Infrastructure finance: how thrift pays

Household savings could power road, port and highway projects, with savings rate expected to touch 40% of GDP, Gaurav Choudhury reports.

How can India finance its infrastructure needs?
Thrifty households could well turn out to be the primary financiers of these mammoth projects. India's savings rate could reach 40% of its GDP in the next few years and can potentially be sustained at high levels for well over a decade, primarily due to armies of young people entering its workforce.

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How can this be done?
The annual pool of financial savings can potentially rise to $800 billion by 2020, which would be about one and a half times the current stock of credit by the banking system.

How will it help the financial sector?
This could have significant implications for the growth of the financial sector, including the growth of banking, insurance and mutual funds. International experience with funding infrastructure has been extremely diverse, depending on the level of development and structure of the economy. Self-generated funds of state-owned enterprises have been the chief source of financing in China. Domestic loans and private debt have been the key drivers in Korea. Pension funds and insurance companies have helped jump-start infrastructure investment in several countries including Australia, Canada, Mexico and Chile. Public-private partnership models have been employed extensively in infrastructure financing in France, the UK, and Brazil, among others.

What does the government propose to do?
Domestic infrastructure companies may be allowed to float tax-free gold bonds aimed at channelising household savings to the cash-starved sector that would require an estimated $1 trillion (about R50 lakh crore) over the next five years.

How will it be done?
The government is actively considering a set of proposals aimed at converting a portion of both flow and stock of gold investment for funding infrastructure projects such as highways and ports. The objective is to induce fresh investment and convert existing gold holdings into investible bonds. The proposals may include allowing infrastructure companies to issue gold bonds that will carry a maturity of 5 years. These bonds will be backed with capital protection and yields will be linked to gold prices. Subscribers to these bonds could be offered the option of delivery of physical gold on redemption. Investment in such bonds may be eligible for tax breaks, similar to those offered by bonds of infrastructure companies such as the National Highways Authority of India (NHAI), the official said.

Why do people invest in gold?
Gold is one of the several assets that people invest in. Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite avenue for parking surplus income.

What has the government proposed for the insurance sector?
The government approved the politically contentious move to hike the foreign direct investment (FDI) ceiling to 49% from the current 26% in India's rapidly growing private insurance sector, which was being hobbled by lack of capital.

Why do insurers need money?
Insurers need funds to maintain a healthy capital base, offer a wider bouquet of products, and protect consumer interests against insolvency. The cabinet has also cleared a Bill to allow up to 49% foreign investment in the pensions industry.

But isn't there already a regulator in the pension sector?
Currently, the pension sector has its own regulator, the Pension Fund Regulatory Development Authority (PFRDA). However, it is yet to get statutory powers through an Act of Parliament. The PFRDA's National Pension System (NPS) was introduced by the government and made mandatory for all new recruits to the government with effect from January 1, 2004. The NPS was opened to all citizens of India from May 1, 2009, on a voluntary basis.

What is the drawback of not having statutory powers?
The drawback of not having statutory powers is that if one of the entities PFRDA regulates violates norms, it cannot impose penalties. The passage of the PFRDA Bill, which was introduced in the Lok Sabha in March 2011, is important to pave the way for setting up a regulator for the sector - which aims to provide social security to millions of employees through efficient intermediation of long-term household savings.