Policymakers are looking at massive infrastructure development to help revive an economy that has been hit hard by successive waves of the pandemic. But in order to meet the ambitious targets, India needs to spend 7-8 per cent of GDP on infrastructure (about $200 billion annually) and it is, at the moment, only investing about half the required amount.
The creation of a new DFI – the National Bank for Financing Infrastructure and Development (NBFID) – plus better controls on loans from banks and NBFCs, and fast asset monetisation to release funds for new projects, are all foundational to the strategy of increasing fund flows to infrastructure. In addition, finding ways to develop the corporate bond market is critical.
The last calendar year has seen several encouraging signals. The NBFID has been set up and the government looks to gradually disinvest around 74 per cent of its ownership, as the new institution ramps up lending to Rs 5 trillion across the next five years. IFCI – a DFI that has struggled for years to contain its bad loans – has significantly brought down its NPA ratios and succeeded in improving its recovery rate on bad loans dramatically.
While infrastructure is still logging very high gross NPAs across the banking sector, the ratio of bad loans has significantly reduced in the last two fiscals. This brings banks back into play as potential sources of credit to infrastructure. Bank exposures to roads and power increased by 3.5 per cent last year. That reverses a trend of falling bank exposures.
The RBI has rejigged its PCA parameters to ensure faster action on bad loans in the banking sector. It has also instituted a new PCA programme in the NBFC sector. This should ensure better discipline from lenders.
The corporate bond market is tiny at 16 per cent of GDP, compared to peer Asian nations. Masala bonds have lost flavour, at least temporarily, for fear of exchange risks. However, infrastructure companies have successfully started to directly access the bond market, especially in the green bond segment. Even in the primary equity market, issues such as those from the Indian Railway Finance Corporation, RailTel Corporation of India, and GRInfra projects have found takers.
Monetisation via asset sales has raised around Rs 386 billion in 2021 (till November), more than the Rs 384 billion raised during all of 2020. Investors have also responded positively to InvITs. Two public sector InvITs – NHAI InvIT and Powergrid InvIT – together raised over Rs 125 billion in 2021 and there are now 13 InvITs, including specialists such as Virescent Infrastructure InvIT, which focus on renewable energy.
Of course, issues and challenges remain. The preference for high quality paper (AAA/AA accounts for about 85 per cent of the debt market by volume), lack of broad-based lenders, and delays in bankruptcy processes are still concerns. The illiquid secondary bond market also limits appetite since banks need to worry about asset-liability mismatches in long-gestation projects.
Economists refer to this strategy of massive government-driven projects as “pump-priming”. If it works, it should reflate construction, along with driving higher consumption of key commodities such as cement, steel and copper. This would help create employment and that, in turn, should lead to more private consumption demand, lifting other sectors. While it’s too early to call this strategy a definitive success, the early signs are propitious.