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Tax-free bonds, special fund may be part of government's infrastructure push
June, 27th 2014

The Narendra Modi-led government is likely to announce a number of measures to encourage infrastructure financing as part of its plan to fix the country's creaky infrastructure facilities.

Tax-free infrastructure bonds could make a comeback and a dedicated fund may be set up to facilitate financing of infrastructure projects, a government official said.

"These bonds should be back...There are a number of financing options on the table...This will help firms raise funds for infrastructure," said the official, who did not wish to be identified.

India is ranked 86th out of 139 countries in quality of overall infrastructure, way below other emerging countries such as China (50) and Brazil (62) in the World Economic Forum's 2010-11 global competitiveness index.

Tax-free bonds, special fund may be part of government's infrastructure pushThe new central government has identified infrastructure development as one of its key focus areas. Its vision was further outlined in President Pranab Mukherjee's speech to both houses of Parliament.

The interim budget had given a miss to these bonds that had last year gained some currency with institutional investors including sovereign wealth funds. Many state-owned entities have pitched for the scheme with the finance minister, and the government is expected to announce it in the budget.

"This will serve the objectives of mobilising long-term savings into a financial instrument as also help fund country's growth," the official said. These bonds have, in the past, allowed investors tax benefits over and above the limit of Rs 1 lakh under Section 80C.

Besides, the government is looking at setting up a dedicated fund that will raise funds from foreign investors and stand guarantee to infrastructure sectors. This will facilitate easier loans by giving the much-needed comfort to lenders, the official said. International lenders such as IFC, sovereign wealth funds and other foreign investors could be roped in to bolster the fund.

This fund could also be allowed to issue bonds to raise debt to on-lend to infrastructure developers.

"Finance has a become a constraint for both borrowers and lenders...It is critical to open a window for pension and provident funds to lend though credit enhancement that upgrades credit ratings of projects," said Vinayak Chatterjee, chairman of Feedback Infra.

The government has already sought comments on the GN Bajpai committee report that has suggested easing of restrictions on investments of pensions and insurance funds to ensure that financing needs of the economy are met.

The infrastructure sector needs $1 trillion in the 12th Plan period (2012-2017) but banks with their balance sheet constraints will not be able to meet this requirement. Banks do not have access to long-term deposits and, therefore, long-term loans are seen as a risky proposition that create asset-liability mismatch.

Gross non-performing assets of state-run banks rose to 4.44% of advances at the end of March from 2.32% in the previous year, largely on account of delayed clearances or fuel supply in case of power projects. Moreover, there is also a restriction on how much banks can lend to an individual project.

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