Gather Funds for the Long Haul

The Economic Times 29th September 2020 Save

CONTEXT: Impact the pandemic and relocation of the businesses out of China requires a rethink on the infrastructure spending in India as a measure to Boost the Economy.

Challenges to infrastructure and large-scale public works:

The National Infrastructure Pipeline (NIP) is dependent on 44% of funding from government resources, and 21% from private participation, both of which are extremely stressed now.

Suggested Measures to Boost Economy:

A National Renewal Fund (NRF): A 50-year ?30 lakh crore (about 14% of GDP) fund could be created.

Utilization of Fund: in the following sectors:

?2 lakh crore for DISCOM bailout and restructuring
?13 lakh crore base capital for a Development Financial Institution (DFI) for infrastructure.
?3 lakh crore for misery alleviation measure
?1lakh crore for healthcare
?2 lakh crore for banks recapitalization
?6 lakh crore for support to states
?3 lakh crore for MSME and sector-specific support.

Advantages of the Fund:

People would be enthused to invest in such an NRF that secures their current existence with a steady stream of interest income,
It could be even considered free from tax beyond a threshold level or linked to age buckets.
Such an approach will also solve the problem of Ricardian Equivalence.
Till date, countries have mobilized $28.6 billion through cheap bonds at an average of 3.1% yield and 24.4-year tenure.

Ways to support the Fund:

Perpetual Bonds: also known as consols bonds or perps have a 3-4% coupon.

These are bonds without a maturity date, having no principal payments, and has minimal impact on debt servicing.
For, E.g. Lekdijk Bovendams Water Board Bond of 1648 continues to pay interest.
In Britain, consols were introduced in 1753 and continued till 2017 (average rate over 264 years was 4.5%) when the government decided to redeem all consols.
Japan introduced a 100-year mortgage in the 1980s that also comes close to consols.
Till date, countries have mobilized $28.6 billion through cheap bonds at an average of 3.1% yield and 24.4-year tenure.

Employees’ Provident Fund Organisation (EPFO), long-term pension and insurance funds could be encouraged to invest in long-term funds.
Countercyclical fiscal expansion at current low rates with the help from RBI will result in lower government debt in the longer run.

A wealth of research shows fiscal multipliers are larger at low-interest rates.
Covid-19 has resulted in even rating agencies appreciating the use of fiscal step-up as a macroeconomic stabilization tool to lift the economy out of low growth, inflation trap.

Release of pending payments by central and state public sector undertakings (PSUs), ministries and departments, which could be fiscal stimulus by itself.

Rough calculations show that this amount could be as high as ?10 lakh crore.
Tracking such payments by using Goods and Services Tax (GST) software architecture to list all invoices submitted to governmental institutions, entity by entity.

Conclusion:

A focus on implementation:

Set up a Project Monitoring Group (PMG) to tackle the rising tide of stressed assets did a commendable job in a short time.
Set up a high-powered Infrastructure Implementation Group (IIG) attached to the Prime Minister’s Office (PMO) to drive the pace of project execution.