Budget 2018: The finance minister, in his Union Budget speech 2018-19, mentioned that the total expenditure on infrastructure during the fiscal will be Rs 5.97 lakh crore—an increase of 20.8% over the previous fiscal. This reaffirms government’s commitment on providing fiscal stimulus towards the development of robust infrastructure in India. In the five fiscals till 2017, the overall investment in infrastructure stood at Rs 37 lakh crore, or 56% more than Rs 24 lakh crore invested during 2008-12. But even then, the ratio of gross fixed capital formation to GDP is yet to regain its peak of 35.6% attained in 2007, compared to 26.4% in 2017. This slowdown was aggravated pursuant to 2012. In the Economic Survey 2017-18, it is noted that the recoveries from investment slowdowns, especially those associated with balance-sheet difficulties, tend to be stickier and hence the slowdowns can be prolonged. Over the period 2017-22, ambitious infrastructure investment, to the tune of Rs 50 lakh crore, has been envisaged. One of the major concerns is the means of finances. There, thus, exists a pressing need for India to deepen and diversify alternative sources for infrastructure financing, i.e., focus on sources other than the commercial banks.
Significantly high gross non-performing assets levels have constrained commerical banks as a source of funding. Thanks to growing stress in the infrastructure sector and higher cases of delinquencies, the growth in bank lending to the sector has fallen from 17.87% in 2013 to -7.25% in 2017. Furthermore, public-sector banks (PSBs), with around 70% share of total loans and advances, enjoy the government’s implicit guarantee. However, this guarantee dampens incentives for the PSBs to work towards creating a specialised niche in the market. At least 13 of the PSBs, accounting for 40% of total loans and advances, have over 20% of their outstanding loans classified as restructured or NPAs. Most have responded in the standard way—to protect capital positions, they have scaled back new lending. The government has recently announced measures to recapitalise PSBs. This will address both the issues of growth capital and capital required to absorb losses arising out of elevated provisioning requirement for NPAs.
To tackle the inadequacy in infrastructure financing, the government has undertaken some noteworthy initiatives through developing policy framework for new financing instruments and for widening opportunities for varied investor classes. But now, it’s high time for the government to address the bottlenecks in the implementation of these instruments and mechanisms on a priority basis. RBI had recently proposed the framework for setting up of whole and long-term finance banks, especially to fund infrastructure and greenfield projects. These banks will take care of the asset-liability mismatch issues faced by regular commercial banks in providing credit to long-gestation infrastructure projects. But the same is yet to see the light of the day.
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Further, the government had set up National Investment and Infrastructure Fund (NIIF) in 2015 as a PPP with commercial investors from India and abroad. During FY18, NIIF closed its first major deal. Many pension and sovereign wealth fundshave shown interest in participating in the fund. The New Development Bank and the Asian Infrastructure Investment Bank have extended credit to various infrastructure projects. In the latest budget, the finance minister also laid emphasis on India Infrastructure Finance Corporation Ltd and ways of expanding its role in infra financing. The government should expand the scope and the overall capital base of NBFCs, infrastructure finance companies (IFC), etc, on a priority basis.
The finance minister, in his budget speech, highlighted relevant RBI and SEBI guidelines to nudge large corporates to access bond markets. Further, relevant reform measures with respect to stamp duty regime on financial security transactions have also been assured. These will be taken up in consultation with the states and necessary amendments will be made to the Indian Stamp Act. High stamp duty has made bonds seem an unviable option—encouraging the borrower to approach the loan market instead. To attract long-term financing from pension and insurance funds, the finance minister proposed lowering of the investment rating requirement from ‘AA’ to ‘A’ grade rating. In India, most regulators permit bonds with ‘AA’ rating only as eligible for investment.
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Updated policy framework for financing instruments/mechanisms like Infrastructure Investment Trusts (InvITs) and Infrastructure Debt Fund (IDF) have also been implemented in recent past. But due to the equity investor’s risk averseness and the quasi-equity nature of instruments, InvITs and IDFs have found limited takers. In the case of IDFs, which only securitise operational assets and issue debt instruments, financial institutions have not been very forthcoming in relinquishing operational assets especially during the current weak credit growth scenario. Though securitisation of infrastructure assets has gained reasonable acceptance, the government should nudge banks (particularly public sector) to participate in more transactions. In the budget speech, the finance minister also mentioned that the government would be initiating monetising of select CPSE assets using InvITs from next year. This will give InvITs more liquidity and wider acceptance in the market.
With the country reaping the benefits of latent demand from demographic potential, conducive business environment and government’s initiatives to facilitate investment, the outlook for infrastructure investment looks buoyant. But in order to facilitate such an investment the necessary fuel in the form of infrastructure financing has to be provided. Considering the stymied traditional sources of banking credit the focus on developing alternative sources of infrastructure financing now warrants specific attention.
Public policy consultant, NITI Aayog
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