Gather Funds for the Long Haul

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.

• A V-shaped recovery seems possible with all these steps.