Capitalism is an economic system where private entities own the factors of production. The four factors are entrepreneurship, capital goods, natural resources, and labor. The owners of capital goods, natural resources, and entrepreneurship exercise control through companies. The individual owns his or her labor. The only exception would be slavery, where it is owned by another individual or a company.
Capitalistic ownership means two things to the private entities. First, they control the factors of production. Second, they derive their income from their ownership. That gives them the ability to operate their companies effectively. It also gives them the incentive to maximize profit. In corporations, the shareholders are the owners. Since there so many, each one has little control. They elect a board of directors that manages the company through chief executives.
Capitalism requires a free market economy to succeed. The market sets the prices of the components of supply. It also distributes them according to the laws of supply and demand. The owners of supply compete against each other for the highest profit. They sell their goods at the highest possible price while keeping their costs as low as possible.
Features of capitalism
Freedom of Enterprise
Sovereignty of that consumer
No Government Interference
Merits and Demerits of Capitalism
1. Production According to the Needs and Wishes of Consumers
2. Higher Rate of Capital Formation and More Economic Growth
3. Complete Freedom of Choice in a Capitalist Economy
4. Optimum Utilisation of Resources Available
5. Efficient Production of Goods and Services
6. Varieties of Consumer Goods
7. No need of Inducement or punishment for good and bad Production
1. Inequality of Distribution of Wealth and Income
2. Class Struggle as Inevitable in Capitalist Economy
3. Social Costs are Very High
4. Unnecessary Multiplicity and too Much of Competition
5. Instability of the Capital Economy
6. Unemployment and Under-employment
7. Working Class does not have Adequate Social Security
8. Slow and Unbalanced Growth
9. No Bargaining Capacity of Labourers hence Exploitation
Socialism is a populist economic and political system based on the public ownership (also known as collective or common ownership) of the means of production. Those means include the machinery, tools and factories used to produce goods that aim to directly satisfy human needs.
In a purely socialist system, all legal production and distribution decisions are made by the government, and individuals rely on the state for everything from food to healthcare. The government determines output and pricing levels of these goods and services. Socialists contend that shared ownership of resources and central planning provide a more equal distribution of goods and services, and a more equitable society.
Common ownership under socialism may take shape through technocratic, oligarchic, totalitarian, democratic or even voluntary rule. Prominent historical examples of socialist countries include the Soviet Union and Nazi Germany. Contemporary examples include Cuba, Venezuela and China.
Socialist ideals include production for use, rather than for profit; an equitable distribution of wealth and material resources among all people; no more competitive buying and selling in the market; and free access to goods and services.
Features of Socialism
1. Collective Ownership
2. Economic, Social and Political Equality
3. Economic Planning
4. No Competition
5. Positive Role of Government
6. Work and Wages According to Ability and Needs
7. Maximum Social Welfare
Merits and Demerits of Socialism
1. Greater Economic Efficiency
2. Greater Welfare due to Less Inequality of Income
3. Absence of Monopolistic Practices
4. Absence of Business Fluctuations
Demerits of Socialism
1. Loss of Consumers’ Sovereignty
2. No Freedom of Occupation
3. Malallocation of Resources
A mixed economy is a system that combines characteristics of market, command and traditional economies. It benefits from the advantages of all three while suffering from few of the disadvantages.
A mixed economy has three of the following characteristics of a market economy. First, it protects private property. Second, it allows the free market and the laws of supply and demand to determine prices. Third, it is driven by the motivation of the self-interest of individuals.
A mixed economy has some characteristics of a command economy in strategic areas. It allows the federal government to safeguard its people and its market. The government has a large role in the military, international trade and national transportation. The government’s role in other areas depends upon the priorities of the citizens. In some, the government creates a central plan that guides the economy. Other mixed economies allow the government to own key industries. These include aerospace, energy production and even banking. The government may also manage health care, welfare and retirement programs.
Features of mixed economy
1. Resource Ownership
2. State Intervention
3. Changing Economic Policy
Economic development is usually the focus of federal, state, and local governments to improve our standard of living through the creation of jobs, the support of innovation and new ideas, the creation of higher wealth, and the creation of an overall better quality of life. Economic development is often defined by others based on what it is trying to accomplish. Many times these objectives include building or improving infrastructure such as roads, bridges, etc.; improving our education system through new schools; enhancing our public safety through fire and police service; or incentivizing new businesses to open a location in a community. Economic development often is categorized into the following three major areas:
Governments working on big economic objectives such as creating jobs or growing an economy. These initiatives can be accomplished through written laws, industries’ regulations, and tax incentives or collections.
Programs that provide infrastructure and services such as bigger highways, community parks, new school programs and facilities, public libraries or swimming pools, new hospitals, and crime prevention initiatives.
Job creation and business retention through workforce development programs to help people get the needed skills and education they need. This also includes small business development programs that are geared to help entrepreneurs get financing or network with other small businesses.
Rostow stages of economic growth
1. Traditional Society:
This initial stage of traditional society signifies a primitive society having no access to modern science and technology. In other words, it is a society based on primi¬tive technology and primitive attitude towards the physical World. In this stage of a society output could be increasing through the expansion of land area under cultivation or through the discovery and spread of a new crop.
2. Pre-Conditions or the Preparatory Stage:
This covers a long period of a century or more during which the preconditions for take-off are established. These conditions mainly comprise fundamental changes in the social, political and economic fields; for example:
1. A change in society’s attitudes towards science, risk-taking and profit-earning;
2. The adaptability of the labour force;
3. Political sovereignty;
4. Development of a centralised tax system and financial institutions; and
5. The construction of certain economic and social infrastructure like railways, ports, power generation and educational institutions. India did some of these things in the First Five Year plan period (1951-56).
3. The “Take-off” Stage:
This is the crucial stage which covers a relatively brief period of two to three decades in which the economy transforms itself in such a way that economic growth subsequently takes place more or less automatically. “The take-off” is defined as “the interval dur¬ing which the rate of investment increases in such a way that real output per captia rises and this initial increase carries with it radical changes in the techniques of production and the disposition of income flows which perpetuate the new scale of investment and perpetuate thereby the rising trend in per captia output.”
4. Drive to Maturity: Period of Self-sustained Growth:
This stage of economic growth occurs when the economy becomes mature and is capable of generating self-sustained growth. The rates of saving and investment are of such a magnitude that economic development becomes automatic. Overall capital per head increases as the economy matures. The structure of the economy changes increasingly.
The initial key industries which sparked the take-off decelerate as diminishing returns set in. But the average rate of growth is maintained by a succession of new rapidly-growing sectors with a new set of leading sectors. The proportion of the population engaged in agriculture and other rural pursuit’s declines, and the structure of the country’s foreign trade undergoes a radical change.
5. Stage of Mass Consumption:
In this stage of development per capita income of country rises to such a high level that consumption basket of the people increases beyond food, clothing and shelters to articles of comforts and luxuries on a mass scale.
Further, with progressive industrialisa¬tion and urbanisation of the economy values of people change in favour of more consumption of luxuries and high styles of living. New types of industries producing durable consumer goods come into existence which satisfies the wants for more consumption. These new industries producing durable consumer goods become the new leading sectors of economic growth.
Models used in the Planning Process
1. Harrod Domar growth model
Harrod and Domar extended the Keynesian analysis of income and employment to long-run setting and therefore considered both the income and capacity effects of investment. Harrod and Domar models of economic growth explained at what rate investment should increase so that steady growth is possible in an advanced capitalist economy.
In the growth models of Harrod and Domar, the rate of capital accumulation plays a crucial role in the determination of economic growth. The problem of present-day mature economies lies in averting both secular stagnation and secular infla¬tion.
They emphasised the double role of the investment process, viz., generating income (increasing demand) and adding to the productive capacity of the economy. The classical economists confined their attention to the capacity side only, whereas the earlier Keynesian economists studied the problem of demand only whereas Harrod and Domar consider both sides.
Relevance of Harry Domar model
1. Developing countries find it difficult to increase saving. Increasing savings ratios may be inappropriate when one is struggling to get enough food to eat. Harod based his model on looking at industrialised countries post depression years. He later came to repudiate his model because he felt it did not provide a model for long term growth rates. The model ignores factors such as labour productivity, technological innovation and levels of corruption. The Harod Domar is at best an oversimplification of complex factors which go into economic growth. There are examples of countries who have experience rapid growth rates despite a lack of savings, such as Thailand.
2. It assumes the existences of a reliable finance and transport system. Often the problem for developing countries is a lack of investment in these areas.
3. Increasing capital stock can lead to diminishing returns. Domar was writing during the aftermath of the Great Depression where he could assume there would always be surplus labour willing to use the machines, but, in practice this is not the case.
4. The Model explains boom and bust cycles through the importance of capital, (see accelerator theory) However, in practice businesses are influenced by many things other than capital such as expectations.
Lewis Model of Economic Development with Unlimited Labour Supply
Some of the main features of Lewis model of unlimited supply of labour are given below:
(I) Two Sector Economy or Dual Economy:
Lewis believes that most of the underdeveloped countries of the world live under a heavy pressure of population due to rapid growth of population. In such economies, unlimited supply or surplus supply of labour is available at a subsistence wage.
The capitalist sector is that part of the economy which uses reproducible capital and pays capitalists for the use thereof. The use of capital is controlled by capitalist sector which hires the services of the labourers. It may be either private or public. The average wages are quite high. The people are generally advanced, literate, sophisticated and skilled in the capitalist sector. They employ labourers for wages in mines, factories and plantations etc. for earning profits. The output per head is high. On the other hand, the subsistence is that part of the economy which does not use reproducible capital.
Under the above circumstances, the main problem is to provide gainful employment to the unlimited supplies of labour. It requires greater attention in development and expansion of subsistence sector. Thus, it is clear that gainful employment can be provided to unlimited labour force when rate of investment is at least 12 to 15 per cent of the national income. In order to provide employment to the unlimited supply of labour or surplus labour new industries can be set up or existing industries expanded without limit at the current wage rate by drawing up labour from the subsistence sector or the subsistence wage.
Relevance of Lewis Model for India
Savings in underdeveloped economies relatively to national income are low. The reason is not that the people are poor, but the capitalist profits are low relatively to the national income. As capitalist sector expands, profit grows relatively, and an increasing proportion of national income is re-invested.
The Classical economists were not wrong in thinking of lack of circulating capital as being a more serious obstacle to the expansion in contemporary world than lack of fixed capital. In this analysis we assume that surplus labor cannot be used to make consumer goods without using up more land and capital, but can be used to make capital goods without using any scarce factors. So, if a community is short of capital, and has idle resources which can be set to creating capital, it seems very desirable even if it means creating extra money to finance the extra employment. There is no loss of other output while the new capital is being made, and when it comes into use it will raise output and employment in just the same way as would capital financed not by credit creation but out of profits.
Mahalanobis Strategy of Economic Growth
The designer of India’s Second Five Year Plan (1956-61) was Professor Prasanta Chandra Mahalanobis, who had adopted the simple two sector model of Soviet Planning of Feldman type. He gave top priority to investment goods, as they were crucial for further economic growth of India. The disadvantage of this strategy was capital deepening, that is, the commitment of large amounts of capital to heavy industry, which would yield low returns. At the same time this investment would generate buying power, which could not absorbed due to neglect of consumption goods, and this could lead to inflation.
Mahalanobis also designed a four sector model. This time also, he retained the emphasis on investment goods, but divided the other sector into three sub-sectors: (a) industry; (b) agriculture and cottage industry and (c) services, education and health etc.
Only one third of the total investment should go to the three sub-sectors as mentioned above. Cottage industry, in particular, was singled out as a major potential producer of consumption goods. The fact that cottage industry required little capital and was labour intensive was highlighted. Of course, for this very reason one could not expect a great deal of savings from cottage industry, which would be required for future economic growth.
Heavy industry in the public sector was considered to be the major item once more, as it was the very symbol of economic independence and was thought to be crucial for the maintenance of political independence.
Planning Model adopted in India
At the time of independence India was a backward underdeveloped country. There was a lot of exploitation of India during the British colonial rule. This made the Indian people very poor. The aim of freedom struggle was not mere gaining political freedom from the British rule but also to attain economic freedom for the Indian people. Economic freedom implies the removal of mass poverty that prevailed in India.
At the time of independence there was deficiency of good entrepreneurs who could use the natural resource endowment of India for economic development. To improve living standards of the people, it was necessary to accelerate rate of economic growth. It was thought that the private sector lacked the necessary resources and the proper mindset to bring about rapid economic growth.
Inspired by the Russian experience, planning as an instrument of economic development was adopted. The Planning Commission was set up to prepare five year plans which would indicate directions in which the Indian economy should move. Resources were to be allocated both at the Centre and in the States according to the plan priorities decided in a five year plan.
The basic objective of Indian planning has been acceleration of economic growth so as to raise the living standards of the people. Further, various five year plans also gave high priority to generation of employment opportunities and removal of poverty. There were two main features of India’s economic policy that emphasized the role of planning and intervention by the State in the development process of the Indian economy in the first three decades of planning. First, to accelerate economic growth economists and planners recognized that raising the rate of saving and investment was essential to accelerate the rate of economic growth.
It was thought that the private sector on its own would not be able to achieve a higher rate of saving and investment required to break the vicious circle of poverty. Therefore, the state had to intervene to raise resources and increase the rate of saving and investment. This made the planning and the expansion of the public sector essential to accelerate economic growth.
This model implied allocating a higher proportion of investible resources to capital goods industries than to consumer goods industries. Private sector which is driven by profit motive could not be expected to allocate sufficient resources to the growth of capital goods industries.
Mahalanobis growth model was wrong in neglecting the role of agriculture and importance of wage goods for accelerating growth of output and employment. In fact, shortage of food, a cheap wage good, rather than machines could act as a constraint on the growth process. This became evident by the time of the Third Plan which laid a relatively greater stress on growth of agriculture to achieve self-reliance.
But rapid growth of agriculture itself requires a good deal of state intervention and planning. The land reforms in agriculture, supply of adequate credit to farmers, development of infrastructure such as irrigation, power, roads were necessary where planning and State could play an important role.
Infrastructure Investment Models
Financing of Infrastructure
The Planning Commission had begun to set out ambitious outlays for the infrastructure sector in the five-year plans (FYPs). These went up from $220 billion for the 10th FYP to $500 billion in the 11th FYP and $1 trillion in the 12th FYP with private sector contributing 20%, 30% and 50% of the resources under the public-private partnership (PPP) rubric, respectively. In the absence of large term-lending institutions as also the lack of an active corporate bond market for raising cheap long funds, banks had opportunities to provide large-ticket loans to corporates and their special purpose vehicles. Many of the promoters who entered the infra arena were first-timers with excellent execution capabilities but equally limited capital.
While most term funding in banks is done on a debt-to-equity ratio of 67:33, in the case of infrastructure projects, the norm was 70:30, in line with “international” practices. Subsequently, on many an occasion, this was tweaked to 80:20 based on, inter alia, perceived attractive project viability parameters—but more proximately, bargaining skills of the project promoters vis-a-vis banks. With an almost lemming-like instinct, many private equity investors, anticipating the upswing in economic fortunes, jumped on to the infra bandwagon by supplementing the margin requirements of promoters.
Given the upbeat, increasingly competitive mood in the country and the entrepreneurs’ desire to grab all possible opportunities, the latter not only started to bid very aggressively but also began gold-plating the projects with exceptional increases in costs which were duly certified by big-name technical consultants to meet the lenders’ requirements.
The meltdown in the financial world of the Western economies carried over to the real sector in developing economies, like India. The concomitant political imbroglio at the time also resulted in decision-making suffering with important time-critical issues being put on the back-burner. Government machinery got sucked into handling the fallout of large scams unearthed by the Comptroller and Auditor General in the telecom, thermal power (coal) and road sectors. The result was a plethora of incomplete projects where promoters did not have the wherewithal for last-mile execution.
Interestingly, GAIL (India) Ltd and Coal India Ltd subsidiaries had provided many raw material supply contracts on “take or pay” basis, but their failure to provide the materials at predetermined rates to the extent required led to many power and some steel projects being stranded.
Issues in Infrastructure Financing in India
The government has increased public investment in infrastructure, announced measures to address issues impeding the sector, such as access to long-term funding, inequitable risk allocation in public-private partnership (PPP) projects, adequate institutional capacity, and so on. Sector-specific policies, such as permitting 100% equity divestment after two years of completion for all national highway PPP projects and a one-time fund infusion to revive and complete such projects that are languishing have also been put in place.
Key issues faced by the sector in the past few years relate to funding, the financial situation of their developers, and inflation pressures. Overcoming such challenges will take a long time. While inflation pressures have eased in the past one-and-a-half years, private sector developers, in general, are still in a bad financial situation and have limited equity to invest in projects.
Commercial banks are reaching sectoral exposure limits and have introduced more stringent lending norms, making it difficult for developers to raise funds.
It is evident that the government has been successful in some critical aspects, viz. identifying and formulating long-term and visionary infrastructure development initiatives, addressing languishing projects, and pushing certain policy initiatives in areas like coastal shipping, aviation and inland waterways. However, more effort is required to overcome the challenges of project funding and the financial constraints faced by developers.
While the revival initiatives are required to be on a wider scale and implemented on a continuous basis, in addition to increased outlays/budgetary allocations, the key expectations from this budget for infrastructure sub-sectors are highlighted below:
It is expected that the government would reiterate its commitment towards its flagship initiatives of Make in India, Smart Cities, Swachh Bharat Mission, Skill India and Digital India, not only through increased fund allocations but also via policy interventions.
For the ports sector, the budget may signal a move towards market-linked tariffs for major ports, which are owned by the Union government. Promotion of coastal shipping has been one of the government’s priority areas. The budget may indicate tax reforms, exempting seafarers from income tax for the time of service on vessels which would help address the issue of shortage of skilled manpower for coastal vessels. Reinstatement of service tax exemption on construction of ports may also be considered.
The budget could give a fillip to the housing sector by including “affordable housing” in the harmonized master list of infrastructure sub-sectors, providing incentives under section 80-IA. Tax exemption may be provided on housing loan interest during construction or prior to possession for economically weaker sections and low-income group house buyers to provide relaxation from dual cost of rent payments during the construction of their house and interest payment on housing loans.
Measures taken by the government in Finance
The RBI and Government have launched several financial inclusion measures and programs over the last one decade. Financial inclusion measures on a mission mode were started since the launch of no-frills account by the RBI in 2005. Later in 2010, it was replaced by the BSBDA. A big stride to provide banking services to the 600000 rural habitations were made with the launch of Financial Inclusion Plan by commercial banks in 2010. Besides these lead measures, the Jan Dhan Yojana has made a camp approach in 2014 towards financial inclusion. In recent years, several digital payments options were used by the RBI to support financial inclusion.
Following are the main financial inclusion measures and programmes launched in India.
1. The basic banking account or Basic Savings Bank Deposit Account (BSBDA): This is the bank account with a minimum bouquet of services including savings and payments given to the financially excluded people that. The BSBDA account has replaced the previous no frills (zero balance) account. Minimum bouquet of products and services were offered under BSBDA and they include:
1. A savings cum overdraft account
2. A pure savings account, ideally a recurring or variable recurring deposit
3. A remittance product to facilitate EBT and other remittances, and
4. Entrepreneurial credit products like a GCC or a KCC
2. Simplified KYC norms: The RBI has simplified KYC regulations especially for small value clients and transactions. This is because in a country like India where documents and identity proof are not with many, it is very difficult to attract them to stricter KYC standards. Hence essential and basic level identities are needed under this simplified KYC regime.
3. Liberalized policy towards ATMs and White label ATMs. To expand the network of ATMs, the RBI has allowed non-bank entities to start ATMs (called ‘White Label ATMs’).
4. Adoption of Business Correspondents (BCs): BCs were allowed to provide banking services in rural areas.
5. Promotion of technology-based instruments for spreading banking services: Several technologies based solutions were initiated by the RBI to promote financial inclusion. These include incentivizing banks to issue smart cards and ATM cards etc, supporting internet banking and mobile banking with regulatory measures. Business Correspondents have to use ICT while delivering products in remote areas.
6. Promotion of Payment infrastructure including pre-paid instruments: Technological development has transformed payment operations. Payments are essential banking services. Here, the RBI itself has the NEFT and RTGS. Banks and Non-Bank entities like telecom companies are allowed to issue prepaid instruments like mobile wallet etc.
7. Financial Literacy Programme: Financial Literacy Centers were started by commercial banks at the request of RBI to give awareness and education to the public to access financial products. Here, RBI’s policy is that financial inclusion should go along with financial literacy. RBI provides support to Financial Literacy and Credit Counselling Centres (FLCCs).
8. Financial Inclusion Plan for the expansion of branch and branchless banking. Commercial banks have launched FIP to provide banking services to remote areas.
9. Liberalized branch license scheme: The RBI has launched this step in December 2009. Here, domestic scheduled commercial banks were permitted to freely open branches in tier III to tier VI centres with a population of less than 50,000 subject to reporting. In north-eastern states and Sikkim, domestic scheduled commercial banks can now open branches in rural, semi-urban and urban centres with the same liberalized procedure. Similarly, banks were asked open at least 25 per cent of the total number of branches in unbanked rural centres.
10. Kisan Credit Cards (KCC) and General Credit Cards (GCC): Kisan Credit Cards were issued to small farmers to get hassle free credit from banks. Issue of credit cards to the credit needy people was another component of the RBI’s financial inclusion drive. Under GCC, banks have been asked to introduce general purpose credit card facility up to Rs 25,000 at their rural and semi-urban branches for low-income people. The objective of the scheme is to provide hassle-free credit to customers based on the assessment of cash flow without insistence on security, purpose or end-use of the credit.
11. Bank -SHG linkage programme
12. Aadhaar enabled payment system
13. Direct Benefit Transfer (DBT): The launch of direct benefit transfers through the support of Aadhaar and Bank Account is one of the biggest development that activated and retained people in the newly opened account.
14. PMJDY: Pradhan Mantri Jan Dhan Yojana
15. EBT: RBI has encouraged Electronic Benefit Transfer for routing social security payments through the banking channel.
16. Unified Payments Interface: UPI is a payment mechanism built by the NPCI to promote online money transactions. It is aimed to facilitate retail payments for ecommerce, small ticket money transfers for person to person payment, micropayments, utility bill payments etc. Purchase of tickets, payment of school fees, etc. can be easily carried out by the interface rather than submitting the bank details while executing the transaction.
17. BHIM App
Future efforts needed
With one of the largest and youngest populations in the world, India needs to create millions of good-quality jobs in the near future to ensure decent living conditions for the vast majority of its citizens.
The country is often cited as an example of an economy that is modernizing by jumping directly into services without passing through manufacturing. The weight of manufacturing in India has been relatively stable over the past two decades, at much lower levels than China and ASEAN countries. Business services – a high value added sector – represent a larger share of economic activity in India than in Europe.
Agriculture accounts today for only 16% of total value added (down from 44% in 1965), but still employs about half of the Indian population. Productivity in this sector did not increase significantly in the past decades, limiting improvements in living standards in rural areas. The fact that the most notable improvements are in the basic drivers of competitiveness bodes well for the future, but other areas also deserve attention, including technological readiness. Despite India’s relatively strong record in terms of economic growth over the last decade, its middle class remains small and getting a job is no guarantee of escaping poverty.
India must take further action to ensure that the growth process is broad-based in order to reduce the share of the population living on less than $2 a day—many of whom are employed in informal and low skilled jobs. Educational enrollment rates are relatively low across all levels, and quality varies greatly, leading to notable differences in educational performance among students from different socioeconomic backgrounds.
The gender gaps in labour force participation and wages are both high, showing that India’s women are not benefiting equally from economic opportunities. India scores well in terms of access to finance for business development and real economy investment (investment channelled towards productive uses), yet new business creation continues to be held back by administrative burdens. India also under-exploits the use of fiscal transfers compared to peer countries.
Private investment, especially from foreign firms, requires a favourable business environment, which includes strong property rights protection and also fair and speedy trials in the case of disputes. To this end, ensuring the independence of the judicial system and increasing efficiency in settling disputes will be key. Business ethics should also improve in line with that of public institutions. Reporting and accounting standards are necessary to ensure transparency in the private sector, increase trust and facilitate long-term financing and investment.
India scores relatively well in terms of access to finance for developing businesses and investing in the economy. India’s entrepreneurs have better access to bank accounts, credit, venture capital, and equity markets than their counterparts in most peer countries. However, access to finance remains limited for low income individuals, especially women. 400 million people remain unbanked in India and disconnected from the financial system despite impressive gains in recent years. Most unbanked are poor and female: only 27% of individuals in bottom quintiles and 37% of women have access to a bank account. Finance can help poor households optimize severely constrained resources across their lifetime.
Public-private Partnership in Infrastructure
PPP is a mode of providing public infrastructure and services by Government in partnership with private sector. It is a long term arrangement between Government and private sector entity for provision of public utilities and services.
PPP mechanism is a major element of India’s infrastructure creation efforts as there is huge level of investment requirement in the sector. The twelfth plan targets to spend $1000 bn to expand infrastructure. Conventional form of finance – the budgetary allocation by the government is not enough to meet this big investment size. So the government at present is making several efforts to modify and energize the PPP (Public Private Partnership) mode of infrastructure generation. A committee chaired by Kelkar also made valuable recommendations to empower the PPP mechanism.
These models operate on different conditions on the private sector regarding level of investment, ownership control, risk sharing, technical collaboration, duration of the project, financing mode, tax treatment, management of cash flows etc. Following are the main models of PPPs.
Build Operate and Transfer (BOT): This is the simple and conventional PPP model where the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it. In return, the public sector will allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.
1. Build-Own-Operate (BOO): This is a variant of the BOT and the difference is that the ownership of the newly built facility will rest with the private party here. The public sector partner agrees to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions.
2. Build-Own-Operate-Transfer (BOOT): This is also on the lines of BOT. After the negotiated period of time, the infrastructure asset is transferred to the government or to the private operator. This approach has been used for the development of highways and ports.
3. Build-Operate-Lease-Transfer (BOLT): In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.
4. Lease-Develop-Operate (LDO): Here, the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. This approach is mostly followed in the development of airport facilities.
5. Rehabilitate-Operate-Transfer (ROT): Under this approach, the governments/local bodies allow private promoters to rehabilitate and operate a facility during a concession period. After the concession period, the project is transferred back to governments/local bodies.
6. DBFO (Design, Build, Finance and Operate): In this model, the private party assumes the entire responsibility for the design, construction, finance, and operate the project for the period of concession. The private party assumes the entire responsibility for the design, construct, finance, and operate or operate and maintain the project for the period of concession.
7. Management contract: Here, the private promoter has the responsibility for a full range of investment, operation and maintenance functions. He has the authority to make daily management decisions under a profit-sharing or fixed-fee arrangement.
8. Service contract: This approach is less focused than the management contract. In this approach, the private promoter performs a particular operational or maintenance function for a fee over a specified period of time.
Advantages of PPP
The basic elements determining PPP projects success are projects suitability to PPPs proper evaluation and selection of correct PPP form on case-by-case basis. Prior to engaging in PPPs, public authority needs to assess and with relief of economic calculations to justify the benefit, efficiency and possible treats of foreseeable PPP form.
1. Ensure the necessary investments into public sector and more effective public resources management;
2. Ensure higher quality and timely provision of public services;
3. Mostly investment projects are implemented in due terms and do not impose unforeseen public sectors extra expenditures;
4. A private entity is granted the opportunity to obtain a long-term remuneration;
5. Private sector expertise and experience are utilized in PPP projects implementation;
6. Appropriate PPP project risks allocation enables to reduce the risk management expenditures;
7. In many cases assets designed under PPP agreements could be classified off the public sector balance sheet.
1. Infrastructure or services delivered could be more expensive;
2. PPP project public sector payments obligations postponed for the later periods can negatively reflect future public sector fiscal indicators;
3. PPP service procurement procedure is longer and more costly in comparison with traditional public procurement;
4. PPP project agreements are long-term, complicated and comparatively inflexible because of impossibility to envisage and evaluate all particular events that could influence the future activity.
Difference of PPP and Conventional Projects
1. Conventional procurement
Public sector institution prepares detailed specifications that describe the works required to deliver the necessary good or services. The works are then put out to tender in order to get the most competitive priced bid. Once the contract is awarded, the client (or its representative) closely supervises the works carried out by the successful partner in order to ensure compliance with the specifications.
Thus the client assumes the responsibility for designing and planning the project, fulfilling all statutory requirements (such as environmental permits, heritage approvals, town planning requirements, etc.) and covering any unexpected costs. The partner is responsible for the construction of the works in accordance with the tender documentation and is thus only responsible for matters covered in the tender documentation or those which could reasonably have been foreseen from the tender documents.
Conventional procurement is based on input specification where the Institution decides what it wants in order to deliver a service and takes full responsibility for all works related to the delivery of the service.
When assessing a project through a PPP process it is crucial to define the desired functionality or result for procurement on the basis of output specifications. Here, the client defines the service that is required. These output specifications are then included in a financial model to allow for comparability between the two forms of procurement: public and private.
Should the PPP option be preferred, the client leaves certain design stages of the works necessary to deliver that sevice up to the partner that will be selected through the bidding process. In some circumstances, due to plicy or strategic reasons the design requirements may not be left entirely to the discretion of the partner and in these cases the client may specify some inputs. The preferred approach however is to ensure that projects are driven substantially to the private party and thereby ensure greater value for money for the Government.
Limitations of PPPs
Unfortunately, PPPs can also drive rent-seeking behavior, and create significant risk of improper collusion between political actors and politically preferred firms and industries. This harms not only taxpayers, but the economy at large, as critical investment decisions are distorted by political considerations. Such shady dealings also serve to delegitimize and discourage privatization efforts and commercial infrastructure investment in general. Worse still, the errors of the public sector component are often blamed on private parties.
Sectors also tend to be intertwined, with investment in transportation infrastructure often coinciding with real estate development or redevelopment. This relationship tends to grow stronger as project size increases, as large-scale developments such as shopping centers and stadiums significantly alter local land-use patterns and demand for transportation.
The popularity of PPPs should not blind policy makers to the fact that these sectors suffer from problems that are markedly different. Outside of limited instances such as the Department of Defense’s Base Realignment and Closure (BRAC) program, PPPs in the real estate sector offer very little in terms of social benefits. These arrangements should be avoided.
A responsible path forward would be to utilize PPPs in surface transportation infrastructure development and management, while cutting bureaucratic impediments such as land-use regulations and business licensing to promote redevelopment. In essence, both require reducing political intervention and expanding market opportunities.
Supply and Management contracts
Contract management is a strategic management discipline employed by both buyers and sellers whose objectives are to manage customer and supplier expectations and relationships, control risk and cost, and contribute to organizational profitability/success. For successful service contract administration, the buyer needs to have a realistic degree of control over the supplier’s performance. Crucial to success in this area is the timely availability of accurate data including the contractor’s plan of performance and the contractor’s actual progress.
One of the special modes of carrying out international business is a turnkey project. It is a contract under which a firm agrees to fully design, construct and equip a manufacturing/ business/ service facility and turn the project over to the purchaser when it is ready for operation for a remuneration.
Advantages of a Turnkey Business
The biggest advantage to buying a turnkey business is that the business model has already been proven so most of the risk and uncertainty is eliminated. Established business or franchises have a much lower failure rate than independent startup businesses. The buyer does not need to worry about whether the product or service will sell or not; he/she can focus on running the business. Often the facilities, equipment, and (in the case of an independent business) the employees are included in the sale, making the takeover process even simpler.
Disadvantages of a Turnkey Business
Buying an established business or franchise requires a substantial investment. Franchise businesses are typically very restrictive – the owner has much less control on how the business is managed and operated versus an independent business. For instance, the contractual requirement to purchase equipment and supplies from head office means one cannot obtain these items from less expensive sources.
Purchasing an existing independent business also requires careful investigation. It is important to find out why the business is for sale – the company may have recently lost a large contract, have a huge tax liability, or otherwise be in decline due to competition or other factors.
Proper business valuation can be difficult for the buyer of an independent business. A business that is being sold as a turnkey business normally includes tangibles such as inventory and equipment through intangibles such as a previously established reputation and goodwill. Tangible assets are normally simple to value but intangibles can very difficult.
Leases and affermage contracts are generally public-private sector arrangements under which the private operator is responsible for operating and maintaining the utility but not for financing the investment. Leases and Affermages differ from management contracts principally in that:
The operator does not receive a fixed fee for his services from the awarding authority but charges an operator fee to consumers, with
In the case of a lease a portion of the receipts going to the awarding authority as owner of the assets as a lease fee and the remainder being retained by the operator
In the case of an affermage, the operator retaining the operator fee out of the receipts (prix du fermier) and paying an additional surcharge that is charged to customers to the awarding authority to go towards investments that the awarding authority makes/ has made in the infrastructure;
The operator tends to bear greater operating risk;
The operator tends to employ the staff directly.
In the case of a lease the rental payment to the authority tends to be fixed irrespective of the level of tariff collection that is achieved and so the operator takes a risk on bill collection and on receipts covering its operating costs. In the case of affermage the operator is assured of its fee (assuming that the receipts are sufficient to cover it) and it is the authority that takes the risk on the rest of the receipts collected from customers covering its investment commitments.
The awarding authority in each case remains responsible for financing and managing investment in the assets–which is supposed to come, at least in part, from the rental payment/ surcharge. Some affermage arrangements the operator designs and manages the investment program.
Concessions, Build-Operate-Transfer (BOT) Projects, and Design-Build-Operate (DBO) Projects are types of public-private partnerships that are output focused. BOT and DBO projects typically involve significant design and construction as well as long term operations, for new build (greenfield) or projects involving significant refurbishment and extension (brownfield).
A concession gives a private concessionaire responsibility not only for operation and maintenance of the assets but also for financing and managing all required investment. The concessionaire takes risk for the condition of the assets and for investment. A concession may be granted in relation to existing assets, an existing utility, or for extensive rehabilitation and extension of an existing asset.
Unlike many management contracts, concessions are focused on outputs – i.e., the delivery of a service in accordance with performance standards. There is less focus on inputs – i.e., the concessionaire is left to determine how to achieve agreed performance standards, although there may be some requirements regarding frequency of asset renewal and consultation with the awarding authority or regulator on such key features as maintenance and renewal of assets, increase in capacity and asset replacement towards the end of the concession term.
Private finance initiative
A private finance initiative (PFI) is a method of providing funds for major capital investments where private firms are contracted to complete and manage public projects. Under a private finance initiative, the private company, instead of the government, handles the up-front costs. The project is then leased to the public, and the government authority makes annual payments to the private company. These contracts are typically given to construction firms and can last 30 years or longer.
A key drawback is the interest and payments associated with PFIs burden future taxpayers. In addition, the arrangements sometimes include not only construction, but also ongoing maintenance once the projects are complete, which further increases these projects’ future cost and tax burden.
Basic structure of a PPP arrangement
Broadly speaking, the project structure refers to the architecture of contract relationships and cash flows that govern the development and life of the project. The main relationship and core element of the project structure is the PPP agreement or PPP contract (also referred to as the “upstream contract”) between the authority and the private partner. It is developed by the authority and regulates the rights and obligations of the private partner to whom the development and management of the infrastructure will be delegated or contracted out.
The PPP project structure will therefore be primarily based on the scope of the contract (which delineates the scope of responsibilities of the private partner), noting that the scope and structure may vary amongst projects of the same sector and type of infrastructure.
The project structure will also reflect the financial structure (how the private party will be compensated or paid for the works and services) and the risk structure of the PPP contract (that is, how the scope of responsibilities is qualified in terms of risks), as well as other provisions.
The private partner will usually be in the form of a Special Purpose Vehicle (SPV), that is, a project company created to develop and manage the project.The SPV will “pass through” most of the rights and obligations to a downstream structure of contracts, allocating responsibilities, obligations, risks, and cash flows from the SPV to the different private actors through different agreements.
The Construction/EPC and O&M contractors, or related investment companies, are also often shareholders of the SPV. There may be other shareholders that are, in essence, financial investors with no role in the project other than acting as equity providers. It is not generally necessary to be a shareholder in order to act as a contractor (although some governments may require this in some projects).
Typically, the government will award the contract to a company or group of companies (consortium). After awarding the contract, the consortium will have to incorporate a specific company (the Special Purpose Vehicle, SPV) in accordance with the relevant legislation governing the formation of companies. The SPV will sign the contract with the procuring authority. By the contract signature, the private partner assumes the obligations described in the contract.
Construction will typically start when the procuring authority gives the construction order. This occurs once final project design is approved and other pre-set conditions are met. Some of the pre-set conditions may be the procuring authority’s responsibility (for example, to provide the right of way or the land), and some others may be requirements of the lenders (such as final clearance of some permits). In some countries, bank practice may be that the shareholders of the SPV have to invest the equity commitment prior to making drawdowns of the loan amounts granted by the lenders. In other countries, the loan drawdowns will occur in parallel with equity investment, in fixed percentages.
The contractor is paid the price of its construction contract in a progressive manner as agreed in the contract. In some projects, it may receive an advance payment for collecting materials, machinery and equipment, and in other projects, it may receive a relevant portion of the price at completion of the works. However, the most common approach is monthly progressive payments against the successive and partial invoicing of the works executed. The works will commonly be reviewed by technical advisors appointed by the lenders.
To guarantee appropriate construction performance to the SPV and lenders, the construction contract will require the construction contractor to provide security, such as bank guarantees and/or parent company guarantees.
In most projects, the procuring authority only authorizes the commencement of operations once construction is completed and the works are commissioned. When the contract is of a user-pays type, the SPV will be allowed to start charging users (with some projects involving upgrades to existing transport infrastructure, charges to users may occur during construction). When the contract is of a government-pays type, the SPV will be allowed to start invoicing the procuring authority at the frequency established in the contract (for example, monthly) and according to the payment mechanism defined in the contract. These will be up to an amount equal to the payment offered, minus payment deductions or abatements .
During the Operations Phase, there will be a number of investments to be made (renewals or reinvestments, also referred to sometimes as “major maintenance” or “life-cycle costs”) so as to keep the asset in appropriate condition during the entire life of the contract. These works are usually done by the O&M contractors under the O&M contracts, but they might be handled and contracted separately under a specific contract for renewals.
The repayment profile is usually defined in advance in the financial agreements, and it is constructed to meet the Debt Service Cover Ratio. Revenues may be paid to equity holders only when O&M costs, taxes and debt obligations are paid as scheduled and reserves are duly funded. The financial agreements usually include additional restrictions on payments to equity holders. The bottom line is that the majority of the return to the shareholders (in the form of dividends (#5b)) will only come into place in the later stages of the contract.
Unless an early termination event occurs (that is, the contract is terminated before the original term expires due to a serious default by the private partner, a force majeure event occurs, or there is a unilateral decision by the procuring authority), the contract will expire in accordance with its terms. At that point, the infrastructure will return to the hands of the government, which may re-tender the management of the asset in a new contract, contract the O&M of the asset in shorter-term contracts, or chose to directly manage the asset itself.
PPP in India
India has systematically rolled out a PPP program for the delivery of high-priority public utilities and infrastructure and, over the last decade or so, developed what is perhaps one of the largest PPP Programs in the world. With close to 1300 PPP projects in various stages of implementation, according to the World Bank, India is one of the leading countries in terms of readiness for PPPs.
VGF for PPP Projects
The main constraint in India’s infrastructure sector is the lack of source for finance. More than the overall difficulty of securing funds, some projects may not be financially viable though they are economically justified and necessary. This is the nature of several infrastructural projects which are long term and development oriented. For the successful completion of such projects, the government has designed Viability Gap Funding (VGF). Viability Gap Finance means a grant to support projects that are economically justified but not financially viable.
The scheme is designed as a Plan Scheme to be administered by the Ministry of Finance and amount in the budget are made on a year-to- year basis. Such a grant under VGF is provided as a capital subsidy to attract the private sector players to participate in PPP projects that are otherwise financially unviable. Projects may not be commercially viable because of long gestation period and small revenue flows in future.
The VGF scheme was launched in 2004 to support projects that comes under Public Private Partnerships. VGF grants will be available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding. The VGF grant will be disbursed at the construction stage itself but only after the private sector developer makes the equity contribution required for the project.
The usual grant amount is upto 20% of the total capital cost of the project. Funds for VGF will be provided from the government’s budgetary allocation. Sometimes it is also provided by the statutory authority who owns the project asset. If the sponsoring Ministry/State Government/ statutory entity aims to provide assistance over and above the stipulated amount under VGF, it will be restricted to a further 20% of the total project cost.
The project agreements must also follow the best practices that would secure value for public money. Regular monitoring and evaluation should be done by the lead financial institutions for the disbursal of the grants. The lead financial institution for the project is responsible for regular monitoring and periodic evaluation of project compliance with agreed milestones and performance levels, particularly for the purpose of grant disbursement.
Monitoring of PPP Projects
The Guidelines issued by the Government for setting up an institutional mechanism to monitor PPP projects respond to the need for ensuring compliance of the terms of the concession agreements with the objective of safeguarding the interests of the public exchequer and the user. While a number of PPP projects have been awarded in different sectors, and many more are in the pipeline, most of the project authorities have not yet created an institutional mechanism for monitoring these projects with a view to enforcing the obligations of the concessionaires, especially with respect to the quality of service and compliance with terms that have a bearing on public interest.
This could lead to situations where government and user interests are compromised, which must to be avoided. These Guidelines have been approved by the Cabinet after extensive inter-ministerial consultations. The institutional structure envisaged under these Guidelines requires the creation of a two-tier mechanism for monitoring PPP projects.
A Monitoring Unit would be set up at the project level while a PPP Performance Review Unit would be constituted at the level of the Ministry or the State Government, as the case may be. Monitoring is to be carried out primarily through a reporting mechanism. The Monitoring Reports for each project would include compliance of contract terms, adherence to time lines, assessment of performance, remedial measures and imposition of penalties.
Non-compliance with the terms of concession agreements would be reported by the respective Ministries to the Planning Commission and Finance Ministry once every quarter for preparing a consolidated report to be placed before the Cabinet Committee on Infrastructure. It is expected that the concerned Ministries and project authorities will establish the aforesaid institutional arrangements with the objective of ensuring that the concessionaires of PPP projects provide efficient and cost effective services consistent with the principles of good governance, accountability and efficiency.
PPP Rules and PPP Policy
The Government is committed to improving the level and the quality of economic and social infrastructure services across the country. In pursuance of this goal, the Government envisages a substantive role for Public Private Partnership (PPPs) as a means for harnessing private sector investment and operational efficiencies in the provision of public assets and services.
India has already witnessed considerable growth in PPPs in the last one and half decade. It has emerged as one of the leading PPP markets in the world, due to several policy and institutional initiatives taken by the central as well as many state governments. Government of India has set up Public Private Partnership Appraisal Committee to streamline appraisal and approval of projects. Transparent and competitive bidding processes have been established.
To provide a broader crosssectoral fillip to PPPs, extensive support has been extended through project development funds, viability gap funding, user charge reforms, provision of long tenor financing and refinancing as well as institutional and individual capacity building. PPPs are now seen as the preferred execution mode in many sectors such as highways, ports and airports. Increasingly, PPPs are being adopted in the urban sector and in social sectors. Over the years an elaborate eco-system for PPPs has developed, including institutions, developers, financiers, equity providers, policies and procedures.
The growing PPP trends, especially in the last decade, justify the need for a broad policy framework that sets out the principles for implementing a larger number of projects across diverse sectors to complement the inclusive growth aspirations of the nation. The National PPP Policy seeks to facilitate this expansion in the use of PPP approach, where appropriate, in a consistent and effective manner.
Models of Foreign Investment
Need of Foreign Investment
Indian infrastructure needs about $1 trillion in investment, the government estimates, most of which it can’t fund itself.
Foreign investors don’t just bring money and jobs, they provide the building blocks for industries whose development in India lags far behind that of much of Asia.
Forms of Foreign Investment
International investment or capital flows fall into four principal categories: commercial loans, official flows, foreign direct investment (FDI), and foreign portfolio investment (FPI). Commercial loans, which primarily take the form of bank loans issued to foreign businesses or governments. Official flows, which refer generally to the forms of development assistance that developed nations give to developing ones.
Foreign direct investment (FDI) pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment. FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch. The reinvestment of earnings and transfer of assets between a parent company and its subsidiary often constitutes a significant part of FDI calculations.
Foreign Investment Promotion Board
The Foreign Investment Facilitation Portal (FIFP) is the single point interface of the Government for investors to facilitate Foreign Direct Investment. Upon receipt of the FDI application, the concerned Administrative Ministry/Department shall process the application as per the Standard Operation Procedure (SOP).
Invest India to promote FDI
To promote Foreign Direct Investment (FDI), the Government has put in place an investor-friendly policy, wherein except for a small negative list, most sectors are open for 100% FDI under the Automatic route.
Further, the policy on FDI is reviewed on an ongoing basis, to ensure that India remains attractive & investor friendly destination. Changes are made in the policy after having intensive consultations with stakeholders including apex industry chambers, Associations, representatives of industries/groups and other organizations taking into consideration their views/comments. The FDI policy is applicable across the sectors/ industries and equally applies to SME sector.
Foreign Institutional Investors
A foreign institutional investor (FII) is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include hedge funds, insurance companies, pension funds and mutual funds.
An incorporated entity, such as a corporation, and a limited partnership are two business structures an individual can operate his business as. There are differences between the two structures, including how they are managed and taxed and how they protect owners from liability.
As a foreign Company through liaison office/representative office, project office and branch office. Such offices can undertake activities permitted under the Foreign Exchange Management Regulations, 2000.
Recent Initiatives to promote Foreign Investment
Expansion of Qualified Foreign Investors (QFIs ) Scheme:
The Qualified Foreign Investor (QFI) is sub-category of Foreign Portfolio Investor and refers to any foreign individuals, groups or associations, or resident, however, restricted to those from a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and a country that is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU).
The objective of enabling QFIs is to deepen and infuse more foreign funds in the Indian capital market and to reduce market volatility as individuals are considered to be long term investors, as compared to institutional investors. QFIs are allowed to make investments in the following instruments by opening a demat account in any of the SEBI approved Qualified Depository Participant (QDP):
1. Equity and Debt schemes of Indian mutual funds,
2. Equity shares listed on recognized stock exchanges,
3. Equity shares offered through public offers
4. Corporate bonds listed/to be listed on recognized stock exchanges
5. G-Securities, T-Bills and Commercial Papers
6. QFIs do not include FIIs/Sub-accounts/ Foreign Venture Capital Investor (FVCI)
Benefits of QFI Scheme
QFIs access to equity market is expected to broad base the market while enhancing the capital flows into India. More importantly, since QFIs are the diversified set of heterogeneous investors, QFIs participation is expected to help dampen the volatility in Indian equity market that arises due to sudden inflows or off-loading done by FIIs.
The direct participation route offered through the QFI scheme was expected to reduce the transaction cost and complexity hitherto persisting due to large number of intermediaries. It would also bring in better transparency while reducing the need for using participatory notes route. QFIs access to Equity market is also expected to help harnessing the investment potential remaining untapped in various sectors.
Initiatives to attract FII Investment
The Government has put in place an investor-friendly policy on FDI, under which FDI, up to 100%, is permitted, under the automatic route, in most sectors/activities. Significant changes have been made in the FDI policy regime from time to time, to ensure that India remains increasingly attractive and Investor-friendly.
In the light of the importance of foreign direct investments for economic growth and development, the government announced key FDI reforms in the defence and railways sectors. The entire range of rail infrastructure was opened to 100% FDI under the automatic route, and in defence, sectoral cap was raised to 49%. To boost infrastructure creation and to bring pragmatism in the policy, the Government reviewed the FDI policy in the construction development sector also by creating easy exit norms, rationalizing area restrictions and providing due emphasis to affordable housing.
To give impetus to the medical devices sector, a carve out was created in FDI policy on the pharmaceutical sector and now 100% FDI under automatic route is permitted.
The Government has undertaken a number of steps to improve Ease of Doing Business in India. Amongst the other important steps, Ministries and State Governments have been advised to simplify and rationalize the regulatory environment through business process reengineering and use of information technology.
These measures are expected to increase FDI, which complements and supplements domestic investment. Domestic companies are benefited through FDI, by way of enhanced access to supplementary capital and state-of-art-technologies; exposure to global managerial practices and opportunities of integration into global markets resulting into accelerated domestic growth of the country. Further, as FDI is largely a matter of private business decisions, global investors normally take time to assess a new policy and its implications in the context of a particular market before making investment.
Infrastructure development holds the key to India’s economic growth. Currently, since September 23, 2011, Indian companies in the infrastructure sector are permitted to utilise 25 per cent of the fresh ECB raised by them towards refinancing of the domestic Rupee loan (s) under the approval route.
Power companies will now be able to raise ECBs for refinancing their rupee debt upto a maximum limit of 40%, provided the remaining 60% of the ECB raised is utilized for investment in a new project. This policy decision would increase access to cheaper funds for companies in the power sector.