The government, through the National Infrastructure Pipeline (NIP), envisions creating new and upgrading existing infrastructure to achieve the target of a $5 trillion economy by 2025. To achieve this target, the country needs to spend $1.4 trillion (Rs 100 trillion) over these years on infrastructure. In the past decade (2007-08 to 2016-17), India invested about $1.1 trillion on infrastructure. The challenge is to step up annual infrastructure investment so that lack of infrastructure does not become a binding constraint on the growth of the economy. To this end, projects worth Rs 102 trillion have been identified that will be implemented in the next five years. The government aims to ensure timely implementation of these projects, spread across 18 states and union territories, by 2024-25.
Highlights of the NIP
A task force was constituted to draw up the NIP for each of the years from 2019-20 to 2024-25. Of the projects in the new pipeline, the centre and states are to implement 39 per cent of the projects each and the balance 22 per cent are to be implemented by the private sector. From 2019-20 to 2024-25, sectors such as energy (24 per cent), roads (19 per cent), urban infrastructure (16 per cent) and railways (13 per cent) will take up around 70 per cent of the projected capex. Of the total expected capex of Rs 102 trillion, projects worth Rs 42.7 trillion (42 per cent) are under implementation, while those worth Rs 32.7 trillion (32 per cent) are at the conceptualisation stage, and the rest are under development. Projects at the conceptual stage include those for the development of expressways, freight corridors, renewable energy, and river inter-linking. States that are yet to communicate their respective pipeline plans are expected to do so in due course. This exercise is expected to be followed up by a periodic review process. Another Rs 3 trillion worth of projects are likely to be added to the NIP.
Financial sector reforms
In order to address key issues and attract foreign and private capital into infrastructure, it is critical to undertake the following policies and reforms.
Revitalising the bond and credit markets
A credit enhancement fund is expected to attract bond market investors towards investing in infrastructure projects. As most of the projects are rated below AA, it is critical to enhance their rating to augment the access of institutional investors through capital market instruments. A well-capitalised credit enhancement institution should be set up early. It is also important that long-term capital from pension and insurance funds is channelised into the infrastructure sector. Building capacity of financial institutions, including India Infrastructure Finance Company Limited (IIFCL) and the State Bank of India, is crucial to provide long-term finance. The task force also recommends suitable governance reforms in IIFCL.
Strengthening the municipal bond market
So far, eight urban local bodies in the country have raised a total of Rs 33.9 billion via municipal bonds. By 2024, 50 cities are expected to issue municipal bonds. The key steps required for encouraging local bodies to issue municipal bonds are:
- Improving financial discipline and ensuring regular disclosures
- Augmenting the revenue base and buoyancy of revenues of local governments
- Addressing the gap in creditworthiness of local governments through innovative credit enhancement structures
- Encouraging pooled bond issuances.
Revitalising asset monetisation
The National Highways Authority of India and the Airports Authority of India have been amongst the first public bodies to monetise operational assets in the past four years. Asset monetisation can be undertaken through the sale of land or non-operational assets, the toll-operate-transfer model, infrastructure investment trusts, sale of assets to strategic/financial investors, loan securitisation, and value capture financing. The task force recommends that the pipeline for asset monetisation for the next two years be finalised by end March 2020.
Long-term financing landscape
Taking note of the scarcity of long-term capital for infrastructure, the task force recommends a regulatory revamp to enable significant participation of foreign portfolio investors and inflow of foreign direct investment into infrastructure debt funds, development finance institutions and securitisation markets.
About three-fifths of the total investment in the infrastructure sector is divided among the road, energy and railway sectors, while the rest covers urban infrastructure. In these investments, about 42 per cent of the projects are already under implementation. Industry experts are of the view that the execution of order books in the ongoing quarter of 2019-20 and the entire 2020-21 fiscal year is likely to show pronounced improvement.
Many brokerage houses are bullish about listed construction players with a large presence in infrastructure sectors. Only select companies such as Larsen & Toubro, PNC Infratech, KNR Constructions and Dilip Buildcon are expected to show growth in the high-teens in their earnings per share in the next two fiscal years, given their relatively strong balance sheet and order book to sales ratio, and superior execution capabilities. However, they expect that private capex is unlikely to constitute a 22 per cent share of the total infrastructure investments, as laid out in the NIP document, which lacks details about financing of the projects.
The construction sector will receive a shot in the arm from the execution of the NIP. Within this sector, the cement industry is expected to be the biggest beneficiary. Demand for the material is expected to rise by 4-5 per cent, aided by a low base effect and push from the affordable housing and infrastructure sectors (roads, railways, ports and airports). Coupled with falling input costs, the outlook for the cement industry seems bullish.
The NIP will enable a forward outlook on infrastructure projects which will create employment, improve ease of living, and provide equitable access to infrastructure for all, thereby making growth more inclusive. The pro-growth stance of the government has set a positive context for 2020-21. However, due to liquidity issues faced by the financial sector, encouraging cooperation from other economic agents (especially the private sector and state governments) has become essential to achieve a fair degree of success in the government’s ambitious investment plan.