 

Mains Question:

Q. India ranks low in most global rankings on infrastructure. Poor infrastructure remains the biggest hurdle to sustaining a fast pace of economic growth and job creation in the future. So what are the reasons behind Gap in Infrastructure Financing in India? What should be the measures to tackle infrastructure financing in India?