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The latest Reserve Bank of India (RBI) monthly bulletin contains a timely paper calling for heightened fiscal support for broad-based economic recovery. We concur. Both the Centre and states need to boldly policy-induce stepped-up capital expenditure (capex) so as to gainfully boost demand and shore up the growth momentum. The paper does add that while fiscal balances have improved somewhat in Q2, following recovery in revenue receipts, the rationalisation of governmental expenditure has been brought about by a cut-down in capex ‘at both levels of government’, which could dampen growth. Given a fragile recovery, continued fiscal support is clearly warranted to better coagulate resources for growth-inducing project funding and investments.
The way forward is to have in place proactive policy to leverage governmental budgets and mitigate risks in infrastructural investments, by, for instance, duly enhanced credit rating for institutional investors. Note that institutional investors in India are permitted to invest in infrastructure projects rated AA or above, but most ongoing projects are rarely rated BBB or above, given myriad construction and other risks in the pipeline, which means significant mismatch between investor credit availability and actual funding requirements for big-ticket investments. Hence the pressing need for a Credit Guarantee Enhancement Corporation, as announced in Union budget 2019-20. We do need robust institutional arrangements to boost credit rating of securities, such as partial guarantee of bond payments and the like, under due regulatory oversight.
Afocused credit guarantee fund for big-ticket infrastructural projects would surely make perfect sense. The mature markets are flush with ultra-low-cost funds with buoyant liquidity on call, and we do need to get our act together to attract long-term institutional funds so as to purposefully bridge the infrastructural deficit pan-India. Reform project funding post-haste with an active corporate bond market design.
This piece appeared as an editorial opinion in the print edition of The Economic Times.