Now, why exactly is infrastructure financing in India important but difficult to fund even through PPP initiatives? This is because infrastructure investments are subject to high market risks and failures, which either makes such projects not profitable on their own or the risk involved is too large to insure. As a result, this makes public support essential even in cases of infrastructure investment from the private sector. However, involvement of a wide range of parties (construction companies, government authorities, operators, private investors, insurers and even the directly affected citizens) and therefore, a number of contracts, make it very complex and unmanageable. Therefore, it calls for better responsibilities on the government’s part, which include providing a proper contractual structure and a well designed legal framework. Other major challenges that contribute to the hindrance in infrastructure financing in India are:
- Though the saving rate in India is around 31%, it is not properly channelized. This is because firstly, most savings are done in the form of physical assets rather than direct funds and second, there is a lack of long term savings among the citizens in the form of pensions or insurances.
- Additionally, most banks face the issue of asset and liability disparity due to long-standing nature of infrastructure loans against the short lasting deposits.
- Earnings from projects like toll (annuity) and power is mostly regulated leading to limited profitability for the private sector. Furthermore, any addition to input cost becomes very difficult to pass due to political pressures.
- Though the Indian debt market fundamentally comprises of government securities, the policymakers face several challenges such as effective market mechanism, basic listing norms of company bonds, robust trading platform and market development for debt securitization.
- Moreover, challenges for PPP in Infrastructure also include limited institutional capacity, shortfall in equity investors, delayed permits and clearance issues, and lengthy dispute resolution mechanisms.
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