Parekh committee on infrastructure finance for India

I was on CNBC TV yesterday along with Ajit Gulabchand, Chairman of Hindustan Construction. The topic was the recommendations of the Deepak Parekh committee to liberalise capital inflows into infrastructure. Gulabchand was all for these. I have my doubts.

But, first, some of the key recommendations:

• Equity flows: allow holding companies to have automatic FDI; remove capital gains of 10% on investment in unlisted companies; provide tax incentives to those investing in IPOs of infrastructure companies or mutual funds investing in the sector.
• Debt flows: Allow refinance of rupee loans through external commercial borrowings (ECBs)- at present ECBs allowed only for specified end-uses; remove cap on interest rates (recently imposed) on ECB borrowings.
  

Is there a case for liberalising capital flows into infrastructure? We must first answer this question because managing the present level of capital flows itself is posing a headache for the central bank today- 'how' to liberalise flows comes next. The Parekh committee appears to think that we need to open up further because the requirement of infrastructure in the period 2007-12 is greater than thought: $475 bn, compared to the Planning Commission's estimate of $320 bn.

I haven't seen the report, so I do not know the basis for doing so. Let me just say this: there has been a tendency in the past to exaggerate the requirement of infrastructure finance. The Rakesh Mohan committee on infrastructure constituted had in 1996 projected an FDI requirement of $150 bn over a ten year period- or $15 bn every year. Well, total FDI flows in the past ten years haven't amounted to that much but that hasn't kept the economy from accelerating from 6% to 8.5%.

Suppose we accept the Parekh committee's projections. Going by the norm that 20% of infrastructure finance in developing countries is met by the private sector, that would mean a private sector contribution of $115 bn over five years. Let us say that 20% of all private sector flows is from FDI. That puts the FDI requirement at $23 bn or around $4.5 bn each year. At today's FDI level of $13 bn (adjusted for exceptional items), this is hardly a tall order. Where, then, is the need to open the tap further?

I also don't see the need to give sops for investors in infrastructure- several infrastructure IPOs have gone through without any difficulty. Same for removing capital gains in unlisted ventures: we do want companies to be listed in the interests of better governance.

I have even bigger concerns about the recommendations on ECBs. The recommendations come into conflict with the present policy position which is to rein in ECB flows into the country, a big chunk of which has gone into real estate.

I don't believe that finance is really a constraint on infrastructure development in India today. The money is available. The policy issues (except, perhaps, in power) have also been sorted out. Mindless liberalisation can add to the central bank's headaches. In short, the broad thrust of the Parekh committee recommendations is neither necessary nor desirable.