Infrastructure is a crucial driver of economic growth. Infrastructure development not only creates employment but also has the capacity to increase consumption and can give a boost to the economy.
The recent announcement of `102 lakh crore by the finance minister Nirmala Sitharaman was shot in arm for acceleration of mega infrastructure projects allocated across the various sectors like power, railways, urban irrigation, mobility, education and health. This will spur up the demand for alternative infrastructure projects funding.
In early 1930’s developed economies like the US, Germany were going through recessionary cycle. For quick revival, these economies relied on slew of mega infrastructure development like autobahns, highways and railways to attract more investments. This had a manifold effect on GDP growth and economic revival. Today, India needs to relook at the same development model by expanding and expediting its infra projects.
The government is rightly concerned about fundraising for such a plan as well as low private sector participation. The problem gets multiplied when Government says that it “has no business being in business or as Chanakya has said “Jis desh ka raja (sarkar) vyapari hota hai, uss desh ki praja bhikhari ho jaati hai”. The government, thus, should work on its disinvestment plans as well.
Infrastructure financing in India faces several challenges right from high cost of capital to shortage of long-term financing due to asset- liability mismatch. It is difficult to fund new projects due to limited availability of capital and liquidity with the Banks/NBFCs and Bank’s sectoral limits. Therefore, alternative funding avenues needs to be worked out. First, the government needs to encourage privatisation. In India, the government has only issued sovereign bonds in local currency in the domestic market to finance the fiscal deficit. Foreign portfolio investors have evinced interest in Indian government bonds traded locally in recent years, as the real interest rate on Indian bonds is attractive compared to other developed economies.
While a sovereign bond is neither necessary nor desirable, it is still essential that a long-term infrastructure bond market for the private sector is created. This can only happen with participation from life insurance institutions and other long-term investors. There is a need to construct a financial bond market which runs for five years and moves assets into a 20-30 year bond / InvIT, essential to ensure constant capital flows. Institutional participation, stamp duty and tax incentives required to make this happen, must be accelerated.
There are two more ways that the central government can think of financing the infrastructure projects. The first step is to mobilise funds via divestment of profit-making state-run companies. The second is to revive private participation to fill the financing gap.
Disinvestment provides the government the much-needed fiscal resources and withdrawal from several activities that can be transferred to private sector without sacrificing any public cause. It also helps in refocusing the scarce administrative resources of the government.
By disinvestment, public money could be freed up for investments in infrastructure, health, social sectors or education. This would also result in improved efficiency and, at times, expansion of enterprises and creation of employment opportunities after management is passed into private hands.
Similarly, disinvestment in major ports and all the waterfront ocean or river areas into a completely open-license regime will revolutionise the ports sector in India. This can earn the government at least `100,000 crore in annuity, if executed well.
We strongly believe that the disinvestment proceeds will be critical for the government to stick to its target of keeping fiscal deficit at 3.3% of the GDP in the current fiscal year.
Though the public-private partnership model has gained significant importance, there is a need to refine and evolve it further to make it a successful proposition. The government, now, needs to lay further emphasis on creating tailor-made solutions to suit the prevailing risks. GOI has come out with the Hybrid Annuity Model or HAM. This model is a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models. The private players are paid to lay down the roads and have no role in the roads ownership. It is the government’s responsibility to maintain and collect tolls on the road.
As an example, NHAI has shown that using such innovative mechanisms their annuity collections will grow from `30,000 crore per annum to `100,000 crore per annum. This alone will be able to fund `10 lakh crore worth of projects.
Thus, the advantage of huge investment drawn to the infrastructure sector via different avenues shall transmit into a manifold effect leading to increase in the GDP growth to a double digit number inclusive of employment generation.
Author is President – NAREDCO