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Wednesday, 22 January 2014 00:18
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Cabinet does well to clear Japan’s STEP loans

Given India’s desperate needs for funding infrastructure—infra-spend is targeted to double to $1 trillion in the current plan—and Japan’s need to find a new source of demand for its stagnating economy, apart from trying to develop a counter to China as far as investing is concerned, it was always curious why India was making heavy weather of the Japanese $4.5 billion STEP loan for the DMICDC project. Special Terms for Economic Partnership (STEP) loans are tied in that 30% of all procurement for the projects have to be sourced from Japan, but it is the lowest-cost loan you can possibly get for infrastructure at an interest rate of 0.1% per annum, a 10-year moratorium on repaying the principal and a 40-year tenure. There would have been a problem, and this was the finance ministry’s contention, had the Japanese been over-charging on the goods sourced from them. The only live example of STEP loans, to the western part of the Dedicated Freight Corridor (DFC), from Dadri to the Jawaharlal Nehru Port Trust, doesn’t suggest this to be the case.

Fulfilling the conditions of the STEP loan are laborious, after all, you have to ensure there are enough Japanese suppliers bidding for each part of the contract. But as DFC managing director RK Gupta pointed out in an interview to FE (January 16), there are ways around it. So, for instance, before the bids for the Japanese part of the corridor were called for, bids for the eastern untied World Bank-financed eastern corridor were made public—whether because of this or not, the Japanese bids for the civil works part of the corridor also turned out to be competitive. Similarly, the Japanese side has been forced to make concessions—the initial condition was that the lead partner in any JV bidding for the DFC had to be majority controlled by a Japanese firm; chances are, this will be relaxed to allowing any consortium that has a Japanese partner. And the definition of what is to be considered Japanese for procurement purposes has already been changed to include goods produced by Japanese JVs in India where there is a minimum 10% stake for Japanese firms.

In other words, what STEP loans can catalyse is the next phase of Japanese investments into India, this time around into the infrastructure sector—one has to look at how Suzuki’s investment into Maruti catapulted India into a global car supplier to realise the possible significance of the move. The Japanese have promised an initial $4.5 billion for the ambitious 24-city-5,500 square km DMICDC project, the first phase of which is to cost R3,25,000 crore—if all goes well, a lot more can be forthcoming. And if the experience is bitter, India always has the option of not going in for more such loans.

 

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