India Infrastructure May Lend $500 Million Reserves

March 2 (Bloomberg) -- India Infrastructure Finance Co., a state-run entity that extends loans at preferential rates, may use $500 million of the nation’s foreign-exchange reserves next fiscal year to build roads, ports and power plants.

The agency, set up four years ago, will eventually draw up to $5 billion from the reserves, which are managed by the Reserve Bank of India and have reached $279 billion, chairman S.S. Kohli said in an interview last week in New Delhi. The holdings, the world’s seventh largest, are enough to pay for nine to 11 months of imports, according to HSBC Holdings Plc.

“The reserves are way above what would be considered adequate and a significant amount can be safely drawn down and spent,” said Robert Prior-Wandesforde, a Singapore-based economist at HSBC, Europe’s biggest bank. “It’s a very small step but it is impossible to close India’s massive infrastructure deficit by conventional means.”

The government is using foreign-currency holdings to spur economic growth after the funds almost doubled in the past four years. The country was forced to turn to the International Monetary Fund for aid in 1991 after Iraq’s invasion of Kuwait pushed up fuel import costs, causing reserves to dwindle to the equivalent of two weeks’ imports.

India Infrastructure plans to raise $1 billion selling 10- year medium-term notes overseas in the next two years. The agency has disbursed 75 billion rupees ($1.6 billion) of funds in the year ending March 31 and plans to boost lending to about 220 billion rupees next fiscal year, Kohli said. That’s dwarfed by the $500 billion the government says is needed to build infrastructure in the five years through March 2012.

Hampers Growth

The inadequacy of the nation’s utilities and transport network shaves 2 percentage points from economic growth, the finance ministry estimates. The government said in last month’s budget it will boost infrastructure spending by 24 percent to 2.67 trillion rupees in the coming fiscal year, when gross domestic product is forecast to climb 8.2 percent.

The plan to tap reserves also underscores policy makers’ efforts to build infrastructure without burdening the government to raise funds. The government plans to reduce its budget deficit to 5.5 percent of GDP in the next 12 months from a targeted 6.7 percent this fiscal year.

“It’s the kind of thing that many governments around the world do to mobilize resources necessary for public infrastructure,” said Andrew Colquhoun, Hong Kong-based director at Fitch Ratings, which has a negative outlook on India’s local-currency rating of BBB-. A stable outlook will require “government action to get India’s public debt ratios firmly on a downward trend,” he added.

Power Plants, Railways

India Infrastructure has so far borrowed $250 million by selling government-guaranteed debt to the Reserve Bank of India, Kohli said. The agency has approved loans totaling $1.37 billion for buying machinery and equipment from abroad, including funding a power plant and two metro rail projects being built by companies controlled by billionaire Anil Ambani.

“Right now there is a big gap between loans sanctioned and disbursed, mainly because it takes time for projects to get off the ground due to regulatory and environmental clearances,” Kohli said. “We expect funding to gather pace in the coming year.”

World Bank

India Infrastructure also has credit lines of up to $1.2 billion with both the Asian Development Bank and the World Bank, Kohli said. The agency is not allowed to lend more than 20 percent of a project’s cost under government rules and it can’t be the No. 1 supplier of funds.

Kohli declined to comment on a Feb. 10 Business Standard report that IIFC will be involved in setting up an India Infrastructure Debt Fund to attract money from global sovereign wealth funds and domestic insurance companies.

Apart from lending directly to companies, the agency also refinances loans by banks to infrastructure projects. India Infrastructure will refinance about 60 billion rupees in the year beginning April, more than double from this year, Finance Minister Pranab Mukherjee said in his Feb. 26 budget speech.

Spending on infrastructure will rise 24 percent to 2.67 trillion rupees, the budget document showed. The budget increases spending on road building by 13 percent, targeting 20 kilometers of new national highways per day.

“Since we get our funding through innovative means, we are able to lend for a longer term than commercial banks,” Kohli said. “But the development of a robust corporate bond market is a must if we are to upgrade our infrastructure to international standards.”