India ranks low in most global rankings on infrastructure. Poor infrastructure remains the biggest hurdle to sustaining a fast pace of economic growth and job creation in the future. Several new initiatives have been launched, including the National Master Plan (GatiShakti) — a coordinated approach to infrastructure investments to break the silos that currently exist across 15 central ministries — to add a new dynamism to infrastructure projects.

India’s biggest challenge is the huge infrastructure financing gap, which is estimated to be more than 5 per cent of GDP. What can be done to cover this huge infrastructure financing gap? There are many instruments that can be used, including new sources of financing, scaling up public-private partnerships, improving the credibility of the regulatory regime, and introducing second generation infrastructure projects to promote fast growing cities and sectors.

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Global investors have started to view India as one of their top destinations for infrastructure projects. India offers a higher rate of return on infrastructure projects, given its youth bulge, rise of the middle class, and a huge domestic market. India needs to take advantage of the global investors, especially in projects that will bring new construction material, clean energy, new modes of transport, digital technologies, and much more.

Most economists agree that infrastructure investments are a key driver of economic growth. India’s investment in the Golden Quadrilateral Highway project is a great example of how infrastructure investments promoted entrepreneurship, economic growth and job creation.

India needs to diversify the sources of infrastructure financing. Unlike other emerging markets, India has relied primarily on the government budget for financing infrastructure projects, with nearly 70 per cent of funding coming from government budget. The financing mix of infrastructure projects needs to change to scale up the contribution of the private sector to increase to nearly 50 per cent of financing of infrastructure projects.

Private investments

There exists a tool to attract private investments in infrastructure projects through public-private-partnerships (PPPs). It offers the efficiency incentives for alternative sources of financing through competition for a contract. India has made progress towards promoting PPPs, especially in electricity and road sectors. This can be scaled up to other sectors, including ports, railways, water and sanitation, and social sectors.

Private investors need a credible regulatory and institutional regime, and contract management, that reduces the time taken for market assessment, socioeconomic impact, affordability, bankability of projects, and future negotiations. Improved institutional capacity will improve the underlying relationships on PPPs, help to make more informed decisions, and reduce the possibilities of renegotiations in the future on PPPs.

The rise in renegotiations have raised concerns about high costs, and the legitimacy of PPPs over traditional procurement. This can be addressed by improving PPP contract management, and projects that are renegotiated should be reviewed to inform future reforms in that sector to minimise the negative impact of renegotiations, and improve the PPP environment.

Fiscal management of PPPs, and the consistency of PPP projects with development priorities, are the two means for ensuring that infrastructure projects are fiscally sustainable, rather than a means of savings through off-budget reporting. India needs to make greater effort towards improved competitive risk allocation in PPP projects.

Fiscal reforms will reduce contingent liabilities, and also generate more revenues to bridge the infrastructure financing gap. Policymakers will also need to avoid the potential for currency mismatches from borrowing in foreign currency for projects that generate revenues largely in local currency. Domestic capital markets, especially green local currency bond markets, will play a critical long-term source of financing for infrastructure projects.

The rate of returns on infrastructure projects in India are much higher compared to OECD countries, due to the global glut in savings, and a huge potential for green growth in India. The funds managed by institutional investors in OECD countries exceed $100 trillion, but their current allocation to India is tiny.

The basic traits of infrastructure projects in India make them extremely attractive for global institutional investors, given the long-term steady revenue stream generated by infrastructure projects, a desire to scale up investments in green growth, less volatility due to the long-term nature of their contracts, and investment returns that exceed inflation. This makes infrastructure investments in India much more attractive for private investors in a volatile world.

The writer is senior fellow at Pune International Development Center, taught economics at Oxford University, and has worked for World Bank and WTO

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