The Indian economy is going through a period of decelerated growth. The GDP growth rate slid to 4.5 per cent in the second quarter of 2019-20, the lowest since 2013-14. This is also the sixth successive quarter of a decline in the growth rate. High unemployment, weak consumption demand, low private investment, slowdown in construction and manufacturing activities, and global headwinds are the primary reasons for the flagging economy. Supply-side measures such as a corporate tax cut and successive repo rate cuts are yet to have the intended impact to revive business activity. The infrastructure sector, too, is facing the heat due to low capital expenditure growth. Amidst this, a pickup in infrastructure financing from key sources was the only silver lining.
Indian Infrastructure summarises financing trends of the past year…
In 2018-19, gross bank credit to infrastructure improved after a decline in cumulative lending to the sector posted in 2017-18. Increasing credit flow to renewable energy, telecom and roads contributed to the 19 per cent growth in bank lending in 2018-19. The momentum continued in the ongoing financial year as well. Notable airport and road projects were able to achieve financial closure. However, the excitement around the hybrid annuity model gradually faded due to issues surfacing and banks resorting to disciplined lending.
The non-banking financial company (NBFC) industry is currently going through tough times on account of unfavourable market conditions. The Infrastructure Leasing and Financial Services default has had a spillover effect on the industry. Currently, many NBFCs are sitting on bad loans and facing asset quality pressures, particularly on their wholesale lending book. A slew of supportive measures have been announced in the past few months to clean NBFCs’ books to some extent. These include portfolio buyout by banks and relaxation in priority sector lending norms. However, it still remains to be seen how and when these regulatory actions will translate into a revival in lending from this critical source.
The bond market, still occupying a minuscule share in infrastructure financing, has seen some action in the past two to three years. Most of the bond issues have been for the telecom, road and power sectors. With regard to municipal bonds, there has been a spurt in issuances since 2015 with eight urban local bodies (ULBs) raising around Rs 34 billion so far. Key initiatives towards enhancing financial transparency of ULBs have brought some cheer in the country’s shallow municipal bond market. Meanwhile, green bonds have become the new flavour. India’s green bond market is strengthening with participation from public and private sector corporations alike that are opting to raise finance, especially for renewable energy projects. These include Azure Power, NTPC Limited, Greenko, ReNew Power and YES Bank. Green bonds have also received marked attention from regulatory authorities to encourage greater issuances.
The year 2018-19 was dry with respect to initial public offerings (IPOs) by infrastructure companies. The only public floats were by public sector undertakings (PSUs) wherein the government attempted to meet its disinvestment target through the IPO proceeds. Heightened US-China trade war tensions, poor market sentiment and the depreciating rupee were some of the concerns due to which companies preferred to postpone their IPO plans. Among PSU IPOs, the Indian Railway Catering and Tourism Corporation received an overwhelming response and was listed at a 128 per cent premium over its issue price. Apart from IPOs, the government also charted out strategic disinvestments in five PSUs for funding their capex plans.
Global investors, including private equity funds, sovereign wealth funds and pension funds, have shown a great deal of confidence in the country’s growth story, the current economic downturn notwithstanding. They have invested in various forms – direct acquisition in companies (mostly renewable energy and logistics), asset acquisitions via platforms (such as Hindustan Infralog and the National Investment and Infrastructure Fund-Roadis platform) and infrastructure investment trusts (InvITs). With six InvITs already up and running and many more in the offing, the instrument is gradually finding its feet. Controlled investments in yield generating assets to manage them professionally have taken centre stage, an example being the toll-operate-transfer model in the road sector.
In sum
The government’s ambitious target of becoming a $5 trillion economy by 2024 seems far-fetched considering the economic slowdown that the country is facing. Besides, recovery under
the Insolvency and Bankruptcy Code is slow and the one-time settlement method is being resorted to in many cases. This not only points towards the intrinsic challenges associated with the infrastructure space but also sends a signal that the “one size fits all” approach is not working across sectors. The country requires more fiscal stimulus packages, in addition to the ones announced recently, to stir consumption and private investment demand. Meanwhile, establishing development finance institutions and relaxing norms for insurance and pension funds for infrastructure investment is the way forward for meeting the long-term financing needs of the sector. Going forward, among alternative financing instruments, InvITs are expected to make a mark in the refinancing market with investors warming up to the product. This also calls for additional regulatory easing for other financing sources to be able to complement commercial banks in infrastructure financing.
Ishita Gupta