Over the past few years, India’s infrastructure development has been at the forefront of its public and economic policy. This sector has been recognised as a key driver for achieving the government’s goal of a $5 trillion economy by 2024-25. This is clearly witnessed by the increase in the infrastructure spend, which is expected to rise from about $1.1 trillion (during 2008-17) to $1.4 trillion by 2024-25. Further, rapid urbanisation has created a massive demand for housing. There is a need to update and modernise public and private infrastructure to cater to the requirements of the 21st century.
As we enter the new era of post-Covid-19, India is looking to accelerate its economic growth engine and fulfil the aspirations of 1.4 billion population. To this end, recognising the economic benefits of infrastructure development and the multiplier effect that the sector can create will be critical. The Government of India has given a policy push with various programmes such as the National Infrastructure Pipeline (NIP), PM Gati Shakti, the National Monetisation Plan and housing schemes to create an enabling environment for such development.
The government launched the NIP programme in 2020 to act as an enabler to provide and infuse funds that the country would need for infrastructure development. The NIP covers the period from 2019-20 to 2024-25 and comprises economic and social infrastructure projects with a total outlay of $1.4 trillion. In the Union Budget for 2022-23, a year-on-year increase of more than 35 per cent in capital expenditure was announced with a proposed infrastructure spend of more than $130 billion.
Green intervention
The definition of the infrastructure sector has undergone an immense change in the past few years. With a global focus on achieving net zero carbon emissions, the task of switching over to “green and sustainable businesses” has taken centre stage for governments and organisations alike, across the globe. Additionally, projects working towards sustainability such as those involved in climate change adaptation, electric vehicles, renewables, sustainable waste and water management, sustainable land use including sustainable forestry and agriculture, and biodiversity conservation are required to thwart the threats posed by climate change. To meet the financial needs of such important projects and ensure their sustenance, it is vital to develop new financial instruments such as green bonds; create institutions such as green banks or lenders and new avenues to attract global funds.
Encompassing all these funding mechanisms and initiatives, the subject of green finance is fast emerging as a priority for governments across the world. We are witnessing growing participation from the ecosystem of organisations and lenders that are pioneering initiatives aimed at powering sustainable economic growth well into the next century.
With India needing close to $10 trillion or roughly Rs 750 trillion to meet its net zero carbon emission goals by 2070,
the green finance sector will play a crucial role in funding initiatives that will enable the switch to renewable energy from conventional fossil fuels, electric vehicles, sustainable waste and water management, etc. Moreover, as the public and private sector join hands to take advantage of the benefits offered through various governmental agencies and schemes, green finance will undoubtedly be the most critical enabler for the world’s fastest growing major economy such as ours in achieving its net zero target well before the set timelines.
Company initiative
With the above backdrop, PTC India Financial Services Limited (PFS) has also evolved over the years to focus on entities in the energy value chain with a focus on sustainable infrastructure and renewable projects, which aligns with the government’s vision of a clean and green society. PFS has been the first mover in both established and emerging green infrastructure finance sectors such as renewable energy, wastewater treatment plants, e-mobility and e-vehicle manufacturing, which are sustainable for a long term in the future.
PTC India Financial is at an inflection point and diversification of the funding mix is key to ensuring steady growth. It is growing with the broader objective of giving back to society through its focus on green and sustainable business, by diversifying the investor base, that is, both domestic and foreign investors, and tapping new regions for fundraising.
Long-term debt financing with cheap borrowing rates will be critical to the infrastructure sector on the path of sustainable growth and success.
Constraining factors
Infrastructure financing in India continues to face many obstacles, ranging from an excessive cost of raising capital to a lack of long-term funding. Financing infrastructure projects is challenging, mainly due to the insufficiency of capital and liquidity in banks and non-banking financial companies (NBFCs) as well as other sectoral constraints. To meet the government’s ambitious target of Rs 111 trillion in investments under the NIP by 2024-25, that is, funding almost 7,000 infrastructure projects under the NIP, the government has taken the initiative of forming a development finance institution (DFI) – National Bank for Financing Infrastructure and Development (NaBFID). NaBFID will be established with a capital base of Rs 200 billion and an immediate funding of Rs 50 billion from the government. The government aims to leverage these invested funds and raise up to Rs 3 trillion in the years ahead. The proposed DFI will expand long-term non-recourse infrastructure funding in the country, including the advancement of debt as well as credit and currency derivative markets, thereby catalysing infrastructure financing in the country. While some measures such as infrastructure investment trusts (InvITs), and encouraging pension funds (PFs) and insurance companies to invest in these AAA rated InvITs have been taken, they still seem far and few.
Growth track
The power, roads and bridges, urban digital infrastructure and railway subsectors together constituted 85 per cent of the total infrastructure investment in India between 2008 and 2019. The central and state governments were the major funding sources for sectors such as power, and roads and bridges, with a moderate participation from the private sector. Digital sector investments were largely driven by the private sector, while investments in the irrigation sector were predominantly made by the state governments. While most infrastructure projects are government (centre/state)-backed, the need in this sector is to ensure the availability of long-term financing and cheaper interest rates. New investor categories need to be tapped to ensure diversity of the funding basket to enable win-win for both borrowers and investors.
Attracting foreign funds is also critical in this sector. While large infrastructure players are yet to tap the foreign funds market (ReNew Power in its marquee deal concluded in August 2022 was able to raise $1 billion through external commercial borrowings for the largest single-project funding in the Indian renewable energy sector), there are many viable and less risky infrastructure projects that are unable to diversify their funding mix. It is here that infrastructure NBFCs such as ourselves can step in, to bridge this gap between the investor and the borrower for long-term funding at a specific return.
When it comes to Indian companies targeting foreign funds, most Indian organisations are rated at par with India’s rating of BBB- or junk at the global scale. Foreign investors look to pricing these debt instruments accordingly, and hence, there is an interest rate mismatch.
Outlook
The infrastructure sector has received a fiscal stimulus and significant attention from the government recently. The government has proposed to develop a Rs 200 billion DFI with the target of financing the enormous NIP project. However, developing a DFI alone will not entirely resolve the infrastructure sector’s distress with regard to financing. It needs to be complemented with alternative infrastructure funding sources, and banks and dedicated NBFCs will have to take charge of funding big-ticket infrastructure projects. Over the past few years, banks have consistently underperformed in terms of their contribution to the total infrastructure lending. The bond market can provide infrastructure corporations with long-term, fixed rate financing. However, the debt market in the country is in its infancy and still has a long way to go. InvITs have received a lot of regulatory attention and there is increasing investor participation as well. With an evolving regulatory framework and clear policies, it is expected that InvITs will be considered the preferred route of infrastructure investment for long-term investors. Going forward, long-term alternative sources of funding, along with low interest rates will be required to maximise infrastructure development in the country.