India boosts infrastructure with tax-free bonds

Reuters | Fri Jul 9, 2010 | 8:09pm IST

A construction in Hyd'bad India will issue tax-free infrastructure bonds with a minimum tenure of 10 years to help overhaul a crumbling sector that has impeded growth in Asia’s third-largest economy, the Finance Ministry said on Friday. The bonds have the potential to raise about $6.5 billion in fiscal year 2010/11, according to government estimates, and the number could rise in 2011/12. The bonds will likely make investments to build roads, ports and power plants for the world’s second most populated nation more attractive to banks that have so far struggled to finance long-term projects with short-term funds. India has consistently fallen short of building infrastructure it has planned for and this has been a drag on achieving a growth pace similar to peer China’s double-digit expansion.

The Finance Ministry said in a statement the bonds will be issued by Industrial Finance Corporation of India, Life Insurance Corporation of India, Infrastructure Development Finance Company Limited, and non-banking infrastructure finance companies, approved by the central bank. "It would help the government in a big way to raise funds for the infrastructure sector, but it needs to come up with more innovative measures to meet the funding needs of that sector," said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a Delhi based think-tank. India aims to spend $500 billion on infrastructure in the five years to end-March 2012 but is already behind schedule. The government is considering doubling that figure in the five years after that.  


The bonds are one of several efforts by the Congress-led coalition government to persuade investors to free up cash for the sector as well as deepen the domestic bond market. The government also wants foreign investors to play a key role in driving infrastructure projects, seen among the biggest in the world over the coming decade. A plan for India’s biggest infrastructure debt fund, worth $11 billion, aims to make the sector more attractive by allowing local banks to fund projects at low rates until they start seeing revenue. Half of the money could be raised from overseas investors, tapping sovereign and insurance funds, the government has said. Private investors could fund as much as 70 percent of the $50 billion worth of road projects planned this year. Red tape and difficulties in acquiring land, along with an underdeveloped domestic bond market and wariness of overseas investors in committing to long-term, big-ticket projects have slowed infrastructure development.

The government last year set a target of building 20 kilometres of road a day, but is currently laying tarmac at less than half that rate. Around 35 million taxpayers would be eligible to buy the tax-free bonds, which have a five-year lock-in period. "Such bonds will help us in raising funds for our various projects and these are beneficial for investors as well as for us," an official at L&T Infra Finance Co, a subsidiary of Larsen & Toubro Ltd said. Capacity bottlenecks in the Indian economy, including poor infrastructure, are partly responsible for driving up headline inflation in India to double-digit levels and prompted a recent proposal for opening the country’s multi-brand retail sector. Analysts say the government should also ease restrictive investment guidelines in the insurance and pension sectors to draw money from both domestic and foreign players to fund infrastructure.


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