By Sidhanta Mehra —
In April 2017, Prime Minister Narendra Modi’s administration took what could potentially be a ground-breaking step in its ongoing devolution of power to India’s states: it announced that it would allow state-government entities — such as special purpose vehicles — to directly access and borrow official development assistance (ODA) resources. States can now independently set priorities for infrastructure development and negotiate directly with ODA providers without heavy involvement by the center, hopefully streamlining the process of receiving funds. Detailed guidelines published a month after the initial announcement, however, have given rise to concerns over how much control India’s states will actually have. Modi’s government will need to make continued effort to realize the potential of this newly modified process of procuring funds.
ODA to India, although the lowest of any country in South Asia, has still ranged from $1 billion to over $3 billion each year over the last decade. Previously, all ODA and multilateral funding to India, regardless of its purpose, was channeled through the central government. The Ministry of External Affairs and other relevant central government agencies exercised close control over negotiations for funds and, in the case of infrastructure, the management of the project itself. Interviews with representatives of funding organizations indicate that while central involvement ensured that ODA providers had a relatively high-capacity partner, it added an extra layer of bureaucracy that slowed down already slow-moving big infrastructure projects. As reported by Indian media, 329 infrastructure projects are running behind schedule, with delays ranging from a few months to over 10 years. While some of these delays may be caused by procedural issues such as acquiring land and environmental clearances, lack of funding is also a major roadblock.
The new guidelines for direct borrowing came in conjunction with approval of funding for the Mumbai Trans-Harbor Link from the Japan International Cooperation Agency (JICA), India’s largest ODA partner. The Trans-Harbour Link was first proposed in 2004 but went 13 years without finding a source of funds. Finally, the Mumbai Metropolitan Regional Development Authority (MMRDA) — the state-owned entity responsible for infrastructure development and strategic planning for the city of Mumbai — was able to successfully negotiate a funding agreement with Japan. JICA will provide more than $2.3 billion in funding for the Trans-Harbour Link. The project will receive more than two-thirds as much ODA funding as India as a whole borrowed in 2015 — a significant sign of the central government’s faith in MMRDA’s ability to execute such a large project with limited central oversight.
But it is important to recognize the limits of the new, decentralized procedure. Most significantly, it will not be applicable to most infrastructure projects in India. It only applies to infrastructure projects that cost more than $775 million, and these projects must be revenue-generating (i.e. they must collect tolls or rents). Furthermore, the state doing the borrowing must be “fiscally sound,” with total debt of less than 25 percent of its gross domestic product (GDP) and holding a fiscal deficit of less than three percent of GDP. These rules would currently exclude at least 19 states and state debt is rising fast. Finally, the state-owned entity responsible for executing the project must boast an average operating profit of $78 million over the past three years. In sum, only a few of the largest and richest states will be able to explore direct borrowing via ODA.
Furthermore, it is still unclear exactly how much involvement the central government will have in the process of negotiating loans and overseeing projects. The Government of India will act as counter-guarantor for all loans and will make the formal proposal to lending bodies. State entities seeking funding will also still need to secure the recommendation of central ministries and approval of the Cabinet Committee on Economic Affairs. Greater ODA access for states will require continued commitment and focus on the part of central ministries to ensure that they adhere to the policy’s spirit of increased state autonomy and offer only minimal guidance and supervision. The true impact of the new guidelines will become clear over the next few years, as more states test the waters.
In the future, the central government could adjust the guidelines to increase the number of eligible projects. For example, currently only established entities are eligible for direct borrowing, meaning that a newly created special purpose vehicle will have to pursue funding the old way. And the vast majority of infrastructure projects, no matter the sponsor, are excluded due to their small size. Opening up streamlined access to ODA funds to such projects could attract even more much-needed funding for Indian infrastructure.