Discuss about the problems and policies in financing the infrastructure development in India.
Answers
India's financial system is dominated by banks. NBFCs too play a part in infrastructure financing. There are NBFCs that specialize in financing infrastructure and certain sector specific NBFCs in the Government Sector. Of course, banks are the predominant providers of finance to the infrastructure sector. The flow of bank finance to infrastructure sector has clocked high growth rates. The outstanding bank credit to the infrastructure sector, which stood at Rs. 95 billion in March 2001, increased to Rs.9,853 billion in March 2016, a compound annual growth rate (CAGR) of 39.31 percent over the last 15 years. This of course covers the period of excessive exuberance when it was fashionable to lend for road projects, power and the like, without the requisite due-diligence.
This phenomenal growth brought in its wake certain undesirable consequences, like high stressed assets. More of this later.
A few economic characteristics differentiate infrastructure assets from other asset classes. These characteristics also make it more difficult to match investment demand and financing supply:
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.
Because of these reasons, there are always challenge in financing infrastructure. At the same time, infrastructure sector will be a key driver for the Indian economy. Given the high priority that the Government is according to the infrastructure sector, there is no gainsaying the enormous potential for financing the sector. As per an estimate, India needs Rs 31 trillion (US$ 454.83 billion) to be spent on infrastructure development over the next five years, with 70 per cent of funds needed for power, roads and urban infrastructure segments. It is essential that the stakeholders take the right steps to participate in this move and also make a decent return from this opportunity.