Interest rates should be reduced to 7-8 percent that would facilitate a greater flow of funds into infrastructure projects, said Planning Commission member Kirit Parikh in a seminar on Friday.
A greater flow of funds can stimulate growth of the economy, added Parikh while addressing media persons at the ‘India Infrastructure Summit 09’ organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) in association with the ministries of shipping, road transport and highways, railways and civil aviation.
An additional one per cent of GDP spent on infrastructure could lead to a one per cent rise in GDP, said Parikh while advocating for reduction in interest rates.
About 40% of the proposed 60 road projects, which were open for bidding, received no bid because of lack finance, lack of access and high perception of risk, said Kirit and added that less then 10% projects got multiple bids.
The inflation has so far slipped down to 0.44% that provides enough room for the banks to cut their interest rates further. Although the Reserve Bank of India has made a multiple rounds of cuts since last October, it is the banks which are not passing the benefits of profits to the customers.
Some public sectors banks since last couple of months have reduced interest rate on long-terms loans that varies between 11.5 to 13%, but it is still 3-4% higher that discourages bidders for infrastructure projects, Parikh underlined.
Banks needed to look at new innovative ways to develop long term debt market to fulfill the needs of infrastructure projects, said Parikh by adding that the government, on the other hand, was also considering on various mechanisms to make projects more attractive for bidders by reducing the element of risk.
According to planning commission, ‘for reducing the high perception of risk, the government was mulling to award some projects on annuity basis in which it guarantees payment to developers that differs from the BOT model where operator owns the road stretch for the period of concession and recovers his investment by collecting toll revenues.'
In another option, the government can award contracts to the players at present discounted value and also increase the time period for toll tax collection to meet the investment cost, it added.
The chairman and managing director (CMD), of India Infrastructure Finance Company (IIFC) S S Kohli said that India’s infrastructure sector needed a whooping investment of over $5bn at present. He advocated the need for developing a long-term debt market to meet the demands of players for long-term finance.
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