New Delhi: India’s first ever infrastructure debt fund could raise half of its $11 billion corpus overseas, tapping sovereign and insurance funds to finance building roads and utilities needed to accelerate growth.
A report released on Tuesday by the Planning Commission said the fund would also help deepen a secondary bond market, the lack of which has hemmed in the financing of India’s targeted infrastructure spending of over $500 billion in the five years to end-March 2012.
India has consistently fallen short of building infrastructure it has planned for and this has been a drag on achieving a growth pace similar to peer China’s double-digit expansion.
The report was from a panel chaired by veteran banker Deepak Parekh and set up to draw the rules for the debt fund. It has suggested allowing the fund to raise Rs10,000 crore ($2.13 billion) each from sovereign, insurance and pension funds overseas and Rs5,000 crore from multilateral agencies.
The fund, likely to be set up by year-end, could issue bonds of up to Rs20,000 crore to domestic insurance and pension funds in multiple tranches over three years, the report suggested.
Another $2 billion could be drawn from the country’s forex reserves, which would provide the much-needed long-term debt and would also increase the volume of debt flows to the sector, the report said.
State-run India Infrastructure Finance Co has set up an overseas unit to borrow up to $5 billion from the central bank’s forex reserves and lend it to infrastructure firms for financing their imports.
Parekh last week told Reuters that “take-out” finance provisions in the report would enable banks to finance the riskier early stages of big-ticket projects before turning them over to the fund.
The report suggested the fund may re-finance up to 85% of existing debt of an infrastructure project based on the public-private partnership model for at least 10 years.
Capacity bottlenecks in the economy, including poor infrastructure, are partly responsible for driving up headline inflation in India to near double-digit levels.
The Congress-led UPA government last year set a target of building 20 kilometres of roads a day and increased the capital spending for the sector in the February budget by 22% to about Rs22,200 crore.
But the country’s road-building is currently running only at 12 kilometres a day. Similarly, it added only 9,585 megawatts of power capacity in the year to end-March 2010, down a third from its target of 14,507 megawatts for the year.
Tuesday’s report has asked sector regulators to liberalize existing rules to allow domestic insurance and pension players to park their funds in the proposed debt fund.
It has also asked the Reserve Bank of India to create a special window for foreign debt with a tenure of 10 years or more to let foreign insurance and pension funds invest in the fund.
The report also suggested the option of setting up multiple funds for different infrastructure projects.