The magic potion for growth seems to be capex spending with the buzzwords being digital (DPI) and physical infrastructure. It began with the National Infrastructure Pipeline (NIP) in 2020 with a Rs 111 trillion outlay covering nearly 7,000 projects spread over energy, roads, railways, social and urban infrastructure sectors.
The Centre and States were expected to foot a major part of the bill (50 percent of the outlay) while banks, infrastructure NBFCs, bond markets and foreign aid were expected to fill in with the rest. Budgetary allocations since 2020 for capex spending have thus gone up more than twofold, from Rs 6.6 trillion in 2020-21 to Rs 14.9 trillion in the last Budget. Almost a third of this went to Roads & Highways and Railways.
For sure, capex spending by Government has an almost immediate impact on economic growth, with GVA going up from the related sectors (construction, steel, cement, etc.) But the real intent is to get private sector investment going in manufacturing and industry, which is expected to really drive growth in terms of output, jobs and income.
Lagging Private Investment
But private investment has been lagging for many reasons, some well-known- slowing personal consumption demand and excess capacities existing. But a more important reason perhaps is the fact that many of the services which now contribute increasingly to total consumption, such as financial services, online e-commerce, and numerous tech startups are not very capital intensive.
Bank credit data also offers anecdotal evidence, with the largest share of term loans going to home loans, not industry, with working capital credit almost half of total credit.
As for the truly capital intensive industries of yore such as iron and steel, metals, chemicals, textiles etc., there has not been much evidence of any significant investment intentions. This also seems to be the case going by the RBI’s reports on Private Corporate Investment: Performance and Near-term Outlook, which are a useful source to gauge private capex intentions. Its latest study (August 2023) shows the infrastructure sector (roads, highways, power, telecom and ports) at the top of the list (60 percent of all envisaged capex) for all bank-funded capex projects sanctioned during the last five years.
Traditional sectors such as textiles, metals, cement, petroleum, food processing etc. accounted for only about 22 percent. It is not known if the huge orders for aircrafts placed by several airlines in recent times figure in the list, but these are expected to happen over many years. Almost the entire capex sanctioned during 2022-23 were to roads and power sectors, perhaps not entirely unexpected given the NIP project proposals, but the gist seems to be that not much capex is expected in industry and manufacturing.
Private sector participation in public infrastructure has not been a great experience for both the players and the financing banks. It was relatively better in the ‘commoditised’ sectors such as telecom and power where stronger demand and shorter project durations made them more viable. But on the roads it was a pothole-filled ride.
Business Model Struggles
The sectoral risks apart, the business model was also an issue. The B-O-T model, which dominated private-public road projects during 2007-13, soon lost favour due to huge completion delays, demand uncertainties leading to stalled projects and mounting NPAs for banks. Bank lending to road projects had grown by a whopping 30 percent during 2010-14 which together with massive lending to power projects (30 percent average growth) took the infrastructure exposure of banks to an all-time high of 14 percent by March 2014.
But unfortunately, NPAs also mounted and the share of infrastructure in total stressed advances of banks jumped to 30 percent by March 2014. This led to a slowing down of lending to the sector in the subsequent years but even today, infrastructure NPAs are almost a third of all industrial NPAs. More than sectoral risks (political risks in terms of tolls, delays in environmental clearances, poor demand) what did them in were their lack of skills in long term project finance besides asset-liability mismatch issues which prevented them from extending sufficient repayment bandwidth to long gestation projects.
Other PPP models that were tried, such as hybrid variants based on toll and annuity, also did not make much impact. So much so, the bulk of NHAI’s current projects are reportedly under the conventional EPC route. With little changing on the ground for banks (short term CASA deposits are still a high 40 percent) the prospect of picking up further infrastructure exposure could be a concern. The other funding sources viz. infrastructure NBFCs, bond and equity markets look equally challenging given the state of markets.
Most countries finance infrastructure through bond markets but the issues with our debt markets are well known – the lack of price discovery due to thin volumes, skewed issuer profiles (largely financial intermediaries) and investor profiles (banks, mutual funds), which together with the absence of retail participation has led to markets being shallow. A limiting factor in this regard has been the large pre-emption of retail savings (bank deposits, pensions, small savings) by the Government.
With an investment plate majorly filled with infrastructure projects and with financing issues being a huge unknown, the wait for private capex could get a little longer.
SA Raghu is a columnist who writes on economics, banking and finance. Views are personal, and do not represent the stand of this publication.
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