India should create an active bond market aimed at attracting new investors like insurance firms and liberalise ECB norms to ensure better credit flow to the infrastructure sector,a study said today. "An active bond market can attract investors (insurance companies,provident funds,pension managers) and provide the much-needed long-term funds to infrastructure developers," a study,jointly done by McKinsey and industry chamber Ficci,said. However,this could be a challenging task in short-term and would require a broad set of regulatory measures,creation of the right set of products,sufficient liquidity and active market making,it said. Bond markets contributed around 50 per cent of the private infrastructure funding in Malaysia,it added. Stating that regulatory constraints often impede funding of infrastructure projects,the study said that relaxing the guidelines for external commercial borrowings (ECBs) could also provide an additional source of funding such projects. "Some measures that can be evaluated include increasing all cap rate for longer-tenure loans; relaxing refinancing criteria for existing ECBs/FCCBs; allowing Indian banks to credit enhance ECBs/FCCBs as currently allowed for foreign banks,and removing withholding tax," it said. India's infrastructure spend grew at a modest pace until the 10th Plan. The 11th Plan proved to be an inflection point in this trend,increasing infrastructure spend from a rate of 5 per cent of GDP to 8.9 per cent. According to estimates,the 12th Plan aspires for a planned infrastructure spend of around USD one trillion - around 11 per cent of GDP. Banks can lend only around 70 per cent of raised deposits. In addition,40 per cent of bank loans are allocated to priority sectors such as agriculture and SSI. This curtails the total funds available for infrastructure financing. Thus,Mckinsey also suggested giving infrastructure priority status.
