Context

The outbreak of COVID-19 pandemic has brought the economic activities to a virtual halt in India as well as across the globe.

Background

• The IMF estimates the global economy to contract by -4.9 per cent this year and the cloud to deepen should the virus not recede in the latter half of 2020.
• The growth of the Indian Economy has been decelerating for the past eight quarters and the Reserve Bank of India has suggested that growth is contracting for the first time in four decades.
• The recently announced economic package provides much-needed near-term liquidity support and long-pending structural reforms aiming towards medium-to-long-term stability.

What are Infrastructure Bonds?

• Infrastructure bonds are borrowings to be invested in government funded infrastructure projects within a country.
• They are issued by governments or government authorised Infrastructure companies or Non- Banking Financial Companies.
• These bonds are listed either on or both National Stock Exchange or Bombay Stock Exchange that provides you with an option to exit after the lock-in period.
• An Indian resident or a HUF can invest in the infrastructure bond but Non-Resident Indians (NRIs) cannot invest in infrastructure bonds.

Need for Infrastructure Bonds in India

• The consumption and investment have been casualties of a sharp deceleration in credit supply even after an impressive bank cleanup exercise by the government and Reserve Bank of India (RBI).
• The NBFC sector, which played an important role in fuelling India’s consumption growth, suffered from funding crunches leading to a further squeeze in credit supply, thereby impacting consumption demand.
• While the government and RBI have taken impressive strides to ensure adequate liquidity, uncertain economic prospects provide little comfort for bankers to lend further.
• Broad-based utilisation levels, as represented by the RBI, dropped to 68.6 per cent in Q3FY20, well below the 75 per cent benchmark for new capacity addition, implying suboptimal levels of fresh investments.
• The deteriorating economic scenario and increasing levels of debt with rating downgrades for industries are likely to aggravate existing problems.

Importance of Infrastructure Bonds

• A study by S&P Global estimates 1 per cent of GDP spend on infrastructure can boost real growth by 2 per cent while creating 1.3 million direct jobs.
• By taking the example of China, floating special infrastructure bonds through large development institution to accelerate the funding of the National Infrastructure Pipeline (NIP) could aid a speedier recovery.
• Investments up to Rs. 20000 are eligible for income tax deduction under Section 80 CCF of the Income Tax Act
• Infrastructure Bonds helps in making our investments easy to handle and monitor because of the Demat Form.
• The listing of Infrastructure Bonds on National Stock Exchange or Bombay Stock Exchange (BSE) increased the liquidity of bonds.
• The Infrastructure Bonds are issued by high credit rating institutions and thus involve minimal risk in investment.
• It provides a decent rate of interest because infrastructure bonds invest in infrastructure, which is a rapidly growing sector in India.

Challenges associated with Infrastructure Bonds

• In some emerging markets, the lack of well-performing infrastructure holds back economic development but also in advanced economies, a lack of investment in well-designed transport, renewable energy, and social infrastructure is becoming more evident.
• Many infrastructure investments generate cash flows only after a large span of time and the initial phase of an infrastructure project are subject to high risks.
• Infrastructure projects are often complex and involve a large number of parties which requires complex legal arrangements to ensure proper distribution of payoffs and risk-sharing to align the incentives of all parties involved.
• Although infrastructure investments are potentially hugely profitable for the economy as a whole, they are especially subject to market failures.

Role of Infrastructure in India Post COVID-19

• The front-loading key projects with greater visibility from the recently announced National Infrastructure Pipeline (NIP) could aid in a quicker recovery.
• The infrastructure has strong links to growth and with both supply and demand-side features that help generate employment and long-term assets.
• India already has several institutions for infrastructure development purposes from the likes of IIFCL, IRFC to more recently NIIF.
• A relook to restructure infrastructure institutions in India into one large development institution could help reduce inefficiencies and allow for greater leverage.

Way Forward

• As the economy begins to reopen, we explore the components of aggregate demand and explain why government expenditure is perhaps the only component that can aid growth going forward.
• Keynesian theory suggests that for aggregate demand to increase, at least one of the components of GDP needs to expand and the growth in the Indian economy has been dominated by consumption (PFCE), followed by investments (GFCF), government expenditure (GFCE) and net exports (NEX).
• Overcoming the infrastructure bottleneck would boost long-term economic growth and infrastructure is an input to a wide range of industries and, as such, an important driver of long-term growth.

Source: The Indian Express