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India needs resources to fund its infrastructure needs

India needs resources to fund its infrastructure needs; speedy policy reforms are critical for this

editorials Updated: Feb 17, 2016 08:34 IST
According to the road transport and highways ministry, an additional Rs 1.75 lakh-crore will be required in the next three years to build 15,000 km of highways.
According to the road transport and highways ministry, an additional Rs 1.75 lakh-crore will be required in the next three years to build 15,000 km of highways.

A growing and developing economy requires infrastructure that makes inter-city transport faster and brings down transaction costs. India is in dire need of resources to fund its infrastructure needs. As of March 31 last year, 328 central infrastructure projects, each worth more than Rs100 crore, were running behind schedule. At fault were fund shortages, tardy environmental clearances, land acquisition glitches and other government red tape.

As many as 104 of these delayed projects were in the roads and highways sector, followed by 63 in power, 43 in petroleum, 37 in coal, 35 in railways and 17 in steel. The Narendra Modi-led government aims to build 30 km of highways every day, thrice the previous administration’s missed target.

Last year, the government announced the launch of the National Infrastructure Investment Fund (NIIF), a sovereign wealth fund that aims ‘to maximise economic impact through infrastructure development in commercially viable projects’.

The government will have a 49% share in the fund and will provide an initial corpus of Rs 20,000 crore. The remaining Rs 20,000 crore is expected to be raised from overseas long-term funds such as sovereign endowments of other countries and wealth funds. Many sovereign funds are themselves financed through pension and provident funds. If a sovereign fund earns great returns by investing in the stocks of a well-performing company, it benefits the contributors. The GIC, Singapore’s sovereign wealth fund, is projected to earn a real interest rate of 6.5%. The interest rate on a five-year Singapore government bond is just below 2%. This means sovereign funds, if run well, can make decent returns for their investors.

According to the road transport and highways ministry, an additional Rs 1.75 lakh-crore will be required in the next three years to build 15,000 km of highways. If managed well, the NIIF, besides making funds for infrastructure development, can serve as a harbinger for deepening the financial services market. This could, in turn, push the savings rate to 40% of GDP in the next few years from the current 30%, an attractive prospect given that armies of young people will enter the workforce in that period.

Frugal households could turn out to be the primary financiers of these projects. International experience has showed that pension funds and insurance companies have helped jump-start infrastructure investment. Budding signs of optimism emanating from the investor community now need to be translated into action, for which accelerating the speed of overall policy reforms will be critical.