INTRODUCTION

Infrastructure is the backbone of economic activity in any country, but unfortunately, India suffers from Osteoporosis. Time and again various policy measures have been taken to boost infrastructure, but no major progress has taken place barring on telecom infrastructure front. To fuel Indias ambitious growth rate and meet distant targets, a major restructuring is required on governance, legal, administrative and financial front. Be it in power,roads, ports, airports, water, railways, urban facilities or even telecoms, the countrys infrastructure needs are enormous. There is a massive and urgent need to increase investment in these sectors. Finance is one of the most basic requirements for carrying out infrastructure projects, which are capital intensive and are in risky domains. The low levels of public investment have made Indias physical infrastructure incompatible with large increases in growth. Any further growth will be moderate without adequate investment in social, urban and physical infrastructure. In India, escalating infrastructure spending is inevitable. The rapid growth of the economy has put a lot of strain on infrastructure areas like power, railways, roads, ports, airports, irrigation and urban/rural water supply. The pattern of inclusive economic growth projected for the 11th plan, with GDP growth averaging 9% per year, can be achieved only if this infrastructure deficit is overcome and adequate investments are in place to support the growth. What we also need is an improved quality of life for both our urban and rural populace.

INVESTMENTS IN KEY INFRASTRUCTURE SECTORS

Sector Power Roads Telecom Ports
*Figures in $ billion Source: CRISIL Reseach

FY 03-07 48 29 24 4

FY 08-12 75 60 22 10

CHALLENGES IN INFRA FINANCING

There a lot of hindrances in achieving easy financing for infra projects in India: Savings not channelized Although Indias saving rate may be as high as 37%, but almost one-third of savings are in physical assets . Also financial savings are not properly channelized towards infra due to lack of long term savings in form of pension and insurance. Regulated Earnings Earnings from projects like power and toll (annuity) may be regulated leading to limited lucrative options for private sector and difficulty for

lenders. Also any increase in input cost over the operational life is very difficult to pass on to customers due to political pressures. Asset-Liability Mismatch Most of the banks face this issue due to long term nature of infra loans and short term nature of deposits. Limited Budgetary Resources With widening fiscal deficit and passing of FRBM act, government has limited resources left to meet the gap in infra financing. Rest of funds have to be met by equity / debt financing from private parties and PSUs. Underdeveloped Debt Markets - Indian debt market is largely comprised of Government securities, short term and long term bank papers and corporate bonds. The government securities are the largest market and it has expanded to a great amount since 1991. However, the policymakers face many challenges in terms of development of debt markets like o Effective market mechanism o Robust trading platform o Simple listing norms of corporate bonds o Development of market for debt securitization Risk Concentration In India, many lenders have reached their exposure limits for sector lending and lending to single borrower (15% of capital funds) . This mandates need for better risk diversification and distribution Regulatory Constraints There are lot of exposure norms on pension funds, insurance funds and PF funds while investing in infrastructure sector in form of debt or equity. Their traditional preference is to invest in public sector of government securities.

OPTIONS FOR INFRASTRUCTURE FINANCING

1. External Financing Provided my multiple agencies for example International Bond Market. The major advantage of International bond market is long maturities, maturities of 10-30 years being typical. Although financing through international bond market can be more expensive than syndicated loans, the matching of bond tenurewith projects protect them against ineterst rate fluctuations. 2. Funding from multi lateral institutions Funding from multilateral institutions like the World Bank and the Asian Development Bank has been limited to public sector infrastructure projects. But now such institutions have shown willingness to support private sector participation such as PPP (Public Private Partnership) projects. 3. Debt financing from Banks Borrowing from banks has its own limitations which includes mismatch of duration on asset and liability side. Due to asset-liability mismatches, banks

tend to have floating interest rates, hence making the project risky. A rate increase of 2-3% may jeopardise a projects viability. 4. Domestic Debt market Despite high savings rate in India, the corporate debt market has not yet developed. The underdeveloped nature of the domestic debt market is further impacted by the crowding out effect of fiscal deficits, which drive up the cost of debt for non-government borrowers. 5. Funds from Insurance Companies and Pension Funds Such Institutions which have long term contractual savings could also prove to be an important source of financing infrastructure. It is natural for these institutions to invest in longer-maturity debts to match long-term liabilities. However, in India this sector is reluctant to fund PPP or other competitive bidding process. 6. Infrastructure Finance Company Limited Special purpose vehicle called Infrastructure Finance Company Limited (IIFCL) set up by government, provides infrastructure funding through long term debts, refinancing or through any other mode approved by the government of India. Funding from IIFCL to a project is limited to a maximum of 20% of the total project cost.

CONCLUSION
Although the steps taken to facilitate the flow of finances to infrastructure has been encouraging, a more caliberated approach to tailor and fine tune the above schemes is needed. A robust framework needs to be established to raise funds for the large sector-wise equity and debt needs and to identify associated obstacles, that need attention. The necessary action should be taken to iron out the deficiencies and provide an effective facilitation mechanism in order to maintain the growth momentum of the economy.