Budget focus on infra: Easier rules to woo long-term capital

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Updated: Nov 30, 2020 2:20 PM

The government is weighing a raft of proposals, including relaxing rules to enable insurance firms and pension funds to put in long-term capital in infrastructure projects, as it seeks to spur job creation and bring the Covid-hit economy back on track fast.

After a record slide of 23.9% in the June quarter, the year-on-year contraction in real GDP narrowed to 7.5% in the second quarter of this fiscal.

The government is weighing a raft of proposals, including relaxing rules to enable insurance firms and pension funds to put in long-term capital in infrastructure projects, as it seeks to spur job creation and bring the Covid-hit economy back on track fast. Extant regulatory norms effectively bar these investors that bring in patient capital from funding private-sector special purpose vehicles (SPVs), while most infrastructure firms are set up as SPVs. These long-term investors are also required to invest primarily in highly safe instruments.

These instruments, such as government and public-sector bonds, often fetch measly returns. Similarly, various institutional investors face restrictions in funding infrastructure projects that are not rated AA or above, even though most of these projects rarely have ratings of BBB or above. “These anomalies between the reality and regulatory requirements are being addressed. While we certainly need more long-term capital, the government also wants to ensure any such step doesn’t pose risks to the broader financial system. Consultations with regulators and others are on and appropriate steps will soon be announced,” an official source told FE. Some of the remedies will likely feature in the upcoming Budget for FY22.

The Budget is also likely to unveil a development financial institution (DFI) with the specific mandate to finance large rural infrastructure projects that require long-term finance and could serve as antidote to general investment famine during economic downturns. It will work under an innovative framework, where private corporate funds and global patient capital will find viability in India’s rural projects. Also, there will be practical solutions to the issue of asset-liability mismatches faced by banks as they lend to long-gestation projects. Already, IRDAI, EPFO and PFRDA are learnt to have initiated discussions on tweaking regulatory guidelines to draw more investments into infrastructure.

The government will soon set up the proposed Credit Guarantee Enhancement Corporation, which will likely have an authorised capital of Rs 20,000 crore, according to sources. It will offer guarantee to bonds issued by completed projects and help their rating profile. This, in turn, will enhance the confidence of long-term investors in these projects and enable them to commit funds.

With the economy battered by the pandemic, a government task force on the National Infrastructure Pipeline had in April firmed up a road map for capital investments of Rs 111 lakh crore in infrastructure up to FY25. As much as 31% or more of the total envisaged investments would have to be raised through debt from the bond market, banks and shadow lenders.

Given that most public-sector banks are struggling to cope with toxic assets, their ability to fund large infrastructure projects remains stunted. Also, as research agency Emkay Global recently estimated, the compounded annual growth rate of the combined infrastructure spending by the Centre and states could slide to just 5.5% over the FY19-25 period from as much as 21% over FY13-19.

Against this backdrop, facilitating the flow of long-term capital through enabling regulatory provisions remains critical to the government’s efforts to kick-start engines of growth swiftly. Earlier this fiscal, the government had said out of the total expected capital expenditure, projects worth Rs 44 lakh crore (40%) were under implementation, projects worth Rs 33 lakh crore (30%) were at a conceptual stage, projects worth Rs 22 lakh crore (20%) are under development (project identified and DPR prepared, but yet to draw-down funds) and the balance projects worth `11 lakh crore (10%) were unclassified.

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