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Budget 2021 | A force multiplier, infrastructure needs financing boost

The government may consider changes to the financing mechanism of loans for the infrastructure sector, which is the key contributor to India's development.

January 30, 2021 / 01:17 PM IST

As India embarks on the journey to be a $5-trillion economy, the key driver for achieving this phenomenal goal will be the infrastructure sector. The sector has been one of the key contributors to India’s overall development and enjoys the government's attention with policies that would ensure time-bound creation of world-class infrastructure.

As per Niti Aayog and Quality Council of India (QCI), India will require an investment of around $4.5 trillion by 2040 to develop the infrastructure for sustaining its economic growth.

Recently, the government has also laid out a National Infrastructure Pipeline (NIP) plan to spend around Rs 100 lakh crore between FY20 to FY25 on the development of infrastructure in the country. Prioritising infrastructure investment necessarily entails extensive private sector participation as well as opening the doors for foreign investors.

Getting the private sector's back in a big way will have to be the topmost priority since the government has limited fiscal headroom. Moreover, with the COVID-19 pandemic severely impacting private sector's finances, the demand for ensuring a sustainable financing mechanism is ever so prominent. It is thus crucial for the government to explore additional interventions that have a multiplier effect on the infrastructure sector.

The government may consider the following initiatives to address the infrastructural funding requirement:


>> The government may consider pursuing asset monetisation initiatives such as ToT and InVIT to fund new infrastructure initiatives. The ministry of road transport and highways (MoRTH) has been a pioneer in asset recycling, which is expected to enable it to generate further revenue from its already matured assets and provide fiscal leeway to fund future projects. Further, the National Highways Authority of India (NHAI) has already started working towards a public sector InvIT and has received a go-ahead from the cabinet for the same. Such initiatives should be encouraged in other infrastructure sectors too.

>> The government should also leverage the experiences of other sectors for implementing Value Capture Financing (VCF) as a tool to monetise land in the vicinity of infrastructure corridors.

>> The government could push for the inclusion of infrastructure as one of the Priority Sector Lending (PSL) areas, as notified by the Reserve Bank of India (RBI). PSL list primarily features the social sectors of the country (agriculture, education, social infrastructure, etc.), and it is important to strike a balance with other infrastructure sectors, which are equally important for the economic growth of the nation.

>> The government could prioritise build operate transfer (BOT) as the preferred mode of project implementation and revisit the contracts in consultation with the private sector as well as project lenders.

To encourage private sector interest in infrastructure development, their key implementation challenges may be addressed in this Budget. One pain point is the lack of cheap credit availability for financing projects. Unlike other sectors, returns from infrastructure projects can take up to 20-25 years. This often leads to an asset-liability mismatch for the lending institutions, who in turn, refrain for making large investments in the infrastructure sector.

These steps can be introduced in the Budget 2021-22 to alleviate concerns of the private sector:

>> The government may reform the existing financing mechanism of loans to the infrastructure sector. Infrastructure projects have a debt tenor requirement of 20–25 years. However, as per their existing convention, the banks typically lend for a term of 10–15 years. Infrastructure projects, particularly those in the road sector, generate significant cash flows even after the loan period has expired. This presents a unique opportunity for the RBI to support the developer by allowing extending the maturity of the loan through refinancing of the debt based on economic life of the project. RBI had issued circulars on the subject in 2014, which were withdrawn in June-2019.

>> The government can announce initiatives for revitalising the bond market (corporate and municipal) in India, which is an attractive source of long-term financing. Even the secondary bond market in the country can be further strengthened to support long term credit.

Given that over the years, the infrastructure sector has been consistently and significantly contributing to the country’s growth, resolving financing issues in this sector can serve as a template for achieving the ambitious targets under NIP.

(Pranavant is the Partner at Deloitte India.)

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first published: Jan 30, 2021 01:17 pm
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