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Day 44 – Q 3. What are the challenges of infrastructure financing in India? Do you think the current investment models are effective in addressing those? Critically comment. (15 Marks)

  • IASbaba
  • March 15, 2022
  • 0
GS 3, TLP-UPSC Mains Answer Writing
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3. What are the challenges of infrastructure financing in India? Do you think the current investment models are effective in addressing those? Critically comment. (15 Marks)

भारत में बुनियादी ढांचे के वित्तपोषण की चुनौतियां क्या हैं? क्या आपको लगता है कि मौजूदा निवेश मॉडल उन्हें संबोधित करने में प्रभावी हैं? समालोचनात्मक टिप्पणी करें।

Approach- 

Candidates need to write about the challenges of infrastructure financing in India. Also, the candidate needs to critically the current what he thinks about effectiveness of investment models in addressing those challenges. 

Introduction 

Infrastructure development involves huge investments, procedural delays and returns spread over a long period of time. These unique features of infrastructure development raise some issues which are specific to the financing of infrastructure. As a result, mobilising and structuring financing for infrastructure development is a complex proposition.

The Challenges of Infrastructure Financing in India 

  • India has infrastructure challenges. Poverty and density may make these issues more pronounced than in many other countries, but the underlying question is always the same. 
  • The corporate bond market is still a long way to go in providing adequate financing to the infrastructure sector in India.
  • Issues relating to land acquisition and environmental clearances add uncertainty which affects the risk appetite of investors as well as banks.
  • Infrastructure is an economic enabler, not a panacea. It is the sum of many physical interdependencies that make up the essential services that a government provides. 
  • These services do not create an economy; they facilitate one. Infrastructure needs to make people more efficient so that they can be more productive with their time. 
  • Almost half of the total investment in the infrastructure sector is done by the Government through budget allocations. But Government funds have competing demands, such as, education, health, employment generation, among others.
  • Commercial banking sector’s ability to extend long-term loans to the infrastructure sector is limited.

Current Investment Models Are Effective in Addressing the Challenges of Infrastructure Financing in India 

  • India’s private sector also needs to change some of its practices, as aggressive bidding and inadequate liquidity drive construction contractors to excessively rely on loan financing. 
  • Construction margins are tight everywhere in the world, but contractors in markets with a healthy secondary market for infrastructure assets are able to recycle their capital quicker, as infrastructure funds and even institutional investors actively buy up operating assets. 
  • These markets take time to develop, but the Indian government can begin laying the foundation for such activity now with effective regulatory reform to create a more attractive market.
  • Drawn-out dispute resolution and land-acquisition processes are other long-standing issues in India. 
  • Delayed environment clearances continue to stall projects despite the passing in 2013 of a Land Acquisition, Rehabilitation and Resettlement Act (LARR).
  • After 2014, the government had its sights set on reforming LARR to remove public consent clauses and social impact assessment requirements if land is acquired for national security, defence, and rural and social infrastructure. 
  • Whatever reforms India settles on – a transparent, consistent and stable land-acquisition process is essential for a healthy infrastructure market.
  • India has a young, well-educated and skilled workforce. In addition, the outsourcing of professional services to India from multinationals and companies based all over the world have brought global best practice to India, which can be exported at cost-effective rates. 
  • As India’s young generation matures, the opportunity for Indian businesses to capitalize on this resource and push beyond India’s borders has never been greater.

Conclusion

This is where India meets its fork in the road. In one direction is business as usual, where India feels and acts like a world in and of itself. The other direction leads to more global engagement. One path is safe – but incredibly congested. The other is bolder and more competitive – but also liberating as its infrastructure market accelerates to match the tenacity of India’s economic potential.

 

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