[Answered] Explain the key issues in infrastructure financing in India. What steps have been taken by the government to address these issues?


Demand of the question

Introduction. Contextual introduction.

Body. Discuss the key issues in infrastructure financing in India. Mention steps have been taken by the government to address these issues.

Conclusion. Way forward.


Infrastructure development is an arduous job. It involves huge investments, long gestation periods, procedural delays and returns spread over a long period of time. These unique features of infrastructure development raise some issues which are specific to the financing of infrastructure. As a result, mobilising and structuring financing for infrastructure development is a complex proposition.


Key issues in infrastructure financing in India:

  1. Fiscal Burden: Almost half of the total investment in the infrastructure sector is done by the
    Government through budget allocations. But Government funds have competing demands, such as, education, health, employment generation, among others.
  2. Asset-Liability Mismatch of Commercial Banks: Commercial banking sector’s ability to extend long-term loans to the infrastructure sector is limited.
  3. Subdued Investments in PPP Projects: Private sector investment is yet to revive in the backdrop of subdued interest from potential stakeholders. Legacy issues and weak balance sheets have led to limited participation from existing infrastructure players in India.
  4. Investment Obligations of Insurance and Pension Funds: Insurance and pension funds are constrained by their obligation to invest a substantial portion of their funds in Government securities.
  5. Need for an Efficient and Vibrant Corporate Bond Market: The corporate bond market is still a long way to go in providing adequate financing to the infrastructure sector in India.
  6. Insufficiency of User Charges: A large part of the infrastructure sector in India especially irrigation, water supply, urban sanitation, and state road transport is not amenable to commercialisation for various reasons. Due to this, the Government is not in a position to levy sufficient user charges on these services.
  7. Legal and Procedural Issues: Issues relating to land acquisition and environmental clearances add uncertainty which affects the risk appetite of investors as well as banks.


Various steps have been taken by the government to address these issues:

  1. Public-Private Partnership: Government is making efforts towards Public-Private Partnership Projects especially in Infrastructure.
  2. Viability Gap Funding: Government has made provision to financially support the viability gap to the tune of 20% of the cost of the project in the form of capital grant from its viability gap fund.
  3. Foreign Direct Investment and Infrastructure Development: 100% FDI is allowed under the automatic route in some of the sectors such as mining, power etc. Further, FDI is also allowed through the approval route in some sectors such as the civil aviation sector etc.
  4. India Infrastructure Finance Company Limited (IIFCL): IIFCL is a wholly-owned Government of India company to provide long term finance to viable infrastructure projects through the Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle.
  5. Infrastructure Debt Funds: IDF is a distinctive attempt to address the issue of sourcing long term debt for infrastructure projects in India.
  6. Reducing bottlenecks: With Initiatives such as ‘Housing for All’ and ‘Smart Cities,’ the government is working on reducing the bottlenecks that impede growth in the infrastructure sector.
  7. UDAY scheme: Under UDAY scheme the government has taken steps to improve operational and financial parameters of discoms.
  8. Masala Bonds: The National Highways Authority of India (NHAI) launched Masala Bonds in May 2017, for raising capital for funding the infrastructure projects in India.
  9. National Infrastructure Investment Fund: National Infrastructure Investment Fund (NIIF) with an initial corpus of Rs 40,000 crore was launched.
  10. National Infrastructure Pipeline: The National Infrastructure Pipeline is a group of social and economic infrastructure projects in India over a period of five years with a sanctioned amount of ₹102 lakh crore.


In terms of the potential to attract global investment, India is in a sweet spot when compared to other emerging economies. Government and the corporate world should work together to iron out structural issues and develop frameworks that allow transparent and flexible risk sharing mechanisms to attract investments in the infrastructure sector. Greater Participation of State Governments must be ensured and steps must be taken to simplify the procedures and to improve efficiency of the Corporate Bond Market.

Print Friendly and PDF