Originally Published 2015-10-21 10:23:15 Published on Oct 21, 2015
Financing of infrastructure in India will remain a big problem despite the fact that the government has issued infrastructure bonds with tax incentives. Finding external finance is thus very important because the amounts required would be in billions of dollars.
Finding adequate funding for infrastructure a big challenge

India needs infrastructure development more than anything else. Not only is the urban infrastructure a problem, but village infrastructure is also grossly inadequate. Villages need roads, small irrigation works, bridges, railways and internet connectivity urgently. There are 6 million villages in India in which 72 per cent or around 800 million people live. Thus village India is the real India and we have to modernize rural areas otherwise the migration flow to cities will not be lessened.

Another shocking statistic is about the lack of electricity in 31,000 villages and yet we are dreaming of digital India! All these infrastructure building projects are going to need a lot of money-estimated to be around $1 trillion in the future.

In cities, there is a shortage of low cost housing and low income people are forced to live in slums. Almost half of Mumbai lives in slums. The pollution in rivers is another serious matter which needs moreattention. Big rivers like Ganga and Yamuna are dead rivers with raw sewage flowing into them at various points. Cleaning up rivers will also require colossal amounts of money. Similarly India needs many more modern ports and airports, requiring investment.

The infrastructure needs have been addressed in the past by expert committees and numerous reports have been written about India's infrastructure requirements. The private sector is not very interested in investing in infrastructure because the returns are slow and spread over a long period. The public private partnership (PPP) mode of investment has not taken off because with a change of governments at the centre, various ground level realities change for investors. The result is that infra-projects get stalled and stuck. Around Rs 8.8 trillion worth of infrastructure investment is on hold which is equal to 7 per cent of the GDP.

Financing of infrastructure will remain a big problem despite the fact that the government has issued infrastructure bonds with tax incentives. Finding external finance is thus very important because the amounts required would be in billions of dollars.

India has got World Bank loans and Asian Development Bank loans in the past which came with conditionalities. These loans have been slow in materializing and both the institutions are bureaucratic and expect certain norms to be followed like government budgetary discipline, privatization, deregulation and opening up trade and investment. The IMF also imposes conditions for loans which relate to market reforms.

India has undertaken many reforms in the past. It has reduced tariffs and opened up trade, dismantled the licence permit raj and has also opened up its financial markets. Yet in certain areas it has retained its sovereignty and not yielded to pressure. It has not opened up farming and the retail trade. Also the labour market reforms have not taken place. India has had to do this to take into account the huge number of small farmers, traders and manufacturers who would be adversely hit if India were to open up fully. Naturally India has the right to have its own priorities and should have the prerogative to sequence its economic reforms.

Yet one only hears refrains of 'reforms are not fast enough' all the time. Prime Minister Modi was expected to bring about drastic, big bang reforms desired by the World Bank IMF and the ADB. But it has not happened yet. Obviously the NDA government has its own compulsions and political ramifications/fallout to think about.

The IMF on the other hand was supposed to have reforms in its governance structure and give due importance to the Emerging Market Economies likethe BRICS ( Brazil, Russia, India, China and South Africa). It was supposed to increase the quota and voting rights( and the borrowing capacity) of important developing countries whose share in the world trade and investment has risen in recent times. But it failed to undertake them despite the G 20 urging IMF to do so. Hence the BRICS voting share is only 11.5 per cent while the EU's is 32 per cent.

Out of frustration with the workings of the Bretton Wood twins IMF and World Bank and their failure to have proper representation of increasingly important countries, BRICS set up the New Development Bank which is now headquartered in Shanghai and K.V. Kamath is the President.

Another bank which has come up is the Asian Infrastructure Investment Bank which was also set up by China in June 2015 to take care of infrastructure finance especially for Asia. India and 45 countries signed up to be its members. Flouting the discontentment of the US, Germany, France and UK also joined the AIIB. Now the membership is around 60. It will not be a rival of the ADB because it will have lower capital base but it will help small countries like Nepal in its rebuilding operations.

Even though the initial capital is only $50 billion with China contributing $29 billion and India $8 billion, huge resources will flow into AIIB. China itself has $3.5 trillion in reserves. India will be the second most important country of AIIB and it will be entitled to big loans for infrastructure building which will be given without strings attached. This will improve the chances of India catching up with the western nations in having efficient infrastructure which will also bring India up in the Index of 'Ease of doing Business'. Currently India is 142nd rank, mainly because of poor infrastructure and the red tapeism of Indian bureaucracy.

If India suffers from balance of payments problem again as in 1991 when it had to pledge gold as collateral to get a loan from IMF, it can go to Contingent Reserve Fund which will be a part of the BRICS New Development Bank. The CRA will have $100 billion as initial capital and China has contributed $41 billion, Russia, Brazil and India contributed $18 billion and South Africa $5billion. Each party shall retain full ownership rights in possession of the reserves that it has committed to CRA. With NDB, AIIB and CRA, India stands a very good chance of building infrastructure, including social infrastructure and access short term funds for any balance of payments problem.

(The writer is a Senior Fellow at Observer Research Foundation, Delhi)

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

Read More +