New Delhi: Government will set up a $11 billion dollar fund to upgrade its creaking infrastructure, refinance high cost debt and develop the debt market by issuing more long-term paper, a planning commission adviser said.
India has possibly grown 7.2% in the fiscal year which ended in March and is expected to grow around 8.5% in the fiscal year 2010-11.
But investors and analysts say poor infrastructure acts as a drag on growth in Asia’s third-largest economy.
Capacity bottlenecks like infrastructure in the economy is also partly responsible for driving up headline inflation in India to near double digit levels.
“Of course, the idea is to refinance high cost debt, develop the bond markets, and some money will be raised by issuing bonds”, B.K.Chaturvedi, a member of the Planning Commission, told Reuters.
He said the plan to set up the fund would need approval from the federal cabinet and it is expected to be operational by the end of the year. The planning commission charts five-year growth plans for the government.
Chaturvedi said the government will tap the pension, insurance sectors and other overseas funds to raise money for the fund. He said a panel had been set up draw up rules for the planned fund.
“For that if the policy environment has to be liberalised, they can make recommendations on liberalising the policy settings if that allows greater fund flow into the infra sector”, Chaturvedi said.
He said the government owned infrastructure company IIFCL may also raise money from the market for the fund and it could use the opportunity to develop the long end of the debt market and put more long term paper in the system.
Analysts said the timing of the fund was right.
“Projects have to be made more viable to attract foreign investment. This is a step in the right direction but you have to do so many things”, said D.K.Joshi, Principal Economist with Mumbai based rating agency CRISIL.
India needs about $500 billion investment in infrastructure until end-March 2012 to bridge the infrastructure gap in the economy, according to planning commission estimates.