A loan worth $1.2 billion doesn’t sound small to most of us. But in the world of infrastructure, it’s a mere drop in the ocean. Especially so when the Planning Commission has estimated that India needs around $500 billion of investment until 2012 if it is to keep growing steadily. Where is this money going to be come from?
Largesse from multilateral institutions is certainly one way. This $1.2 billion to India Infrastructure Finance Co. Ltd (IIFCL) comes courtesy the World Bank; Mint reported on Thursday that the two bodies concluded negotiations last week. The IIFCL chief told Mint in July that it is raising some $500 million from the Asian Development Bank, too.
That’s well and good, but such institutions can’t be the panacea. First, India is hardly the only destination for scarce World Bank resources. Second, such institutions are sometimes wary, rightfully, of the transparency of projects.
Third, the World Bank can afford something most commercial banks can’t. It can give out long-term loans—this one is for 28 years—at comfortable interest rates. A State Bank of India (SBI) can’t hold assets (its loans) for 25 years when its liabilities—the short-term deposits from where it gets its money—mature sooner. The government can hold a gun to banks’ heads, but that will only create non-performing assets.
IIFCL is attempting to solve this mismatch through “takeout financing”. Here, SBI would pay for the first two years of a project and then transfer the asset to IIFCL’s balance sheet. This process has met little success in the past and it remains to be seen if this will work. For instance, IIFCL has no financial regulator: What if its capital adequacy and asset quality is shoddy? A better bet to pump more money is improving the market for insurance and pensions, and developing the one for debt. Insurance and pension companies, which provide guarantees or hold capital for long periods of time, are perfectly matched. And a deep, liquid bond market can give us better long-term instruments.
Committee after committee, particularly one led by Deepak Parekh in 2007, has pointed this out. But given that the last government struggled just to introduce a new pension scheme, and given that savings are now being channelled to fund trillions in government debt, the needed liberalization is still far away
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