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Government borrowing a hurdle to infrastructure finance, says Tarapore

As long as the government keeps borrowing from the capital markets, finance for infrastructure projects will prove hard to come by, according to former deputy governor of the Reserve Bank of India, S S Tarapore.

Addressing the national conference on debt markets in Bombay today, Tarapore said if the government continued to raise money through gilts at relatively high rates and for short periods, infrastructure financing would get into a bind. There would not be easy solutions to get long-term finances for projects, in spite of innovative financial engineering.

Citing the recent debate about the financing requirements of the infrastructure sector through non-government debt market, he observed that the interest rates in India tend to remain high because of the large government market borrowing programme. So there is no way that the interest rates in the non-government debt market can be kept at reasonable levels. The dilemma is that infrastructure can not tolerate interest rates above a certain level -- it needs these resources for very long periods.

The non-government debt market does continue to be moribund but the problem is not with this segment as much as the voracious demands for finances by the government. Unless the government borrowing is reined in, he said that there was little scope for developing a genuinely active market in non-government paper.

An active, liquid secondary market is necessary for a healthy government securities market, he said. It is a fact other than in the United States and the United Kingdom, the government securities market has limited depth and liquidity. At present, the RBI's legitimate preoccupation with overall liquidity control prevents it from undertaking an active role in the secondary market, he opined.

UNI