01/07/2020 - Indian Economy

KEY POINTS

·         While the government and RBI have taken impressive strides to ensure adequate liquidity, uncertain economic prospects provide little comfort for bankers to lend further.

·         Even though we may see the release of some pent-up consumption, industry-wide job/pay-cuts with a growing sense of uncertainty over the future may limit spending to non-discretionary items and force people towards precautionary savings.

·         A higher rate of investments is essential for sustainable economic growth. The deteriorating economic scenario and increasing levels of debt with rating downgrades for industries are likely to aggravate existing problems.

·         Notably, 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 an upper hand here. Front-loading key projects with greater visibility from the recently announced National Infrastructure Pipeline (NIP) could aid in a quicker recovery.

·         India already has several institutions for infrastructure development purposes from the likes of IIFCL, IRFC to more recently NIIF. However, over these years, their scale and functioning have remained inadequate. Perhaps, a relook, to restructure these into one large development institution could help reduce inefficiencies and allow for greater leverage.

·         Taking a cue from China, floating special infrastructure bonds through this organisation to accelerate the funding of the NIP could aid a speedier recovery. Further, taking a page from the New Deal and its Reconstruction Finance Corporation, this institution’s ability for greater leverage can be used to make amends to our credit channels as well as the development of state government and urban local body bond markets.

·         This could help businesses and bankers overcome risk aversion and bring back trust in the system while financing new paths for growth.

·         At a time when liquidity is ample and the cost is low, borrowing shouldn’t be so scary. The exogenous component could step-in in a greater way, perhaps because, it is the only one that can.

Sir pls review

please review

Please Review

Good infrastructure plays a key role in a country's growth, economic development, and prosperity. Developing infrastructure involves high-cost, i.e., a lot of investment which can be financed through various avenues, with "infrastructure bonds" being one of them.

Infrastructure bonds issued by DFIs (Development Finance Institutions)- IDBI, SIDBI, ICICI, IFCI, NABARD, HDFC, LIC, etc., support "long term infrastructures of industry and agriculture". 

>>> Significance of Infrastructure bonds floated by DFIs :

-  DFIs influence project design and policy to "improve direct poverty impacts".

 For example - providing affordable access to services that were previously not available, or access to new markets for industries and agriculture, will have direct poverty impacts. 

- It also proactively seek to "create local employment"- which is the demand of the hour as people become unemployed due to a virtual halt in economic activity because of coronavirus lockdown, and "stimulate broader economic development through", for example, forging linkages with local suppliers including SMEs (small to medium-sized enterprises).

- DFI-backed loans in the form of infrastructure bonds are less risky than pure commercial loans : Given this factor, DFIs can lend on better terms (e.g. for longer maturities) and hold riskier portfolios.

- DFIs mitigate early-stage project risk, thus "leveraging additional finance" by improving the attractiveness of deals. 

-National Infrastructure Pipeline(NIP) is one such example,which attract new investments both from foreign and domestic investors.

>>> Need of the hour -a quicker recovery of Indian economy :

- Assessment and Categorisarion : Projects funded by DFIs needs to be assessed and categorised more systematically. This will enable support from public agencies to be structured in the most appropriate and effective way. 

- Selection of infrastructure projects :  on the basis of a comparison of alternatives and their likely development impact.

>>> Conclusion : 

To bridge the infrastructure gaps that industry and agriculture face everyday and due to which India's GDP growth pull to 1-2 percent every year, Infrastructure bonds floated by DFIs plays an imperative role.