Budget 2018: Finance Ministry decides not to recreate an omnibus development bank

Instead, the ministry has cleared a proposal from at least one line ministry to create a specialised financing arm quite like the IRFC

The word from North Block just before the Budget is that the finance ministry has decided not to recreate an omnibus development bank. Instead with at least one international rating agency having pushed up India’s credit rating, it will push state-owned and supported entities to take advantage of the favourable conditions to raise more money from the markets.

For this purpose, the ministry has cleared a proposal from at least one line ministry to create a specialised financing arm quite like the Indian Railway Finance Corporation.

When state-owned institutions raise money from the markets on their own steam to finance their capital needs, those qualify as off-Budget borrowings. Prime Minister Narendra Modi and Finance Minister Arun Jaitley are convinced that even for financing the needs of the soft infrastructure sectors, the same strategy could be applied. This would keep the government borrowing within prudent limits. Keeping the government borrowing within limits will also retain the current soft interest trends for borrowing by state-owned and private sector entities. It is not clear, however, for which of the social sector expenditures the government will use this route to raise money, though both education and health sectors demand huge increase.

The money to be raised will show up in the aggregate expenditure of the government, but will not push the borrowing figures askew. It will also show up as part of the aggregate capital expenditure (capex) plans. How much money the government pushes for capex in FY19 will be a keenly watched metric in the Budget the finance minister will table in Parliament on Thursday (February 1). The percentage of gross fixed capital formation in the economy (at current prices) has slipped to 26.4 per cent of gross domestic product for FY18, according to the first dataset released by the government this month. It was 29.3 per cent in FY16. A turnaround here is considered essential for the Indian economy to regain its growth momentum. 

A possible way to do this is the route adopted by the government for the recently formed National Industrial Corridor Development & Implementation Trust (NICDIT). The Trust has taken over the building of the Delhi-Mumbai Industrial Corridor Project. NICDIT is being used as a revolving corpus into which investments into the project-specific vehicles is being routed. All debt service payments made by the vehicles or money raised from their disinvestment are to be ploughed back into the corpus, enabling the NICDIT to support the development of more industrial cities in future. 

The money will also raise the capex profile of the state-owned enterprises. In FY18, the Budget Estimates for state-owned enterprises to raise money from the debt markets were estimated at Rs 3 . 85 trillion. It was a five per cent dip from the impressive Rs 4 . 06 trillion raised in FY17 by the same entities in FY17, a 30 per cent rise achieved over the scorecard for FY16. While the final figures for FY18 will be released in the Budget papers on Friday, the difference is expected to persist.

For FY19, Jaitley is expected to ask these companies to be more aggressive in their capital-raising plans and exceed the levels for FY17. Other than the off-Budget nature, borrowings by the state-owned entities will also spur them to use the money to set up projects quickly since they run an interest cost. The push will be despite the extensive cash reserves built up by some of these companies that has made them reluctant to approach the capital markets. In the absence of investment plans, the government has been soaking up some of this money to meet its fiscal balance. Yet, there are several sectors of the economy like transport and civil aviation within the infrastructure sectors where there is an acute fund constraint.