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Anupama Airy and Mahua Venkatesh, Hindustan Times
New Delhi, February 05, 2013
To woo the middle class with an eye on the 2014 general elections while pushing its agenda for growth, the UPA government is expected in the coming Union budget to unveil a wide range of tax-free savings instruments to channelise household funds into large infrastructure projects.

Senior finance ministry officials said HDFC chairman Deepak Parekh, who is also heading a high-level committee on infrastructure financing set up by the government, met representatives of major financial institutions and banks including the State Bank of India, ICICI Bank, IDFC, IDBI, Bank of Baroda, Punjab National Bank, Power Finance Corporation, Rural Electricity Corporation last week to discuss the issue and look at new ways to finance the cash-strapped sector.

"Finance minister P Chidambaram may announce the launch of savings instruments for the middle class to park their savings  that can be directed specifically to fund the infrastructure sector," said an official who did not want to be identified.

Such tax-free infrastructure bonds, he said, could be planned through infrastructure companies like India Infrastructure Finance Company Ltd (IIFCL) as also others banks and financial institutions. The country's infrastructure sector needs an estimated $1.0 trillion during the 12th plan period (2012-2017).

Given the wider reach and attractiveness, there is also a proposal to allow banks to float tax-free bonds for infrastructure financing. The government is pushing banks also to fund for infrastructure projects.

Government sources said that bonds are regarded one of the most important sources of financing as it enables infrastructure companies to raise long-tenure debt at fixed interest rates from sources other than banks.

However, the bond market in India has remained underdeveloped even though the equity market has developed well.

As a result, neither household savings nor long-term insurance or pension funds are being channelised through bonds to finance infrastructure projects.

As reported by HT first, the finance ministry may also allow IIFCL in this Budget (for 2013-14) to provide guarantees for specified infrastructure bonds.

This would enable such bonds to be rated as `investment grade’  to be able to attract insurance and pension funds and household savings, a senior government official told HT.