|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 JULY 2010
India's poor infrastructure needs more than money
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And so, in an attempt to bridge a funding shortfall and help banks avoid asset-liability mismatches, the government plans to create a Rs 500 bn debt fund. This will raise low-cost and long-term resources for re-financing power projects. In this kind of financing, a long-term financing institution such will agree to take an existing loan off the books of a bank for a price. This would help banks in asset-liability management in financing long-term projects. Especially when their resources are short or medium-term in nature. What is more, the government has set up a target of adding 160,000 MW of capacity in the Eleventh Plan (2007-12) and Twelfth Plan (2012-17). This will require huge investments running into trillions of rupees. And therefore, depends upon the ability of the government to mobilize debt.
But will this be enough to solve the ills that are afflicting India's power infrastructure? Or other areas of infrastructure such as roads for example? We are very doubtful. While financing projects is all very fine, the matter does not end there. Execution remains the key. And on this front, history has laid bare, the government's inefficiency. As Ajit Dayal, the founder of Equitymaster has rightly pointed out that the Ministers seem to be more focused on how to get a quick solution for the pathetic state of India's infrastructure. But what India desperately needs is a long term solution!
The RBI has revised the repo rate upwards by 0.25%. On the other hand the reverse repo rate (rate at which banks lend to RBI) has been hiked by 0.5%. What this means is that the RBI wishes to persuade banks to borrow less from it and instead keep more money with the RBI. The obvious impact of this will be in the form of liquidity being sucked out from the banking system.
One notable factor in this review is the non mention of fiscal deficit. The bumper 3G telecom auctions and fuel price hikes seem to have completely addressed that concern. Thus, while the RBI's tone seemed to be far more optimistic on the domestic scenario, inflation stuck out as the grey area.
Well, we certainly applaud Mr. Picard's well intentioned efforts. And if Bernie's poor victims can be compensated, why not the millions of investors who suffer at the hands of Wall Street day in and day out? After all, even Wall Street ran a giant Ponzi scheme before the onset of the financial crisis and duped investors to the tune of trillions of dollars. The only difference perhaps lied in the fact that while Madoff lied to his investors, Wall Street blamed it on the rules of the game. Save for this one reason, Wall Street certainly runs a bigger Ponzi scheme than Mr. Madoff.
As per the government, these institutions were set up to lend to a particular sector, power here. As such, their diversification into an unrelated and a much wider area like banking isn't the right way to go. In an age when numerous large Indian private sector companies have forged into unrelated businesses, this thought from the government seems to be in the right direction.
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