DIPP floats discussion paper on infrastructure financing

Written by Timsy Jaipuria | New Delhi | Updated: Oct 29 2011, 07:19am hrs
In In order to make infrastructure financing easy, the Department of Industrial Policy and Promotion (DIPP) has floated a discussion paper.

The paper aims at assessing the requirement of funds for infrastructure and industry, surveying the various sources, options and channels available with the country and the inadequacies of the present regime.

A senior DIPP official told FE that the thought behind the discussion paper was to find solutions to the issues that the country faces - lack of world-class infrastructure - in order to sustain a GDP growth of 9-10%. For this, the country needs to lay emphasis on the growing needs of the manufacturing sector, which will help it grow at 13-14% per annum.

"To achieve this, India needs to rapidly attract global investors through the creation of world-class infrastructure and reduced logistics costs, supported by an enabling policy framework. This is particularly significant in the context of the National Manufacturing Policy and the Delhi-Mumbai Industrial Corridor Project, which are aimed at creation of futuristic integrated industrial cities with world-class infrastructure that can compete with the best manufacturing and investment destinations in the world," according to the paper.

Thus, putting in perspective the importance of infrastructure and classifying it as a critical determinant of investments, manufacturing depth, logistics, productivity, inclusive development, national integration and poverty reduction. The paper analyses the insufficient capacity across infrastructure sectors leading to a widening infrastructure gap, resulting in lower productivity, higher transport and logistics costs, reduced competitiveness, and slower growth, he said.

The paper further adds that the infrastructure finance market in India is characterized by the absence of an active long term corporate debt market, asymmetric information on infrastructure projects, and inherent risks in financing infrastructure projects. "Adding to the problem of inadequate long-term funds is the conversion of development finance institutions (DFIs), which had been the major source of long-term finance earlier, into commercial banks which face asset liability mismatch issues and are rapidly nearing their limits for sectoral and group exposure in infrastructure," it has said.

Interestingly, the paper also talks that while the quantum of investment in infrastructure in India has increased from 5% of GDP during the 10th five year plan (2002-07) to the current level of about 8% of GDP, it is still not enough. Comparing the same with other countries, it is observed that while it is significantly lower than China (20%), the extent of investment is higher than Brazil (3.3%), East Asia (6.2%), Europe (5%) and US (2.4%). However, in terms of access to basic infrastructure parameters, it is evident that India has lagged behind most of its Asian peers as well as UK and US, thus leading the discussion.

According to the 11th Five Year Plan the projected investment requirement for infrastructure sector is at Rs. 20.5 lakh crore at 2006-07 prices, equivalent to $514 billion. The mid-term appraisal of the 11th Five Year Plan indicated that while the physical targets may not be met, the financial outlays would be close to the original projections. The investments in manufacturing sector during 2005-10 at current prices were R27.9 lakh crore. This investment averaged 11.25% of the GDP at market prices. The manufacturing and infrastructure together accounted for more than half of total investments during this period.