The timing's not quite right

The global credit market is in turmoil. This could make a long-tenor bond a costly affair.

The government is considering floating long-tenor bonds in the international capital markets to open a new pipeline for funding infrastructure worth $1 trillion that is expected to come up over the next five years. Financing new ports, highways and power plants in India has been a knotty problem. The government does not have the money. Local infrastructure companies are not big enough to raise equity, and if they manage to do it, banks are perilously close to the limits set on their lending to the sector. Besides, Indian banks find it difficult to lend for the 30-year lifespan of a typical project when their borrowing horizon is far shorter. The country's private pensions and insurance industries, which draw such long-term investments, are feeling their way about in their infancy and there is political opposition to speeding up their growth through bigger doses of foreign equity. Borrowing abroad remains a viable way to finance the infrastructure deficit. That the government chose to exercise the option now, when the global credit market is in turmoil, could make the enterprise a costly one.

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There is little appetite internationally for emerging market debt as Europe struggles to put its house in order and the US resorts to unprecedented pump-priming. An offering from India at this juncture will have to be sweetened by some form of sovereign guarantee or attractive interest rates. Both have been attempted before and have run into controversy. The Centre has been chary of underwriting revenues of infrastructure projects after burning its fingers over the Enron power project in Dabhol, Maharashtra. And bonds directed at non-resident Indians - named variously as India Development Bonds in 1991, Resurgent India Bonds in 1998 and India Millennium Deposits in 2000, which collectively raised slightly over $11 billion - succeeded because they offered premium returns without a currency risk. Significantly, they were of a shorter tenor in markets not as adverse as now. Designing a bigger 30-year bond offer with a proxy sovereign guarantee for a body of investors larger than the Indian diaspora will need some deft financial engineering.

Yet, the government needs to improvise if it hopes to get the economy growing at close to 8% again. Building infrastructure fast is one obvious way out. A rapidly growing India is not only an economic catalyst for South Asia, it also works as a political ballast for the region. Prime Minister Manmohan Singh has rightly connected India's prosperity with its security: it is in our interests for our neighbours to gain from our growth. Reviving the economy, thus, acquires greater urgency. Innovative policymaking must be encouraged if the nation has to move towards energy and food security. A large chunk of reforms can, as Mr Singh has pointed out, be attempted without running into political opposition. It's about time we got down to teasing the kinks out of the system.