The Industry Ministry today pitched for setting up of sovereign wealth fund for infrastructure financing, which requires an estimated Rs 45 lakh crore (USD 1 trillion) in the next five years.
In a discussion paper on infrastructure financing, the ministry said that the government should use part of its foreign exchange reserves to set up the sovereign wealth fund (SWF) as has been done by countries like China, Korea and Singapore.
"While the Reserve Bank of India has reservations about the issue, this (SWF) option needs to be explored," it said. India has foreign exchange reserves of about USD 320 billion. Besides, setting up SWF, the ministry has also made a case for development of domestic bond market, currency market and debt funds for financing infrastructure projects, seen as a major bottleneck in achieving double-digit economic growth.
The concept paper also suggested that the government should address the taxation issues concerning infrastructure bonds as they would not be eligible for tax exemptions under the Direct Tax Code (DTC), which is likely to come in force next fiscal.
The Planning Commission pegs infrastructure fund needs at USD 1 trillion during the 12th Plan (2012-17), up from USD 500 billion estimated in the current Plan. The government expects half of this investment to come from the private sector.
India, the paper said, "needs to rapidly attract global investors through creation of the world class infrastructure and reduce logistics costs, supported by an enabling policy framework". The paper said that discontinuance of tax incentives under DTC on investment in infrastructure might act as a detriment for the infrastructure funding companies to raise capital.
Talking about developing the currency market, it said availability of foreign exchange hedging instruments need to be strengthened as foreign debt investors are wary of betting on the currency of a developing economy for long tenure. It also advocates credit enhancement through guarantee to address issues related to credit gap rating and risk perceptions.
"One of the major impediments in attracting foreign debt capital for infrastructure is the sovereign credit rating ceiling. A credit enhancement mechanism can bridge the rating gap between the regulated investment norms and/or risk perceptions and the actual ratings of Indian entities," it added.
Apart from highly regulated investment norms, the paper said, lack of liquidity also acts as a dampener for insurance companies to invest in infrastructure company bonds. "We need to make infrastructure financing easy. Since, infra projects have long gestation period, we need to debate upon the infra debt financing needs and channels that can be made available," a senior industry ministry official said.
Infrastructure projects are complex, capital intensive, and have long gestation periods that involve multiple and often unique risks to project financiers. The paper points out that the infrastructure finance market in India is characterised by the absence of an active long-term corporate debt market, asymmetric information on projects, and inherent risks in financing them.
While the quantum of investment in infrastructure in India has increased from 5 per cent of GDP during 2002-07 Plan period to the current level of about 8 per cent, it is still not enough as in terms of access to basic infrastructure parameters, India has lagged behind most of its Asian peers.Considering the 9% GDP growth target set for the 12th Plan, an increase in investment in infrastructure from current level to about 10% in 2016-17 (terminal year of 12th five year plan) is envisaged.
The Public sector has been the major source for infrastructure investments till date, with the private sector playing an increasingly important role. Around 75% of the investment was contributed by the public sector during 10th five year plan, which has decreased to around 63% of the total investment in 11th five year plan.
Seeking public comments, the paper said attracting global investors is particularly significant in the context of the National Manufacturing Policy and the Delhi Mumbai Industrial Corridor Project which are aimed at creation of futuristic integrated industrial cities.
In a discussion paper on infrastructure financing, the ministry said that the government should use part of its foreign exchange reserves to set up the sovereign wealth fund (SWF) as has been done by countries like China, Korea and Singapore.
"While the Reserve Bank of India has reservations about the issue, this (SWF) option needs to be explored," it said. India has foreign exchange reserves of about USD 320 billion. Besides, setting up SWF, the ministry has also made a case for development of domestic bond market, currency market and debt funds for financing infrastructure projects, seen as a major bottleneck in achieving double-digit economic growth.
The concept paper also suggested that the government should address the taxation issues concerning infrastructure bonds as they would not be eligible for tax exemptions under the Direct Tax Code (DTC), which is likely to come in force next fiscal.
The Planning Commission pegs infrastructure fund needs at USD 1 trillion during the 12th Plan (2012-17), up from USD 500 billion estimated in the current Plan. The government expects half of this investment to come from the private sector.
India, the paper said, "needs to rapidly attract global investors through creation of the world class infrastructure and reduce logistics costs, supported by an enabling policy framework". The paper said that discontinuance of tax incentives under DTC on investment in infrastructure might act as a detriment for the infrastructure funding companies to raise capital.
Talking about developing the currency market, it said availability of foreign exchange hedging instruments need to be strengthened as foreign debt investors are wary of betting on the currency of a developing economy for long tenure. It also advocates credit enhancement through guarantee to address issues related to credit gap rating and risk perceptions.
"One of the major impediments in attracting foreign debt capital for infrastructure is the sovereign credit rating ceiling. A credit enhancement mechanism can bridge the rating gap between the regulated investment norms and/or risk perceptions and the actual ratings of Indian entities," it added.
Apart from highly regulated investment norms, the paper said, lack of liquidity also acts as a dampener for insurance companies to invest in infrastructure company bonds. "We need to make infrastructure financing easy. Since, infra projects have long gestation period, we need to debate upon the infra debt financing needs and channels that can be made available," a senior industry ministry official said.
Infrastructure projects are complex, capital intensive, and have long gestation periods that involve multiple and often unique risks to project financiers. The paper points out that the infrastructure finance market in India is characterised by the absence of an active long-term corporate debt market, asymmetric information on projects, and inherent risks in financing them.
While the quantum of investment in infrastructure in India has increased from 5 per cent of GDP during 2002-07 Plan period to the current level of about 8 per cent, it is still not enough as in terms of access to basic infrastructure parameters, India has lagged behind most of its Asian peers.Considering the 9% GDP growth target set for the 12th Plan, an increase in investment in infrastructure from current level to about 10% in 2016-17 (terminal year of 12th five year plan) is envisaged.
The Public sector has been the major source for infrastructure investments till date, with the private sector playing an increasingly important role. Around 75% of the investment was contributed by the public sector during 10th five year plan, which has decreased to around 63% of the total investment in 11th five year plan.
Seeking public comments, the paper said attracting global investors is particularly significant in the context of the National Manufacturing Policy and the Delhi Mumbai Industrial Corridor Project which are aimed at creation of futuristic integrated industrial cities.
Moneycontrol
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