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Financing mechanism for building infrastructure in India-FM
Following is the extract from the address made by the Finance Minister, Shri P. Chidambaram at the London Business School on 28th June 2007

Gross Capital Formation in Infrastructure (GCFI) in 2006-07 was estimated at 4.6 per cent of GDP. Our endeavour will be to raise that proportion to at least 8 per cent. Given an economy of the size of US$1 trillion and which is growing -- an 8 per cent GCFI will yield a minimum of US$80 billion a year and, over a five year period, it would be possible to find a minimum of US$400 billion for the infrastructure sector.

Within India, a large part of the resources will be found through the budgets of the Central and State governments. Tax revenues are buoyant and it is possible to make larger allocations. Governments can also borrow within the limits imposed by the fiscal responsibility laws. We have taken measures to broaden and deepen the debt market, and this will result in greater diversification of risk and would ensure that the quantum of finances increases substantially. Large amounts of money are parked in insurance and pension funds, and these could be used for infrastructure financing of long tenor.

There is help from other sources too. Multilateral institutions continue to support our efforts. Between 1986 and 2006, the Asian Development Bank has funded the transport sector to the tune of US$4.96 billion, the energy sector to the extent of US$4.25 billion and the urban infrastructure sector in a sum of US$1.76 billion. Over the last five years, the World Bank has committed US$4.7 billion to the transport sector, US$1.38 to the urban water sector and US$0.5 billion to the energy sector.

Recently, Citigroup and Blackstone have joined hands with two Indian companies, IDFC and IIFCL, to launch jointly a US$5 billion India Infrastructure Initiative. US$2 billion will be made available for equity investment and US$3 billion in the form of long term debt to fund infrastructure projects in India.

Bilateral support is also forthcoming. The Delhi-Mumbai and Delhi-Kolkata dedicated freight corridors that will be built by the Indian railways has received strong technological and financial support from the Government of Japan.

Arithmetic, however, will not automatically translate into achievement. My purpose in giving these numbers is to demonstrate that finding the finances for the infrastructure sector is well within the realm of possibility.

The real challenge lies beyond the resources: we need to look for innovative mechanisms and instruments to channelise the funds into the infrastructure projects. We have taken several initiatives in this behalf. We offer viability gap funding for projects that would otherwise be considered not commercially viable and hence not bankable. It will be in the nature of a capital subsidy. In order to promote public private partnerships, we have an exclusive mechanism to appraise the proposals, invite bids from prospective developers, make the public contribution in the form of grant or loan or tax incentives, and assist in taking the project to financial closure. We have established the India Infrastructure Finance Company to raise low cost resources and lend or co-lend to infrastructure projects, especially projects that have a long gestation period and need long term financing. We have also persuaded the Reserve Bank of India to lend US$5 billion from the foreign exchange reserves to the IIFCL to enable IIFCL to on-lend to infrastructure projects for their capital expenditure. These and other innovative measures under consideration will ensure the flow of funds to the infrastructure sector.

I believe I have given you a flavour of our ambitious plans. Success will depend upon the ability to clear the roadblocks and implement the projects without time or cost overruns. Large projects face issues concerning land acquisition and rehabilitation and resettlement of displaced families. Some projects may have an adverse impact on the environment and their design may need to be modified. Above all, we need to build capacity in the implementing agencies to be able to resolve the problems that they may encounter and push towards successful completion of the projects. I marvel at what China has accomplished in the last two decades in the infrastructure sector and wonder if there are any lessons that India can learn from China!

A country that aspires to have an economy that will be the third or the second largest in the world must have world class infrastructure. The drumbeats of infrastructure are getting louder in India and the rumble is felt and heard all over the country. The desire for world class infrastructure is not driven by government alone; increasingly it is demand-driven and community-driven. I am confident that within the next ten years we will succeed in putting in place infrastructure in India that is equal to the best in the world.

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