Budget 2022 | India needs a framework to fund its capital investment

Budget 2022

Harsh Shah

Budget 2022 announced an over 35 percent increase in annual capital expenditure to Rs 7.5 trillion in FY23. Twinning it with the objective of reducing the fiscal deficit to 6.4 percent in FY23 and ~4.5 percent by FY26, unless the revenue receipts move upwards, the onus will need to shift further onto private players to bring in long-term and steady flow of capital to help fund India’s capital investment.

However, in order to facilitate private participation, and make the National Monetisation Pipeline (NMP) a success, there is a growing need to promote enhanced competition between participants, and this can be achieved via systematic and transparent processes of monetisation, categorisation of risks, and corresponding returns.

Systematic reforms and policy initiatives, backed by a conducive regulatory framework, are the need of the hour to deepen the financing universe in the infrastructure sector. This has been the major underlying expectation from our side this Budget season. Long-term lucrative financing can only be established with structural reforms. One such shining example is the advent of Infrastructure Investment Trusts (InvITs) in India, offering both financing and ownership of operational real and infrastructure assets in a more structured manner. Given InvITs and Real Estate Investment Trusts (REITs) have delivered superior returns for investors (even during the pandemic) while maintaining credit quality, there is need to make them more mainstream, and expand investor participation, and boost liquidity.

The key is to give the capex cycle a positive spur to really stimulate infrastructure spending. Establishment and listing of the National Infrastructure Pipeline (NIP) and the NMP has given a structured approach to identify financing needs, gap in funding sources, and the urgency to plug them effectively. Timely implementation of ongoing projects, and segregation of development capex vs takeout financing is critical.

InvITs, as platforms for infrastructure ownership, have established their ability to attract diverse capital investor base, including pension and insurance funds globally, and mutual funds and domestic retail savings domestically.

Budget 2022 should have focused on facilitating and providing solutions via deep-rooted reforms in the power sector across the value chain. For instance, while there were incentives for module manufacturing which will provide incentive to invest in the solar energy manufacturing sector, the pathways to address the structural reforms seems to be missing in the Budget speech.

While there is a target of 500 GW of solar and wind power, and a need to establish a green bond market for funding these projects, we were left desiring for specifics. We anticipate that the government will address these reforms systematically as the sector continues to evolve to the changing macro environment. There has to be a concerted effort to provide a framework for achieving the milestones we have set ourselves, and to establish and attract suitable financing channels to provide a permanent, and self-sustaining capex cycle.

Harsh Shah is CEO, IndiGrid Trust. Views are personal, and do not represent the stand of this publication.