By Dhanendra Kumar
Infrastructure is the key to speedier economic growth, trade and exports, efficiency, job creation, quality of living, inclusivity, and poverty reduction. It is the ‘force multiplier’ of all economic activities across sectors like cement, steel, ports, railways, transportation, logistics, auto, real estate and so on. According to Economic Survey 2021-22, India needs to invest about $1.4 trillion in infrastructure to emerge as a $5 trillion economy by FY25.
The building of infrastructure requires large and lumpy investments, with long gestation periods. The deficiency of infrastructure also cannot be made up through imports and has to be developed locally. That is the essence of ‘Atmanirbhar Bharat’. The role of local players, banks, and financial institutions become critical in this regard. Due to various constraints, there are limited players in the field. During the last 15 years, several major listed infrastructure players have gone bust or faced grave existential issues. This include the likes of behemoths such as IL&FS.
There are various other reasons too—recurring economic sluggishness after the pandemic and Russia-Ukraine war, high interest costs, project delays, supply constraints, debt servicing issues, energy problems, and reduced investments flows. Other issues relating to land acquisition, prolonged litigations, procedural hurdles, delayed clearances, and policy changes exacerbate the complexity. As India aims to transform into a $5 trillion economy soon, we need investment on a gigantic scale in roads, railways, power, ports, logistics, digital communications, 5G, and more. The government launched several initiatives like the National Infrastructure Pipeline (NIP) with a projected infrastructure investment of around `111 trillion during FY20-25. The finance minister referred to the establishment of the Infrastructure Finance Secretariat in Budget 2023. It seeks to assist stakeholders in encouraging more private investment in infrastructure, which are predominantly dependent on public resources. According to the ministry of finance, while 44% of investment is funded through central and state budgets, banks, financial institutions, and the Development Finance Institution (DFI) are expected to play a crucial role in financing these with a share of about 30%. Thus, the role of the banks and financial institutions becomes critical.
Infrastructure projects are capital-intensive, and many companies face challenges in raising adequate and timely financing. In the current geopolitical environment of limited access to long-term funding, high interest rates, and other challenges, infrastructure companies have to rely even more on banks and financial institutions to fund their liquidity needs.
Unlike Western countries, most major Indian banks are government-owned. The banking policy is guided by and closely aligned with our national goals. Our central bank is highly reputed globally for its professionalism, lauded for its policies during and after the pandemic.
As critical infrastructure projects have a long gestation period, only banks and certain other financial institutions are best placed to extend loans to private enterprises. Considering the government’s vision of developed-nation status for India by 2047, banks (especially PSBs) must continue to play the role of financing India’s growth story without being deterred by short-term challenges. While a few large Indian players in the infra sector like L&T, Adani, and a few Tata Group entities have delivered mega projects in a timely manner and are in better shape, certain recent developments show how even they face occasional shocks due to external factors.
Take, for example, the Hindenburg report making multiple allegations against the Adani Group, a conglomerate central to the Indian infrastructure. Included in these allegations were a series of claims questioning the propriety of loans extended by SBI and investments made by the LIC. This put some projects on the back-burner and made financial institutions wary of lending.
Some people jumped on the bandwagon; the rest is history. Three months down the line, things have changed for the Adani Group. A high-level committee appointed by the country’s apex court in its report has not made any conclusive adverse findings. Investors flocked back, and the Adani Group seems to be recovering. Some investors who continued to have faith in the company and India’s growth story invested undeterred and made huge gains within a few months. Throughout this process, the CXOs of major Indian banks had to reassure stakeholders that the concerns raised won’t drastically impact their loan book. These developments show how an unexpected event can have a systemic impact on the country’s banking system and spiral into another major shock for the infra sector.
All that is needed is for the banks to remain undeterred by such events and stick to their professional judgement with strict due diligence per their procedures. Anything otherwise may create another lost decade for the Indian infrastructure sector. It is up to the banking system to ensure that our infrastructure growth is not hampered at this critical juncture.
The author is Former executive director for India, World Bank; ex-chairman, CCI; and founder chairman, Competition Advisory Services LLP
