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June 28th, 2021

Leveraging Global Markets to Fund Infrastructure at the Sub-National Level in India

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Estimated reading time: 10 minutes


June 28th, 2021

Leveraging Global Markets to Fund Infrastructure at the Sub-National Level in India

0 comments | 6 shares

Estimated reading time: 10 minutes

  by Jaansiva YS (The National University of Advanced Legal Studies, India)


The Reserve Bank of India (RBI) has created a framework permitting Indian body corporates to issue masala bonds, moreover allowing all entities, that are eligible to receive FDI, to issue these bonds. Masala bonds now form the second-largest component of India’s external debt (33.1%) and are now an attractive means of raising funds for infrastructure development.


The ‘new normal’ in the age of the coronavirus pandemic has prompted Governments across the world to increase fiscal expenditure to provide welfare and reverse the decline in economic growth. While the increase in budgetary spending spurs economic activity, economists (such as Ms Gita Gopinath in her post on the IMFBlog from January) encourage priority spending on healthcare and education to remedy the setback on human capital accumulation.

Governments, particularly in the developing world, would therefore be left with lesser fiscal room for infrastructure spending that generally results in employment opportunities and increased economic output.

Even while countries like India have long been facing a crunch in funding infrastructure development, the pandemic’s onslaught on economies has further heightened the necessity for such funding to spur economic activity.

The National Infrastructure Pipeline

The lacklustre quality of infrastructure in India has always been the albatross around the neck of India’s growth story. Often paling in comparison to China, the Indian growth story has been bottlenecked by an infrastructure deficit that scuttles its ambitious plans of expanding its manufacturing sector through policies such as ‘Make in India’.

Acknowledging the deficit, India drew up the ‘National Infrastructure Pipeline’ consisting of over $1.5 trillion in investments in infrastructure. While the States’ share makes up 40 per cent of the implementation, the Federal Government’s share is at 39 per cent. The private sector makes up the remaining 21 per cent.

Limitations for Sub-Sovereign Funding

Although States play a major role in infrastructure development, they do not enjoy access to resources on par with the Federal Government. The latter has more avenues for taxation while also being constitutionally better placed to raise more funds.

For example, while a quasi-sovereign wealth fund such as the National Infrastructure Investment Fund (NIIF) can accept foreign investments, a State or sub-sovereign fund cannot. The Kerala Infrastructure Investment Fund Board (KIIFB)’s fundraising endeavours abroad provide an insight into States’ limitations.

The Kerala Infrastructure Investment Fund Board (KIIFB), a sub-sovereign entity, having been set up by the regional State Government of Kerala in 1999 as its principal funding arm. In 2019, it approached the London Stock Exchange to list its issue of masala bonds, making them the first sub-sovereign entity in India to access the international debt capital markets. Earlier, London also witnessed the listing of masala bonds issued by NTPC Ltd., a Government of India utility undertaking, making them the first quasi-sovereign entity to do so.

However, in its audit report of the State’s finances, the country’s supreme audit institution and constitutional body, the Comptroller and Auditor General of India (C&AG), flagged the off-budget borrowings of the State through KIIFB as a violation of the Constitution of India. The report opined that the State violated constitutional provisions which, practically, required States to obtain the Government of India’s consent before raising loans. Further, the listing of masala bonds was found inconsistent with the constitutional provisions giving exclusive powers to the Federal Government to make foreign loans.

Masala Bonds

The infrastructure financing method resorted to by KIIFB offers some crucial pointers for sub-sovereign fundraising. Central to the mechanism adopted by KIIFB to raise funds from abroad are ‘Masala Bonds’. These are Rupee-denominated debt instruments issued to investors outside India and were first introduced to the markets by the International Finance Corporation (IFC) in 2013. As these are Rupee-denominated instruments, overseas investors bear the risk of exchange rates.

The country’s central bank, the Reserve Bank of India (RBI), has created a framework permitting Indian body corporates to issue masala bonds under their External Commercial Borrowing (ECB) policy. It has also allowed all entities [eligible to receive FDI] to issue these bonds.

With the London Stock Exchange emerging as the largest masala bonds centre globally, masala bonds now form the second-largest component of India’s external debt (at 33.1 per cent), trailing the US dollar-denominated debt, which stood at 51.9 per cent in December 2020. Masala Bonds, therefore, are an attractive means of raising funds.

Funding Infrastructure Development at the Sub-Sovereign Level

As noted in an earlier piece on Investment Promotion Agencies (IPAs) published in the blog, investment promotion comprises a multi-layered architecture involving national and sub-sovereign efforts. Regional organisations are much closer to the actual investment environment, making them more effective in influencing investment operative conditions.

Recognising the importance of foreign funding for infrastructure at the sub-sovereign/State level, the Federal Government has allowed ‘financially sound’ States to avail external assistance from bilateral partners to implement vital infrastructure projects.

While States cannot borrow from abroad at their discretion, they may yet avail external assistance from India’s Official Development Assistance (ODA) partners. They include the Japan International Cooperation Agency (JICA), French Development Agency (AFD) and other ODA partners.

The potential for the private sector in implementing infrastructure projects at the State-level is immense. While banks and non-banking financial companies (NBFCs) remain a significant source of financing for private players, they are frequently stressed. With exposure to long-term infrastructure loans significantly contributing to the domestic financial sector’s liabilities, they may be wary of taking on further risk.

Aided by the central bank’s policy framework, masala bonds offer a viable source of funding for private players engaged in developing infrastructure. The international debt markets would provide issuers with a much more extensive and diverse array of investors of varying risk appetites looking to invest in emerging markets, while raising the issuer’s profile in global capital markets.


Addressing the vitality of long term debt financing to fund infrastructure development, India announced a Development Finance Institution (DFI), called the National Bank for Financing Infrastructure and Development (NaBFID), to ‘act as a provider, enabler and catalyst for infrastructure financing’. In addition to developing the domestic bonds and derivatives markets, its stated objective also includes co-ordinating with the State Governments and other stakeholders in infrastructure financing (both inside and outside India). In line with this mandate, NaBFID is also empowered to raise funds from international markets and investors. While private players may directly tap the international debt markets to access funds, States may co-ordinate with the Federal Government and NaBFID in accessing such resources. Masala bonds make a viable instrument for raising such funds.



This post represents the views of the author and not those of the GILD blog, nor the LSE.

Jaansiva Y S is a final year student at The National University of Advanced Legal Studies, India.

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