India eases foreign borrowing rules to aid infrastructure

Published 23 September 2008

The U.S. infrastructure is often described as “aging” or “crumbling”; in india they refer to the country’s “ramshackle infrastructure”; the Indian government, as part of a move to have $500 billion invested in improving the country’s infrastructure, eases borrowing rule, allowing Indian companies involved in infrastructure improvement to borrow more money abroad

Analyst writing about the U.S. infrastructure typically choose from a menu of three adjectives, and place one of them in front of “infrastructure”: “aging,” “dilapidated,” or “crumbling.” It is the same in India (although we noted that in a couple of publications, Indian analysts also use “ramshackle”), and the Indian government has decided to do something about it. Indian companies building badly needed infrastructure, seen as key to economic growth, can now borrow more abroad, the government announced, to counter a domestic borrowing crunch. Firms working to improve dilapidated roads, gas, ports, and other sectors have found it much harder to raise funds at home as the central bank has aggressively tightened monetary policy to battle inflation at 13-year highs. “Considering the huge funding requirements… it has been decided to enhance the existing limit of 100 million dollars to 500 million dollars for borrowers in the infrastructure sector,” the finance ministry said late Monday.

AFP reports that billions of dollars must be spent to improve infrastructure to achieve higher economic growth needed to lift millions out of poverty, the government says. The finance ministry said in a statement it was changing its external commercial borrowing policy “to keep it in tune with the evolving macroeconomic situation,” a reference to the difficult borrowing environment.

India’s ramshackle infrastructure is a “critical constraint” to stronger growth, said Montek Singh Ahluwalia, deputy chairman of the government’s key Planning Commission, recently. Under its five-year economic plan to 2012, the government is aiming to draw $500 billion in infrastructure investments to attain average growth of nine percent annually.

An inflow of funds could also help boost the rupee, which is riding at two-year lows against the dollar as risk-averse foreign investors dump Indian shares amid economic turmoil sweeping the globe, analysts say. They questioned, however, whether the ministry’s move would be enough to improve the borrowing climate for infrastructure companies. “The flow impact is unlikely to be sizeable given the (adverse) global financial backdrop,” said Rajeev Malik, economist at Macquarie Securities. “Indeed, there is a good chance that the government will have to ease (the borrowing rules) again further in the next two or three months,” he added.