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Government Should Focus on More Effective Growth-Oriented Policy Framing in India

The caveat is that cash flow mismatches must be avoided. For instance, excessive debt servicing costs during production ramp-up periods when incoming cashflows for a utility business are low can render even suitable projects unviable.

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Allen, who co-founded Microsoft with Bill Gates in 1975, announced in 2011 that he had formed the privately funded Stratolaunch. Pixabay

It is crucial for the government to keep pushing towards more effective growth-oriented policy framing and implementation in India.

The focus must be on creating both “hard” and “soft” infrastructure while facilitating effective debt usage. Hard infrastructure must see a continuation of the progress seen in areas such as highway construction and the gradual increase in participation of deep-pocketed institutional investors in owning assets. Soft infrastructure pertains to assets that help create demand for hard infrastructure assets.

Airline businesses would be an example of soft infrastructure that is so essential for robust demand for airport assets. Ensuring that both hard and soft infrastructure asset creation pick up further pace is vital.

The need to push along with creating new hard infrastructure assets such as airports, highways, energy generation & distribution etc. is evident given the trend of higher consumption. The critical aspect that needs to be kept in mind is a “sustainable” path of creation is much more likely to deliver long-term benefits than a rapid approach with pitfalls along the way.

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One of the crucial linkages between efficient creation and operation of both hard and soft infrastructure is optimal debt usage.Pixabay

In layman’s terms, effective project planning, efficient project implementation and prudent usage of debt funding in the hard infrastructure creation process will be of vital importance.

In the recent past, active participation by capital-rich large institutional investors in the highways and renewable energy sector in India shows the demand for such assets. That said, the two Toll-Operate-Transfer (TOT) highway auctions by the National Highways Authority of India (NHAI) are symbolic that investors will be aware of both asset price and quality. While the first TOT auction saw a winning bid that was much higher than expected, the second auction had to be cancelled since the highest bid wasn’t where the NHAI expected the bid price to be. The key takeaway is that investors would be discerning regarding asset quality and pricing. The government must make sure that the investment momentum sustains while learning a few lessons from the TOT auctions.

Creating soft infrastructure is as important as creating hard infrastructure. Soft infrastructure are assets that perhaps do not fit the traditional definition of infrastructure assets but are essential pillars of economic growth, primarily as soft infrastructure such as airlines create demand for hard infrastructure assets such as airports.

The recent turmoil in the airline sector further emphasises the need to create policies that help boost the sector. While it is true that any industry is subject to the travails of the business cycle, and this is especially true for airline businesses, it is also essential that all steps from a policy perspective are taken to ensure that the sector can thrive. A vibrant airline sector translates into greater usage for airport assets, thereby boosting the demand for airport infrastructure. Higher demand for airport infrastructure from the investment community can hopefully translate into a robust infrastructure creation pipeline for the sector.

One of the crucial linkages between efficient creation and operation of both hard and soft infrastructure is optimal debt usage. It is important to note that debt in itself is only as good as its usage, implying that prudent use of debt for businesses delivers value for the ecosystem. On the contrary, excessive debt usage, especially for businesses unsuitable for debt usage can lead to results that aren’t suitable.

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Therefore, debt usage within the context of both the cashflow profile of the industry and cashflow matching is an essential cog in the wheel to ensure economic expansion. Pixabay

The assertion that “capital structure risk must be inversely proportional to business risk” is one that merits attention. The statement mentioned above implies that debt is more useful for businesses that have access to steady cash flows as opposed to companies that have higher variability of cash flows. So, in general, a utility business would be more suitable for debt usage than say a retail business. The caveat is that cash flow mismatches must be avoided. For instance, excessive debt servicing costs during production ramp-up periods when incoming cashflows for a utility business are low can render even suitable projects unviable.

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Therefore, debt usage within the context of both the cashflow profile of the industry and cashflow matching is an essential cog in the wheel to ensure economic expansion. Measures such as effective bankruptcy regulations and prudent lending that ensure better debt usage must be encouraged even further.

The linkage between hard infrastructure, soft infrastructure and optimal debt usage is an essential one especially in the context of India’s need to expedite infrastructure creation, boost economic growth and create jobs. A renewed focus on infrastructure building and the linkages is the need of the hour. (IANS)

Next Story

Here’s Why Coronavirus May Have Severe Impact on Asia’s Economy

This time around Chinese tourism matters even more to Southeast Asia

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The Coronavirus outbreak, which has so far caused 41 deaths in China, and caused the country to quarantine 16 cities, is causing comparisons to the 2003 spread of severe acute respiratory syndrome, or SARS, which decreased the value of the global economy by $40 billion. VOA

Southeast Asia’s proximity to China and dependence on that nation for a major share of its economy is raising concerns that the coronavirus outbreak  that started there will not only have health impacts but harm the region’s economies.

The outbreak, which has so far caused 41 deaths in China, and caused the country to quarantine 16 cities, is causing comparisons to the 2003 spread of severe acute respiratory syndrome, or SARS, which decreased the value of the global economy by $40 billion.

“Now that the Wuhan coronavirus has been found to be able to be transmitted from human to human, the economic consequences could be extremely concerning for the Asia-Pacific region,” Rajiv Biswas, IHS Markit Asia Pacific chief economist, said.

Sectors of the economy that are particularly vulnerable to a SARS-like virus epidemic that can be spread by human-to-human transmission are retail stores, restaurants, conferences, sporting events, tourism and commercial aviation,” he said.

Observers agree that tourism could be one of the hardest-hit industries, in part because of the millions of Chinese who usually travel now, during the Lunar New Year, and in part because China has grown so much in the last two decades that many neighboring nations depend on it for tourism.

That is only one of the economic differences between China today and the China of the SARS virus in 2003.

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The recent coronavirus outbreak originating from China to other countries including Singapore may impart some uncertainty to near-term business and consumer sentiments. VOA

China has since then become a member of the World Trade Organization and the second-biggest economy in the world. Its supply chain has become more integrated with the rest of the world than it has ever been, and it has become the biggest trading partner for many countries in the region.

The 2003 virus decreased China’s economic growth rate, but its effect was the same for Malaysia, Singapore, and Vietnam, Biswas said.

This time around Chinese tourism matters even more to Southeast Asia.

After Hong Kong, nations for which Chinese visitors’ spending accounts for the biggest share of gross domestic product are, from most to least, Cambodia, Thailand, Singapore, Vietnam, and Malaysia, according to statistics released by Capital Economics, a London-based research company, Friday. In many of these nations, businesses catering to tourists display signs in Chinese, accept China’s yuan currency, and use that country’s WeChat for mobile payments.

Major tourism events in the region add to the threat that the virus and its economic impact will spread, such as the Tokyo Summer Olympics, Biswas said. Vietnam will also host the Vietnam Grand Prix Formula One race this year, while Malaysia will host the Asia-Pacific Economic Cooperation forum.

Singapore is an island nation that depends heavily on foreign trade, including to facilitate trade and investment in China. Selena Ling, head of treasury research and strategy at Singapore’s OCBC Bank, said Friday she was expecting Singapore’s economy to stage a modest recovery from 2019, but that may change.

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Southeast Asia’s proximity to China and dependence on that nation for a major share of its economy is raising concerns that the coronavirus outbreak  that started there will not only have health impacts but harm the region’s economies. VOA

She said “the recent coronavirus outbreak originating from China to other countries including Singapore may impart some uncertainty to near-term business and consumer sentiments.”

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That could mean slower growth in the first quarter of 2020, she said. (VOA)