Making vainglorious announcements is the easy part. Planning to achieve them is difficult. On a visit to Beijing in June 2016, Arun Jaitley announced the intention to spend $1.5 trillion on infrastructure alone, over the next decade. Has he planned how to finance this?

He needs to spend $150 billion every year. Last year, India raised ₹1.7 lakh crore capital; the target this year is ₹2 lakh crore, or or $30 billion. There is a shortfall of $120 billion every year, for 10 years, if we are to achieve the spend Jaitley says is necessary. How will this be met?

A recent issue of government bonds has partly devolved on the RBI, indicating a weakening domestic appetite for bonds.

The government sequesters a part of the bank deposits, compelling them to invest in government bonds. Other than banks, the domestic market comprises largely insurance companies and pension funds.

The government does not, sadly, market India as a destination for fixed income. Globally, fixed income markets are larger than equity markets, yet India has not developed a market of its own.

Inter-state borrowing

Part of the $120-billion/year gap can be met through inter-governmental borrowings. Japan has financed India’s $100 billion Delhi Mumbai Industrial Corridor (DMIC) project and will be funding the Mumbai-Ahmedabad bullet train project. Both at low interest rates. But there is no free lunch. We are required to make a significant amount of purchases from Japanese companies.

We can, and should, have policies to help develop a fixed income market.

Put the $120 billion in the context of the global pool of financial assets, which is over $200 trillion (or 3X global GDP). India needs 0.06 per cent of the world’s pool of financial assets, and has 16 per cent of the world’s population and a growing market. So, with a little effort and correct policies, which need to be made, we can easily fund our infrastructure needs.

Debt instruments

India has developed a variety of new debt instruments. In addition to government/corporate bonds, it has developed Masala bonds (which are denominated in Indian rupees, thus placing the exchange risk on the lender and compensating him with a higher interest rate), InvITs, and REITs (ditto for real estate projects), among others.

Investors have certain concerns, which need to be addressed. Consider Masala bonds, denominated in rupee with the investor bearing the exchange risk. For India, this is desirable, right? Yet, for some strange reason, SEBI clubbed these bonds with foreign exchange-denominated bonds, and placed a cap. That killed a market which was growing well. Such thoughtless regulatory interventions should be avoided.

Stability of the currency is another worry. Masala bonds carry a higher coupon rate to compensate the investor for the exchange risk. Yet, over the past year, the INR has depreciated 5.1 per cent against the dollar, making a big dent in investor returns.

The RBI, in its circular dated April 27, has placed unnecessary restrictions on foreign investment in corporate bonds. Why such pinpricks?

The government needs to think about having policies in place, and improving the macro picture, to make the fixed income market attractive. Or else to stop dreaming about a $1.5-trillion spend on infra. It makes good headlines, but needs to be followed up with policy action.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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