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The finance minister recently outlined an ambitious Rs 102 trillion plan to boost India's infrastructure. Like many previous announcements, the plan was loud on intent but mum on critical economic details. Specifically, no insight was provided on how the central government would fund the Rs 40-odd trillion that it has committed to contribute. Neither have details been shared about what was driving the government’s confidence in assuming that private players would be willing and able to invest close to Rs 20 trillion in India’s infrastructure over the next five years.
Mobilising funds for transformational infrastructure development has been a challenge the world over. Investing in infrastructure carries unique risks which are made all the more peculiar in India owing to the weakness of our institutions and the fractured nature of our polity. Infrastructure projects are lumpy, difficult to diversify, long in gestation and illiquid. This makes infrastructure investments unfeasible for most investors except for patient capital that is not excessively risk-averse. Such investors are rare. Moreover, as the recent brouhaha over Amaravati shows, infrastructure projects in India also carry a significant political risk premium.
The government faces two challenges in funding its infrastructure push. One, with government finances stretched to their limit and the economy slowing, it has little fiscal space to fund infrastructure projects through budgetary allocations. Second, the private sector’s appetite for infrastructure projects is probably at an all-time low and it is unlikely to commit the quantum of funds that the government is assuming. However, these problems are not insurmountable if we learn from the experience of China and South Korea.
At the beginning of its economic miracle in the early 1990s China faced a similar gap between infrastructure aspirations and finances. In a detailed paper, George E Peterson of the World Bank explains how China transformed its infrastructure by employing a land lease model [Land Leasing and Land Sale as an Infrastructure Financing Option (2006)]. This model originated in Hong Kong and was later adopted by the Chinese government.
To raise funds for infrastructure development, Chinese municipalities used their land bank. Land development rights were sold outright to private parties on long-term leases, or, in many cases, realising that the development of infrastructure would enhance the market value of land, the government issued debt secured by land and repaid it by selling land parcels at enhanced prices after the project was complete.
Unlike China, all land is not public in India. Even so, the Indian government is sitting on large swathes of land that can be leveraged to fund infrastructure projects. By some estimates, the Indian Railways alone has a land bank of 12,066 acres of surplus land, which can be developed to fund capital expenditure. Additionally, urban development authorities in India can also acquire land and sell development rights to fund infrastructure just as the Mumbai Metropolitan Region Development Authority did quite successfully with the Bandra Kurla Complex.
Mobilising funds for transformational infrastructure development has been a challenge the world over. Investing in infrastructure carries unique risks which are made all the more peculiar in India owing to the weakness of our institutions and the fractured nature of our polity. Infrastructure projects are lumpy, difficult to diversify, long in gestation and illiquid. This makes infrastructure investments unfeasible for most investors except for patient capital that is not excessively risk-averse. Such investors are rare. Moreover, as the recent brouhaha over Amaravati shows, infrastructure projects in India also carry a significant political risk premium.
The government faces two challenges in funding its infrastructure push. One, with government finances stretched to their limit and the economy slowing, it has little fiscal space to fund infrastructure projects through budgetary allocations. Second, the private sector’s appetite for infrastructure projects is probably at an all-time low and it is unlikely to commit the quantum of funds that the government is assuming. However, these problems are not insurmountable if we learn from the experience of China and South Korea.
At the beginning of its economic miracle in the early 1990s China faced a similar gap between infrastructure aspirations and finances. In a detailed paper, George E Peterson of the World Bank explains how China transformed its infrastructure by employing a land lease model [Land Leasing and Land Sale as an Infrastructure Financing Option (2006)]. This model originated in Hong Kong and was later adopted by the Chinese government.
To raise funds for infrastructure development, Chinese municipalities used their land bank. Land development rights were sold outright to private parties on long-term leases, or, in many cases, realising that the development of infrastructure would enhance the market value of land, the government issued debt secured by land and repaid it by selling land parcels at enhanced prices after the project was complete.
Unlike China, all land is not public in India. Even so, the Indian government is sitting on large swathes of land that can be leveraged to fund infrastructure projects. By some estimates, the Indian Railways alone has a land bank of 12,066 acres of surplus land, which can be developed to fund capital expenditure. Additionally, urban development authorities in India can also acquire land and sell development rights to fund infrastructure just as the Mumbai Metropolitan Region Development Authority did quite successfully with the Bandra Kurla Complex.
Investing in infrastructure carries unique risks the world over, but they are all the more peculiar in India owing to the weakness of our institutions and the fractured nature of our polity
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