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Evolution of Financing Needs in Indian Infrastructure

Sinha, Pankaj and Arya, Deepshikha and Singh, Shuchi (2012): Evolution of Financing Needs in Indian Infrastructure.

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Abstract

India has emerged as one of the fastest growing economies even in the difficult financial downturn era. In coming years, India will be demanding a large number of infrastructure services to match the demand and keep an upward sloping growth curve. Indian infrastructure including both soft (port services, air and telecom) and hard (road, railways and airways) infrastructure is growing at a fast pace at present. The country also has largest road network (3.34 million km) and second largest rail network of the world. Requirement for investment in infrastructure projects was expected to increase by 145.6% from Five Year Plan 2002-07 to FYP 2007-11. Part of the investment is expected to come from the various resources as public private partnerships and public investments. Indian government is also trying to experiment with different tools of PPP (public private partnerships) financing such as VGF (viability gap financing), SPV (special purpose vehicle) to decrease the deficits on the accounts of infrastructure. This paper studies the evolution of financing needs and consequential innovative methodologies in Indian infrastructure. Government has made various efforts to match the growth in infrastructure with country’s economy growth. However, Indian infrastructure is still lagging behind globally. This study analyzes existing frameworks available for financing and risk involved in them. India has lot of opportunity to grow using public private partnership model, but still the numbers of project financed are very less. We also have studied project financing model and capital financing model which are used by various competitive countries to India. A regression analysis has been conducted on a macroeconomic model of investment in infrastructure which takes into account the exogenous variables interest rate, inflation rate, foreign exchange rate (USD/INR) and nominal gross domestic product based on Indian data from 1987-2010. Here we study how changes in any one of the aforementioned factors impact the infrastructure investment. The paper also tries to find out the correlation between and trends followed by CNX Infra and S&P 500 based on daily time series for both. A comparative analysis of two South Asian countries namely South Korea and Malaysia has been carried out with respect to India. The objective of this study is to find out what are the similarities and complementarities between the infrastructure investments of these countries and India. This helps in suggesting which ways India can move forward in order to optimize and align its infrastructure development with its continuously burgeoning needs. Finally, we have made our recommendation to facilitate infrastructure financing optimally by removing the externalities from the existing system. We also suggest a few innovative ways to finance infrastructure in India which might prove successful.

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