Mumbai: Former Reserve Bank of India (RBI) governor Y.V. Reddy questioned the ability of the local to help finance infrastructure projects.
“Where in the world has infrastructure been financed by the bond market?” Reddy asked, speaking at an RBI-organized conference on investment and financing in Asia. “Empirical evidence in Europe, in the UK or Asia, China or Japan does not suggest that the corporate bond market has helped.”
Only the US corporate bond market has contributed towards raising long-term finances consistently for infrastructure, he said while chairing a session on the impact of infrastructure bottlenecks on Asian growth. “But you cannot take the US experience in today’s context.”
Reddy’s comment came just a day after RBI deputy governor Subir Gokarn said the burden of financing infrastructure should be taken away from banks and redirected towards channels such as the corporate bond market.
Speaking at the same conference on Thursday, Gokarn said that the development of the corporate bond market was “most important”. “We do see the bond market as something that will supplement the capacity of the banking system and over time displace it as the primary vehicle of a large quantity of finance moving into infrastructure,” he said.
RBI has long been advocating development of a corporate bond market because banks, which mostly depend on short-term deposits for funds, cannot fund long-gestation projects that require money to be invested for 10 years or more.
Earlier this year, RBI allowed ready forward contracts, enabling mutual funds, insurance companies and non-banking finance firms to borrow money by offering corporate bonds as collateral. Last year, it introduced plain vanilla credit default swaps for corporate bonds.
RBI’s moves were aimed at providing trading flexibility in the corporate bond market and attracting more investors.
Deepak Mohanty, RBI executive director, said the main problem for the corporate bond market was demand.
“There is need for demand from pension funds and insurance companies to get a balance between bank and market funding for infrastructure because banking weightage in infrastructure funding has increased,” he said.
Mohanty added that a reduction in state borrowing and reforms in insurance and pension sectors will create more space for private investment to flow into infrastructure.
Eswar Prasad, professor of trade policy at Cornell University in New York, said the flow of capital from the advanced economies can help if channelized into infrastructure.
“But changing demographics in advanced countries and the new Basel III banking norms will soak up a lot of capital there. My concern is whether growth in emerging markets can be held back if advanced countries can’t get their act together,” he said.
Reddy said another infrastructure hurdle for emerging countries such as India is bad governance.
“Public policy requires huge awareness if Asia has to increase its middle class. The inefficient allocation of resources will make infrastructure offerings expensive, like for example a high-cost power plant makes electricity expensive for final consumers,” he said.