The Indian government has taken the proposal to float a sovereign bond off the table. Instead it has decided to ask the World Bank to aggressively encourage global pension and insurance funds subscribe to its Global Infrastructure Facility (GIF) for lending to countries like India.
To prod the Bank,which is reluctant to expand the scope of GIF fast,the government is propping up the BRICS Bank concept which the existing multilateral institutions are uncomfortable with. The Bank,once set up,will be outside the purview of their monitoring.
India feels,for it to remain interested in the Bretton Woods institutions,they should provide more loans to it. The Indian government estimates are based on an evaluation of the cost of securing loans from abroad.
A finance ministry official explained that even if India did float a sovereign bond or asked a bank consortium to do so,the rating will be at the bottom of the investment grade. The pricing of the paper will be correspondingly stiff. A bond floated by World Bank or by in-the-pipeline BRICS Bank will instead enjoy a triple-A rating.
The difference in cost is massive for us. Since we will need regular tranche of such papers the difference will become considerable soon, the official said.
So even after allowing for the mark up for the papers coming from the multilateral bodies,the costs will be lower. It is something like riding piggy back on a high rating without having one.
But,for this to happen,there is one key obstacle. India has already fully utilised the available lines of credit from ADB and the World Bank.
Since an expansion of the investment corpus of these institutions is a long way off,the alternative is an expansion of the GIF. Finance minister P Chidambaram made it the key point of his intervention at the session on Financing for Investment at G-20 Finance Ministers and Central Bank Governors
meeting in Washington DC last week. We would like to see the detailed proposal for its (GIF) establishment with specific time lines by the December Deputies meeting.
Government officials estimate that despite liberalising financing rules for infrastructure,money from abroad will take time to come. There are also domestic issues which need to be sorted out.
Repeated soft loans from the GIF can be a manna in this context. Its balance sheet will be outside the Bank. So the Bank has been leery about allowing it to collect money from global capital markets in major tranches despite its potential.
India wants it to do just that to get cheaper access to global markets. Talking about BRICS Bank allows India to put pressure on the World Bank to get moving on the proposal fast.