The government’s decision to set up a committee under Dr Rakesh Mohan, a former deputy governor of the Reserve Bank and currently India’s executive director on the IMF board, to take a comprehensive relook at how domestic private and foreign investment can be attracted for infrastructure funding is extremely welcome. There is no
doubt that infrastructure funding is a serious problem: the shortage of funds in the 12th Five-Year Plan is expected to be around 30 per cent. Some put the figure at `13 lakh crore. The funding is now being taken care of by gross budgetary support, which is 53 per cent of the requirement, against a target of 32 per cent. Public sector banks provide 80 per cent of the funding for infrastructure projects, with the rest coming from the private sector and institutions like the Infrastructure Development Finance Company and the India Infrastructure Finance Company Ltd. In the case of IDFC, for instance, 40 per cent of its funds come from public sector banks, so the pressure on banks is tremendous. That is why it is imperative to find alternative funding sources. Dr Mohan had some years back developed a whole set of government policies to attract private and foreign investment for infrastructure development. But the core issues have remained unresolved despite a slew of seminars and conferences deliberating and offering solutions. The infrastructure deficit is said to cost India one to two per cent in GDP growth every year.
The government and all connected with infrastructure are aware of the risks that private and foreign investors face — such as in construction, land acquisition (one of the biggest hurdles today) and environmental clearance (which has held up scores of projects). These problems are not new, and experts have come up with several suggestions over the years. One of these is a strong corporate bond market for long-term financing. Many years back the R.H. Patil Committee had drawn up an exhaustive set of guidelines to develop a strong bond market, but till today there has been no movement in its implementation. The lack of urgency is very visible.
One of the key solutions agreed on was to get household savings, estimated at 22 per cent of GDP, and insurance and pension funds, estimated at over `5 lakh crore, routed to infrastructure funding through the equity and bond markets. This is a challenge that stares the government in its face, but since there is no institutional mechanism to enable this, the bulk of these funds continue to lie in bank deposits. Investing the several lakh crores of rupees in insurance and pension funds in the equity markets is of course a very sensitive political issue, and even though the government is trying to provide encouragement, the trustees of these funds are not biting the bait. The reason is simple: the Indian stock markets are not considered safe enough as they still suffer from manipulation and price-rigging despite the monitoring carried out by the Securities and Exchange Board of India. People have lost several thousands of crores of rupees over the years to unscrupulous scamsters and have no hope of getting it back.
The new Rakesh Mohan Committee will have to take a holistic view when looking for solutions. Instead of treading on ground already covered, maybe it can call all significant players in the funding business to thrash out major problem issues one by one, starting perhaps with land acquisition. While foreign funds are always welcome, there is more than enough money available within the country: what needs to be done urgently is to devise risk-free ways so that domestic savings, insurance and pension funds can be directed towards infrastructure funding.