The Central government will need to significantly accelerate its infrastructure capital outlay in FY2022 to catch up with the investment planned under the National Infrastructure Pipeline (NIP)
The Central government will need to significantly accelerate its infrastructure capital outlay in FY2022 to catch up with the investment planned under the National Infrastructure Pipeline (NIP). Due to COVID-19 pandemic, the actual infrastructure investment during FY2021 will fall short of the target for the year under NIP. Hence, a lot of catching up will be required to complete the projects planned under the NIP by 2025.
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While as per the NIP financing plan, the state government’s budgetary capital outlay is to fund around 24-26 percent of the total NIP investment, near term fiscal constraints and priority towards social spending is likely to limit a major increase in the state’s capex. Hence, the Central government, which is relatively better placed, is expected to increase the infrastructure capital outlay in FY2022, till the time the state’s capacity to increase capital investment improves. The Central government is also likely to use stronger Central Public Sector Enterprises (CPSE) like ONGC, Coal India, IOCL, to step up the capex.
Investors also expect a funding roadmap for the NIP, since besides the Central and state budgetary allocations a major part of the financing is to be availed from other sources like financial institutions, investors, and corporates. Measures to improve infrastructure financing avenues would prove a boon for the NIP implementation plan. As infrastructure debt financing in India is primarily from banks and infrastructure NBFCs (PFC, REC, IRFC, IREDA, IIFCL, and private sector NBFCs), these are expected to fund a major part of the debt to be availed for the NIP. Banks and NBFCs are planned to provide credit, ranging between Rs. 26 to 30 trillion to the infrastructure sector by 2025, which is nearly double their current outstanding credit of Rs. 22.6 trillion to the sector.
This will also be challenging as the infrastructure sector has witnessed high stressed advances in the past, and financial institutions have been limiting fresh exposure to the sector. This apart, their capacity to finance is also limited in comparison to the sharp increase in infrastructure projects planned under the NIP. Hence, it is important to strengthen these institutions (particularly NBFCs), thereby increasing their ability to scale-up infrastructure project financing.
Further, a new Development Finance Institution (DFI) for the infrastructure sector was mentioned in the last Union Budget, and it is expected that the upcoming budget would provide more details on this, including its structure, and equity allocation. Over the next five years, the DFI is expected to bridge the shortfall in NIP financing by about Rs. 2-3 trillion. While the DFI has the potential to raise sizeable low-cost foreign funds, which can be used to improve financing available to the infrastructure sector, scaling up the new DFI would be challenging.
The corporate bond market is also expected to play a major role and finance about 6-8 percent of the NIP, hence steps towards deepening and facilitating the corporate bond market is also expected. So far, the bond market access is limited to public sector enterprises or very strong corporates.
This is also due to restrictions on investments by long-term investors like pension and insurance funds in corporate debt as only investments which are rated in the AA category or higher can be classified as ‘Approved Investment’. In 2017, a new rating scale for infrastructure companies was devised, however, it had seen limited application in the absence of regulatory approval. Recently, the Insurance Regulatory and Development Authority (IRDA) permitted infrastructure investment rated in the A category, along with an Expected Loss Rating of “EL1” as part of the Approved Investment. An increasing investment threshold for such institutions, while balancing the risk involved, can pave the way for deepening the corporate bond markets.
The private sector will be playing a major role in the NIP – both in implementation as well as in its funding. It is expected that the government will take measures towards reviving private sector participation by reducing execution bottlenecks, improving the risk-sharing mechanism and fast-tracking the resolution of long-pending claims.
To channelise equity capital into infrastructure projects, the Infrastructure Investment Trust (InvIT) can play a key role. It has emerged as an attractive vehicle for long-term investors to invest in operational infrastructure projects, thereby churning the developer’s capital deployed in such projects. Increased capital availability with developers can help improve private players’ interest in PPP projects, thereby speeding up the infrastructure investment cycle. On similar lines, it is also expected that public sector enterprises will use the InvIT to monetise assets. Entities like the National Highways Authority of India (NHAI), and Power Grid Corporation of India Ltd (PGCIL) have already indicated their plans to float InvITs and raise between Rs. 50-100 billion each, and it is expected that the Budget will plan to complete these issuances in FY2022.
Further, the National Investment and Infrastructure Fund (NIIF) is also expected to mobilise sizeable equity from foreign investors and invest in the infrastructure sector in the country. The NIIF has so far been successful in partnering with prominent global investors like ADIA, PSP, CPPIB, Temasek, etc., and manages over US$4.4 billion of equity capital commitments. However, given the size of the global funds, the NIIF has huge potential to scale-up. Hence, ICRA expects higher budgetary allocation towards the NIIF with a mandate to increase the pace of infrastructure investment.
In a nutshell, increased budgetary allocation towards infrastructure in FY2022, and a funding roadmap for NIP would provide more certainty on the implementation of the NIP and will be a key factor to watch out for in the upcoming Budget.
The author Shubham Jain is Group Head & Senior Vice President, Corporate Ratings, ICRA Limited. Views are personal
(Edited by : Aditi Gautam)
First Published: Jan 25, 2021 5:14 PM IST