In a first-of-its-kind move, the government plans to extend sovereign guarantee to private sector borrowings for large-scale infrastructure projects. The move, termed path-breaking by many, will significantly reduce India Inc?s cost of funds and provide private corporations a huge incentive to continue with their investment plans in such uncertain times. Hitherto, government guarantees have been the exclusive preserve of public sector undertakings.
Montek Singh Ahluwalia, deputy chairman of the Planning Commission and Prime Minister?s ?sherpa? or chief coordinator at the Summit on Financial Markets and the World Economy at Washington DC on Friday said the government has to do ?more than it would do under normal circumstances? to avoid a deterioration of India?s growth prospects. ?A sovereign guarantee will help,? he said after a working dinner meeting hosted by US treasury secretary Henry Paulson.
India hopes to beat the global slowdown through counter-cyclical devices such as increased public expenditure, higher draw-downs from multilateral institutions such as the World Bank and sovereign guarantees to private corporations. Ahluwalia said such guarantees did not add to the government?s budget, and yet provide the much-needed fiscal stimuli to spur growth.
According to government estimates, the funding needs of the infrastructure sector are estimated to be a whopping $500 billion over the next five years. Higher infrastructure spend, India believes, will boost domestic demand and help the country mitigate the indirect impact of the global crisis, which by no means is trivial or insignificant.
Jayesh Desai, head, infrastructure, real estate and government services in global consulting firm Ernst & Young, said, ?This is truly amazing. The cost of funds will drop by at least 100-150 basis points.? Typically, infrastructure projects entail a debt-equity ratio of 75:25 and a 1-1.5 percentage point reduction will pare costs substantially, he said.
Ahluwalia said the International Bank for Construction and Development (also called the World Bank) had said it would extend $100 billion in loans to developing countries and companies therein. For the current year, though the Bank has committed $3 billion, it plans to top it up with another $3 billion. It will, over the following two years, continue to bring $3 billion each year, over and above the normal development expenditure.
When asked if the government had enough fiscal headroom to increase public expenditure as suggested by the Prime Minister, he said, ?We can ignore fiscal and revenue deficits in the current context where growth is a major concern.? The Fiscal Responsibility and Budget Management Act binds the government to cut the Centre?s fiscal deficit by 0.3% a year.