Viability Gap Funding In India: Everything You Need To Know

In India, the government has been increasingly supportive of startups and small businesses through initiatives like the Startup India Action Plan. One such initiative is viability gap funding (VGF), which is a form of financial support provided to startups and small businesses to help them cover the gap between their costs and their revenue.

This blog post will explore everything you need to know about VGF in India, from what it is and how it works, to the eligibility criteria and how to apply for it. If you’re a startup or small business owner looking for government support, read on for more information.

What is viability gap funding?

Viability gap funding (VGF) is a type of government grant provided to public and private entities to encourage investments in infrastructure projects that would otherwise not be economically viable. The VGF covers the difference between the project’s cost and its expected commercial returns.

In India, the VGF scheme was first introduced in 2006, and has since been used to finance a range of projects, including airports, seaports, roads, and power plants. The Indian government has committed INR 500 billion (US$7.4 billion) to the VGF scheme over the next five years.

The VGF program has been credited with helping to revive India’s flagging economy, and attract foreign investment into the country. It has also been criticized for being opaque and prone to corruption.

The history of viability gap funding in India

The history of viability gap funding in India can be traced back to the early 2000s when the Indian government began to provide financial assistance to private companies for infrastructure projects. The rationale behind this move was to attract private investment into sectors that are critical for economic development but are not commercially viable.

One of the earliest examples of such a project is the Delhi-Mumbai Industrial Corridor (DMIC), which is a $90 billion infrastructure initiative that aims to connect the two cities with high-speed rail, roads, and ports. The Indian government has committed $11 billion as VGF for this project.

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Other notable examples of VGF-funded projects in India include the Bangalore Metro, Chennai Metro, Mumbai Metro, and Kolkata Metro.

How does viability gap funding work?

Viability gap funding (VGF) is a form of government support for infrastructure projects that are considered commercially unviable. The Indian government has been using VGF as a tool to promote private investment in infrastructure since the early 2000s.

Under the VGF scheme, the government provides financial support to make up for the difference between the project’s estimated cost and its expected commercial return. This support can take the form of either equity or debt financing.

To be eligible for VGF, a project must be located in India and have a minimum size of INR 1 billion (approximately US$15 million). The project must also be at least 60% complete before it can receive VGF support.

The amount of VGF that a project can receive is capped at 20% of its total cost. In addition, the government may also provide other forms of support, such as duty exemptions and tax breaks.

The VGF scheme has been successful in attracting private investment into India’s infrastructure sector. However, it has been criticized for being opaque and prone to corruption.

What are the benefits of viability gap funding?

Viability gap funding (VGF) is a type of financial assistance provided by the government to help make projects economically viable. The funding can be in the form of a grant, loan, or equity investment.

The main purpose of VGF is to encourage private sector investment in infrastructure projects that would otherwise be unviable due to high risk and low return. By sharing the risks and rewards of a project with the private sector, VGF makes it possible to attract private investment and get important infrastructure projects off the ground.

In India, VGF has been used to finance a wide range of infrastructure projects, including airports, power plants, roads, and urban transit systems. VGF has been instrumental in helping India build much-needed infrastructure and create jobs during a time of economic growth.

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Benefits of Viability Gap Funding

There are several benefits of VGF:

1. Attracts Private Investment: By sharing the risks and rewards of a project with the private sector, VGF makes it possible to attract crucial private investment for otherwise unviable projects. This is essential for building important infrastructure that can boost economic growth.

2. Creates Jobs: Infrastructure projects financed by VGF create jobs during construction as well as after completion. This can help reduce unemployment and spur economic growth.

3. Improves Infrastructure: Much-needed infrastructure is built with VGF financing, which can improve quality of life and contribute to economic development.

What are the challenges of viability gap funding?

One of the key challenges of viability gap funding is that it can be difficult to track and monitor the use of funds. This is because viability gap funding is often provided as a lump sum to a project developer, who may then use the funds for a variety of purposes. This can make it difficult for government agencies to ensure that the funds are being used effectively and efficiently.

Another challenge of viability gap funding is that it can create a moral hazard, where project developers may be tempted to take on more risk than they would otherwise if they know that there is a safety net in place. This could lead to projects being undertaken which are not in the best interests of the country or its people.

Finally, viability gap funding can be seen as a form of subsidy, which may distort markets and lead to inefficient allocation of resources. It is important that any such subsidies are well-designed and carefully targeted so as to minimise these negative effects.

Conclusion

Viability gap funding is an important tool for businesses in India to get the financing they need to get started or expand. However, it’s important to understand how the program works and what the requirements are before applying. We hope this article has provided you with a helpful overview of viability gap funding in India so that you can make the best decision for your business.

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