The Rs 2427.40 crore Sethusamudram Ship Canal Project off Tamil Nadu coast was on Thursday cleared by the Union Cabinet.

Announcing the Cabinet Committee on Economic Affairs decision, Finance Minister P Chidambaram said a Special Purpose Vehicle would be set up for the project.

Elaborating on the project, Chidambaram said it was a dream for over 100 years. With the cabinet nod, the government has fulfilled the Common Minimum Programme and budget promises, he said.

"It opens up a channel that will enable ships to India avoid going around Sri Lanka [Images]," he said adding the channel would bring benefits as was the case with Suez Canal and Panama Canal.

Apart from giving a "decent return", Chidambaram said the project has "tremendous externalities" in defence, security and anti-smuggling.

The project is estimated to cost Rs 2,427.40 crore, which is going to be funded by Centre, port trusts, Shipping Corporation of India [Get Quote], Dredging Corporation and others, apart from an initial public offer or private placement of Rs 226 crore.

The Dredging Corporation of India [Get Quote] along with the port trusts of Chennai, Ennore, Vizag and Paradip will contribute Rs 30 crore each.