GENERAL COMMERCIAL KNOWLEDGE

Assignment/Project Title: Sourcing Indias Infrastructure

Investments
Group Name: Externalites

Submitted on: 25/11/2010

Group Members' contribution to this Project

Sl. No.

Student ID

Student Name
B.Santhosh Kumar

Contribution %

CBS/IT/10-11/036

CBS/MAR/10-11/004 B.M. Kumaran

CBS/HR/10-11/029

CBS/MAR/10-11/013 Neha Prasad

20

CBS/HR/10-11/019

Neha Sharan

20

N. Anitha

20
20
20

6
7
Total

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100%

Purpose

To analyze where Indian can source the $1 trillion needed for infrastructure to
sustain the economic growth.

Scope

This report covers about infrastructure, FDIs, IIDF, Infrastructure bonds,

Privatisation, Joint Ventures, Free trade Agreements, Tax reforms

Audience

Available to:
Prof.Vijayaraghavan (General Commercial Knowledge)
Chennai Business School

Review Date

25-11-2010

Owners

Santhosh, Kumaran, Anitha.N, Neha Prasad, Neha Sharan

TABLE OF CONTENTS
1. Introduction_____________________________________________

Pg.No
3

i.

Infrastructure______________________________________

ii.

Situation Analysis__________________________________

2. IIDF___________________________________________________

3. PROPOSALS____________________________________________

i.

FDI______________________________________________

ii.

Privatization_______________________________________

iii.

Trade Agreements __________________________________

iv.

Infrastructure Bonds________________________________

4. Conclusion_______________________________________________

5. References_______________________________________________

6. Appendix________________________________________________

10

Introduction:
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Infrastructure is the buzzword in the present Indian context as there is a huge gap between
demand and supply, this was the reason infrastructure funds were best performers in India in the past two
years, adding the investment of $500 billion expected in the country's infrastructure should trigger more
money into infrastructure funds.

What is Infrastructure?
Infrastructure activities, such as power, transport, telecommunications, provision of water, and sanitation
and safe disposal of waste, are central to the activities of the household and to economic production.
Without any of these either economic production will suffer or the quality of life will deteriorate. One
could thus view these activities as essential inputs to the economic system.

The image above projects the amount needed to be invested in infrastructure by the year 2020. It is a tall
ask, even for a country as big as India.

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Situation Analysis:

The image above shows the response of people who were asked the reasons making India
a difficult country to run a business. It can be clearly seen that inadequate supply of
infrastructure leads the reasons for the loss of many business opportunities India could attract.
Indian government being increasingly worried about Chinas growing economic and political
threat over India is seriously lacking behind China in terms of infrastructure. Infrastructure is
one of the key components for an economic development of a country. Around $1 Trillion is
needed to sustain the growth of India over the next 5 years. Although rapid strides have been
made in industries such as Telecom and Technology throughout the country still the overall
basic infrastructure scenario in India is still largely inadequate. Essential areas such as
Power, Transport, and Education etc. are low in standards when compared with other
developing countries like China, Brazil, and Russia. The 1.1 billion populations are already
putting stress on the existing limited resources which makes it the primary objective for
government to address this issue as first priority as recognized in the eleventh five year plan.
The picture below sums up the existing condition in India and the need for change.

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Indian Infrastructure Debt Fund (IIDF):

The UPA government had recently set up a 15-member committee under the chairmanship of
former HDFC chairman Deepak Parekh to work out the modalities of the proposed India Infrastructure
Debt Fund (IIDF). This is a proposal for setting up an India Infrastructure Debt Fund (the Fund) for Rs.
50,000 crore ($ 11 billion) to meet the needs of long-term debt for infrastructure projects that are set up
through Public Private Partnerships (PPP). The Fund will also help bridge the emerging gap in the total
debt required for funding infrastructure projects which presently rely on commercial banks. The provision
of low-cost long-term debt is necessary for reducing the cost of infrastructure projects and this Fund
would be a significant step in that direction. The Fund would only lend to projects that have entered into
commercial operation after completion of construction. This would imply taking over of the existing debt
of commercial banks and thus releasing their lending space for provision of loans to new projects. When
the Fund is fully operational, it will also help create a secondary market for debt bonds.
Since infrastructure funds are long-term funds the payback period will also being longer. So they need to
be financed long-term in order to be sustainable and cost effective. Infrastructure projects have so far
being financed by banks, now facing the practical difficulty in providing long-term debt due to their assetliability mismatch. IIDF hopes to address the deficit of the past years and for 01.06.2010 and keeping
pace with the needs of a rapidly growing economy. The Eleventh Five Year Plan has set a target (revised)
for scaling up investment in infrastructure from about 5% of GDP, as prevailing in the Tenth Plan, to
8.4% by the terminal year of the Eleventh Plan (2011-12). In absolute terms, this implies an investment of
about Rs. 20,54,000 crore (US $ 513.55 billion) during the Eleventh Plan as compared to Rs. 9,06,074
crore ($ 227 billion) during the Tenth Plan. For achieving this sharp increase in investment, the role of the
private sector would have to be enhanced besides an increase in public sector outlays. It is envisaged that
36% of the total investment during the Eleventh Plan would need to be mobilised from the private sector

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as against 25% achieved during the Tenth Plan, which implies an increase from Rs. 2,25,200 crore ($ 56
billion) in the Tenth Plan to about Rs. 7,43,000 crore ($ 185 billion) during the Eleventh Plan

Debt Gap:
According to the Eleventh plan of Rs. 7,43,000 crore ($ 185 billion) would require an equity
contribution of about Rs. 222,900 crore ($ 56 billion) and debt of about Rs. 520,000 crore ($ 130 billion).
In addition, the debt required for public sector projects has been projected at Rs. 506,000 crore ($ 126
billion). Thus, the total debt requirement for infrastructure would be Rs. 102,6000 crore ($ 257 billion).
Projections for debt resources that are likely to be available for infrastructure suggest that there would be
a gap of Rs. 201,300 crore ($ 50 billion) during the Eleventh Plan period. However, this gap has not
surfaced during the past three years mainly because of the slow roll-out of projects on account of several
reasons including the global financial crisis. This situation is likely to change as some recent initiatives of
the government, coupled with a simplified and standardised policy and contractual framework, are likely
to lead to an accelerated roll-out of projects to be undertaken by private entities through Public Private
Partnership (PPP). The more recently forecasted figures show that the debt gap has increased to about
$500 billion by the year 2015.

Proposals:

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FDI:
The image above shows the investment opportunities available in India. FDIs are a
paradox which has to play the major role in meeting the infrastructure funds needed by India. The reason
it is a paradox is because FDIs are difficult when the existing infrastructure in itself is strained still FDIs
continue to pour in India because of the other factors which counter balances against the infrastructure
negativity. As government plans for more and more divestments of the primary infrastructure sectors like
Energy, Transportation, Communications FDIs in India is expected to grow significantly larger and make
the large portion of the funds needed to meet the infrastructure -requirements of the country. In a bid to
make the core sector attractive for FDI, the Cabinet Committee on Foreign Investment (CCFI) has
modified the 49 percent cap on foreign equity in the infrastructure sector. This major policy decision
which will indirectly raise the foreign equity investment in infrastructure sector to well over 51 per cent,
if a domestic partner fails to meet his commitment from internal sources, including borrowing. The new
mechanism is designed to overcome the constraints for foreign equity cap in the infrastructure sector.
Under the norms, companies operating in the sector can bring in equity through the mechanism of an
investing company for the purpose of making investment in a licensee company in the service sector
where there is a prescribed foreign equity cap.

Privatization:

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Increasingly the government is forced to take measures to divest its holdings from the
public sector companies for more investments to meet the challenges of overshooting demand.
Privatization or Divestment as the government prefers to call it will change the role of government
from operator to a facilitator and regulator for essential services/products in the country. Access to the
most important areas of public will open the real floodgates for investments in infrastructure.
Government can also sit back and efficiently manage the industry by monitoring and guidance. It has
been a success story on opening the communication and technology markets for private players but
India should also retrospect the condition of the education system where private players are dominant
but still the standard of education remains poor and revamp its policy in a fool proof manner. In some
sectors where privatization is almost unavoidable like Airports, Ports etc., government needs to be
more careful before trying to privatize sectors like water and education where the cumulative impact
on the economy will be much more than the facing failures in sectors such as Transportation.

Trade Agreements:
Trade agreements are expected to bring in new investment opportunities into India over
the next half a decade. The major one being the Nuclear deal signed with the US. This deal is expected
to fetch India $150 billion in the next decade for nuclear power plants. The resilience of the government
to pass the nuclear bill in the parliament despite the risk of losing power emphasizes the importance of
this deal and how acute Indias energy shortage is. This is the largest sum expected to share the
infrastructure gap India is trying to fill provided the deal materializes. India is also negotiating a Free
Trade Agreement with the six-nation Gulf Cooperation Council, for greater investment from the UAE,
asking the oil-rich country to be a part of its growth story, especially in the infrastructure sector. It is
specifically targeting UAE as both countries already have a bilateral trade worth $44 billion and they
want to capitalize over the benefits available. India has also indicated the outstanding results achieved in
return to the $1.5 billion invested by the Abudhabi government. India in turn has also shown the political
will to engage with countries which have completely different political policies such as Iran and
Myanmar to meet its future energy requirements. For a very long time negotiations have been going with
Iran for a gas pipeline to get its share of 6600 MWh produced in Iran. It is $10 billion joint venture
project by India.

Infrastructure Bonds:
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Strong forex reserves, high domestic savings by Indians and a robust economic growth
driven by strong capital markets and sturdy private sectors enable the government to invite (PPP)
public private partnership. Government can issue infrastructure bonds bringing public and private
firms together to invest in those bonds and the funds will be used for infrastructure development. The
initial offerings from IDFC and L&T infrastructure bonds were a damp squib among the people but
the government is still optimistic about its offerings is planning to come out with a new set of
offerings in the form of tax exemption up to 20000[Refer appendix 1 & 2]. Rural Electrification
Corporation (REC), Power Finance Corporation (PFC) and India Infrastructure Finance Company
(IIFCL), will approach the market by December-end to lure investors with tax-free options. The two
significant economic factors playing vital role in the investment decisions in the infrastructure bonds
are Inflation and interest rate movements. Infrastructure bonds help in controlling both. The
infrastructure bonds will give a new instrument to banks, which at present depend largely on the
cheaper current account and savings account deposits for a bulk of their funds. The tenure of these
bonds is 10-years, with a lock-in of five years.

Conclusion:
If India plans to spend $514 billion -- with private firms contributing 36 percent -- to
overhaul its creaky infrastructure that is an obstacle to achieving faster growth in Asia's third largest
economy. India expects private firms to fund half of the projected $1 trillion investment in infrastructure
between 2012 and 2017. The four ways mentioned above are the most conventional ways to source the
$1 trillion needed provided it handles the practical challenges in accomplishing them like Corruption,
Inefficient bureaucracy, Maintenance, Risk factors in long-term debt, Entry and Exit barriers, Diplomacy
etc If one angle of sourcing the money exists government should counterwork on the opposite angle on
minimizing this $1 Trillion. Efforts should be encourage and adopt innovative strategies which should act
as a catalyst for the infrastructure growth. Companies performing CSR activities with direct impact on
infrastructure should be given more tax benefits (Ex: A company adopting a local village). More Indian
universities should tie up with universities worldwide to be knowledge updated. Indigenous research
should be made to develop a knowledge repository. Joint Ventures on infrastructure projects should be
encouraged by the government especially with technically advanced countries like Japan. Efforts should
be made starting from policy level to move to cleaner energy and ecofriendly environment to reduce
infrastructure spending.

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References:
http://www.asiatradehub.com/India/intro.asp
http://www.indiainbusiness.nic.in/trade/bilateral.htm
http://129.3.20.41/eps/urb/papers/0506/0506002.pdf
http://www.thehindu.com/news/national/article907565.ece
http://www.legalserviceindia.com/article/l306-Infrastructure-Investments-in-India.html
http://mospi.nic.in/nscr/infs.htm

Appendix:

Appendix 1
Tax Rate
Slab

Investments in Infrastructure
Tax
Savings

Returns
After 3
years

After 5
years

30%

6,000

2,000

32,139

20%

4,000

27,485

30,139

10%

2,000

25,485

28,139

25,194

29,387

Obligatory Returns to defy Inflation

Effect

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Appendix 2
Tax Rate

Tax fortified in lieu of investing in Infrastructure Bonds

Slab

Yields on investments from Market after Tax

After 3 years

After 5 years

30%

21,292

28,159

20%

24,334

32,182

10%

27,376

36,204

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