Conclusion

Conclusion

Infrastructure is crucial in determining the economic growth of the nation. Since the last decade of the 20th century, plenty of infrastructure projects in India have been financed with a mix of public and private funding, which has improved the quality and timely completion of the projects. Despite the active involvement of both the sectors, India is still struggling to maintain pace with other fast-moving economies like China or other emerging economies. Developed nations showcase a stark contrast to India in terms of physical and social infrastructure which have become a source of inspiration for our country (Agrawal, 2015).

The recent events of the IL&FS crisis have highlighted the structural vulnerabilities in the financial mechanisms of urban development through debt-financing. Some of the major conflicts of interest identified above may lead to distressing endings for a particular investment. These troublesome events lead to a liquidity crunch which affects investors who are due repayment as well as debtors who depend on loans to continue working. Investors advance their money as loans after analysing the risks attached to the investment because they want to minimise the risk of defaults for debt repayment.

Debt financing as a method of financing is used all over the world for a multitude of business ventures. Deficit financing has become the basis of urban development all over the world. David Graeber in his book Debt: The First 5000 Years (published in 2011) talks about perceived morality that the concept of debt is regarded in, in the eyes of the general public - when people assume that repaying loans is one’s obligation, that implies there is no degree of risk on the part of the lender:

“Isn't paying one's debts what morality is supposed to be all about? Giving people what is due them. Accepting one's responsibilities. Fulfilling one's obligations to others, just as one would expect them to fulfill their obligations to you (Graeber, 2011, p. 4). ”

However, this is not the system debts are based on - it is based on the assumption that the creditor may not be able to retrieve the money. The possibility that a debtor may not be able to reimburse the debt makes the entire system more complicated and realistic. “If a bank were guaranteed to get its money back, plus interest, no matter what it did, the whole system wouldn't work (Graeber, 2011, p. 3). ” Financial institutions are meant to advance money towards profitable investments or transactions. Bankruptcy laws all over the world allow debtors a fresh start by forgiving their debts when it is established that they are not in a position to repay their creditors. In such a situation, creditors are given the opportunity to retrieve their money by liquifying the debtors’ assets, which may not generally lead to a full

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recovery (Tuovila, 2020). This means that creditors are not ensured to get their money back. This introduces the need for risk assessment, credit ratings, auditors - all to assess the creditworthiness of the parties involved. The system continues to become complicated as the number of participants in the mechanism increases.

Even though the nodes of credit rating agencies and auditors are present to make the system more robust, debt financing has proved to be not a very prudent financing method. Notable conflicts of interest within the system, which may or may not have been identified on paper, have been identified in the mechanism in real life:

● Private sector participation is widely accepted for its contribution to finance and relevant expertise in the field of infrastructure. These entities undertake projects involving service, development, operations and maintenance of the assets. However, there are disadvantages to their participation in infrastructure development - projects which affect the lives of multitudes of people. The private sector seeks to make profits in every project it gets involved in. This was witnessed in the case of the DND flyway, where NTBCL continued to collect toll tax even after making the desired profits as per the contract.

Another reasonable argument is that privatization of basic necessities like water might jeopardize the basic right to drinking water. For example, due to the desire of profits, the privatisation of water in Cochabamba, Bolivia, resulted in the infamous ‘water war of Bolivia’ . Some of the examples closer to home are the Borai Industrial Estate’s Water Supply project on the Sheonath river in Chhattisgarh and Kannada Ganga Project in Karnataka (CB, 2010).

We understand the importance of private sector participation in urban development projects due to insufficient funds with the government. However, the differences in aspirations lead to adverse effects on the economy and the common man.

● Auditors are involved to provide honest opinions about a company’s financial position.

The system is such that auditors are appointed by the shareholders of the company, who naturally want the best for the company they have invested in. This ensures that the external auditors thus appointed are not on the ‘issuer pays’ business model, thereby reducing chances of collusion. However, in large scale companies like IL&FS, the management appointed to oversee the modus operandi and performance of the company may collude with the auditors on a personal level. This corruption is generally not accounted for on paper, but it occurs in real life - as is evident in the case of IL&FS.

● Credit rating agencies, based on whose ratings investors decide whether or not they want to delve into certain investments, follow the ‘issuer pays’ business model. There are steep chances of collusion in such a situation where a company will pay hefty

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amounts to paint a pretty picture of themselves and their securities. This is also witnessed in the case of IL&FS and the Subprime Mortgage Crisis of 2008.

NBFCs are crucial for the nation because they are the main source of supply of credit for the economy. However, they tend to create asset-liability mismatches as part of their financial model which is not prudent financing. Any effect on NBFCs is resonated in the broader economy of the nation. After the IL&FS crisis, RBI is attempting to regulate NBFCs to mitigate these problems (Lele, 2018).

Debt financing as a financial mechanism is in practice all over the world. It is an essential system to facilitate the funding of many projects - large or small. However, some discrepancies in this system have been identified, some of which are evident on paper as well. Attempting to resolve these conflicts will go a long way in improving the major financing system the entire world economy depends upon. Proper planning, stringent regulations, and increased transparency in the development of urban infrastructure projects will also help India achieve its ambitions in terms of economic growth, and providing for the needs of its quickly expanding population in a sustainable manner.

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