The India Infrastructure Finance Company Limited (IIFCL) has unveiled a proposal for a new “mezzanine” financing framework designed to help Indian states bypass fiscal limitations and accelerate infrastructure development. Presenting at the Andhra Pradesh Reimagining Public Finance Summit, hosted by the Finance Department, Government of Andhra Pradesh and powered by Elets Technomedia, Palash Srivastava, Managing Director at IIFCL, outlined the strategy as a response to the tightening Fiscal Responsibility and Budget Management (FRBM) constraints faced by state governments.
With states increasingly unable to provide upfront cash for Viability Gap Funding (VGF) due to budget deficits, IIFCL proposes a shift toward subordinated debt structures. Under this model, instead of a state paying VGF upfront, a sector-specific reserve fund would be created to handle interest subvention.
“States are facing severe FRBM challenges. The center is now contributing nearly 80% to development finance while states contribute only 20%—a sharp decline from the 50-50 ratio seen in 2011,” he observed. “Our innovation allows states to support projects through interest subvention reimbursed from a reserve, rather than immediate capital expenditure.”
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MD, IIFCL also heavily criticized the lack of asset management at the municipal level, arguing that better monetization of existing assets could fund new developments. He cited examples of municipal properties that generate negligible rent due to outdated contracts.
“If you don’t monetize, you cannot front-end development,” he argued. The proposed framework would not only ease the immediate burden on state exchequers but also encourage better maintenance of assets over their entire lifecycle, ensuring that infrastructure projects do not languish after construction. IIFCL believes this shift from tax-based finance to user-charge-based finance is essential for the next phase of India’s infrastructure growth.
