Skip to main content

Funding Infrastructure in India – How resilient is the Domestic Debt Market in India?


Funding Infrastructure in India
– How resilient is the Domestic Debt Market in India?

by

Vighneswara Swamy Ph.D
vs@iegindia.org
Senior Fellow, Institute of Economic Growth, Delhi



Abstract


India with over 1.21 billion people, about 17.5% of the world’s population is projected be the world’s most populous country by 2025. Coupled with expanding population, the growing needs of the economy in the recent years have placed intense stress on physical infrastructure i.e. electricity, railways, roads, ports, irrigation, water supply and sanitation, all of which already suffer from deficit in terms of capacities as well as efficiencies. The stated object of inclusive growth averaging at 9 percent per year as envisaged under the Twelfth Five Year Plan (2012-17) can be achieved, provided, the infrastructure deficit is overcome. To attain this adequate investment has to take place in the infrastructure sector to support higher growth. Mid-Term Appraisal of the Twelfth Plan suggests that in order to attain 9 percent real Gross Domestic Product (GDP) growth rate, infrastructure investment should be on average almost 10 percent of GDP during the Twelfth Plan which translates into around INR 65 lakh crores at current prices. Accordingly, Energy sector requires around INR 23242 billion, Transport and Storage sector – INR22446 billion, Telecommunication – INR 11140 billion, Irrigation – INR 5953 billion and Water supply and sanitation – INR 3013 in all adding up to INR 65795 billion (about One trillion dollar).

There has been a progressive involvement of the private sector in infrastructure investments. As per the World Bank data, during the period 2006-12, private sector investments in India were to the tune of US$ 60949 in telecommunications, US$ 117920 in energy, US$ 75202 in transport and US$ 357 in Water and Sanitation. However, the government has to play a proactive role in developing a well-structured platform for raising the required investments in Indian infrastructure. Given the huge demand of US$ 1 trillion for infrastructure investments during the 12th plan period (Table 1), there is a greater emphasis on creating a domestic debt market with special focus on bond market as an alternate source of funding for bank finance, which is faced with myriad problems of stress assets, asset restructuring, etc.

Table 1: India’s Infrastructure Investment Requirements
Infrastructure Investment requirement for the 12th Plan (2012-17):
Public sector contribution at
INR 33700 billion
Budgetary support of INR 13143 billion
Internal generation of INR 6869 billion
Borrowings of INR 10693 billion
Private sector contribution at
INR 31300 billion
Internal generation of INR 9630 billion
Borrowings of INR 21670 billion
Source: Planning Commission data


In this backdrop, this paper analyses the resilience of Indian debt markets in meeting the funding requirements of Indian infrastructure. Employing data from the most authentic robust data sources such as; World Development Indicators (WDI), Reserve Bank of India (RBI) database, Planning commission data, Bank for International Settlements (BIS) database, Securities and Exchange Board of India (SEBI) database and others, we offer an in depth comparative analysis of the structure, size, volumes and efficiency of Indian domestic debt markets. We also look at the effectiveness of the market structure and adequacy of the financial instruments offered presently by the domestic debt markets and also the market players in the wake of emerging challenges. Further, we offer several recommendations to enable the domestic debt markets in meeting the challenges of the increasing demands of the growing Indian economy.   

Comments

Post a Comment

Popular posts from this blog

My Quick Take on the RBI Monetary Policy Announcement

  My Quick Take on the RBI Monetary Policy Announcement Overall, I believe the RBI's decision to maintain the repo rate at 6.5% and raise the GDP growth forecast for FY23-24 to 7% is a positive and prudent move. Here are my perspectives on the key aspects:   1. Pause in the rate hike cycle: Anticipate a protracted pause in the short-term key lending rate due to the increasing GDP growth and controllable inflation. This will provide much-needed relief to businesses and individuals struggling with high borrowing costs.   2. Stable economic growth: India's GDP growth of 7.6% in Q2 FY23-24 demonstrates a resilient and vigorous economic revival. The RBI's updated projection of a 7% expansion for the whole fiscal year further reinforces this optimistic perspective.   3. Inflation remains a concern: While the recent decline in inflation to a four-month low is encouraging, continued vigilance is necessary. The RBI's focus on withdrawal of accommodation w...
Post a Comment
Read more

The Dynamics of Finance-Growth Nexus in Advanced Economies

This study investigates the relationship between finance and economic growth in advanced economies as these countries experience significantly higher levels of financial development. Using a fully balanced panel of 31 years from 1983 to 2013 for 24 economies, we provide new evidence on the finance-growth relationship. We evidence the presence of nonlinearity as there is an inverted U-shaped relationship between finance and growth in the long run. The results show that there exists a threshold effect of the finance-growth relationship estimated at 142 percent of GDP. We find that surpassing the threshold would cost the countries instead of furthering economic growth as too much finance is harmful. Based on the panel Granger causality test results, we argue that financial development should be associated with optimal growth performance. Our findings for the advanced economies provide useful inferences to the emerging and developing economies in designing their financial dev...
Post a Comment
Read more

Monetary and Fiscal Policy Coordination during the Fiscal Dominance Regimes

Key points • This study empirically examines the interaction between monetary and fiscal policy by using Vector Auto Regressions (VAR) and a Vector Error Correction Model (VECM) and explores the need for coordination. • The Stackelberg interaction model with government leadership to know the strategic interaction between monetary and fiscal policy is analyzed. • The findings show that an unexpected increase in the monetary policy effect: (i) has a contractionary impact on the economic growth; (ii) leads to a gradual decline in the inflation; (iii) tightens the liquidity conditions; and (iv) rise in the bond yields. On the other hand, an unexpected increase in the fiscal policy effect: (i) has a positive effect on GDP growth; (ii) has an initial decline, but a gradual rise in the inflation levels; and (iii) leads to falling bond yields. • Monetary policy is found to be more responsive to fiscal policy effects. The results imply that there is a greater need for effective coordinat...
Post a Comment
Read more