India estimates a $300bn infrastructure funding gap

The Indian government has estimated a gap of $300 billion in its target to achieve infrastructure investment of $1 trillion by 2017, finance minister Pranab Mukherjee said, indicating that the availability of long-term resources to meet the country’s infrastructure requirements remains a key challenge.

“Government of India recognized that the debt of longer maturity was usually not available because of the various constraints such as absence of benchmark rates for raising long-term debt from the market; asset-liability mismatch of the tenor of debt in case of most financial institutions; and high cost of long-term debt,” he said.

Speaking at the launch of a take-out financing scheme by the India Infrastructure Finance Company (IIFCL), Mukherjee said the government will try to raise over $300 billion through long-term debt to fill the estimated gap in funding infrastructure projects in the 12th five-year plan period (2012-2017).

Meanwhile, IIFCL has signed an agreement with the Union Bank of India for a take-out amount of INR15 billion (€241.6 million; $337.4 million) for seven different projects in sectors including power and road. IIFCL has also signed an agreement with four other commercial banks – Punjab National Bank, Allahabad Bank, Indian Bank and United Commercial Bank, according to a press release issued by the Ministry of Finance.

IIFCL aims to address the asset-liability mismatch commercial banks have in their books from funding long-term projects with short-term money. This is where takeout financing comes in, under which a new party takes over existing lenders’ obligations in a project by providing permanent financing.

Under this scheme, IIFCL would buy out 50 percent of commercial bank loans, to increase capacity in the bank sector for infrastructure funding. Reports suggest IIFCL plans to buy INR250 billion (€4 billion; $5.6 billion) of commercial bank loans over the next three years, with INR30 billion to be bought in the first year. The remaining INR220 billion will be bought by March 2013, reports say.

Mukherjee said: “The take-out finance scheme of IIFCL is a step towards accelerating the flow of funds to the infrastructure sector and would help address the constraints relating to asset-liability mismatch faced by commercial banks.”

India has targeted an ambitious $500 billion of infrastructure investment in its five-year plan ending  2012 and $1 trillion by the end of 2017. It is looking for heavy private investment in order to reach these targets.