In recent years, India has been on an infrastructure expansion drive. To support this growth, alternative and long-term funding avenues are being explored. While the annual union budgets have consistently provided strong financial support, there is a need to scale up private sector participation for asset creation. In an interview with Indian Infrastructure, Palash Srivastava, Managing Director (Additional Charge), India Infrastructure Finance Company Limited (IIFCL), discussed the current trends in infrastructure spending, the existing financing gaps and measures to address them. Edited excerpts…
What have been the recent trends in infrastructure spending?
The government’s capital expenditure (capex) has historically been the primary driver of India’s rapid infrastructure development. Between FY 2014 and FY 2024, capex witnessed an astounding rise of nearly 800 per cent – from Rs 1.12 trillion to an estimated Rs 10 trillion. Today, infrastructure development remains predominantly government-financed, with approximately 80 per cent of funding sourced from public funds. Of this, around 66 per cent is contributed by the centre and 34 per cent by the states.
However, to meet the growing infrastructure demands of a $5 trillion economy and beyond, there is a pressing need to diversify infrastructure financing sources. While the government’s budgetary allocation has been significant, fiscal space is inherently limited. For India to grow faster, the financial system must play a more active role in infrastructure financing.
However, the participation of states and municipal authorities has remained stagnant in the past few years. States hold the potential to match the centre’s contribution. To this end, they need to be adequately empowered through technical capacity building, access to co-financing and financial structuring support.
There is ample liquidity and macroeconomic stability in the system today. What is needed is the creation of more effective financing vehicles and institutional frameworks, especially to enable states and urban local bodies (ULBs) to access long-term capital for infrastructure development. Strengthening public-private partnerships (PPPs), enhancing municipal bond markets and promoting pooled financing mechanisms will be critical in this next phase of infrastructure-led growth. In this evolving landscape, the role of specialised financial institutions has become increasingly important in bridging the infrastructure financing gap. Of late, non-banking financial company-in-frastructure finance companies (NBFC-IFCs) have overtaken banks in terms of infrastructure financing. The share of NBFC-IFCs increased from 46 per cent in FY 2018 to 56 per cent in FY 2024, whereas the share of banks decreased from 54 per cent to 44 per cent.
What are the key reasons for the low participation of states and municipal bodies in infrastructure financing?
Many challenges continue to restrict the participation of states and municipal bodies in infrastructure financing. One of the foremost constraints in the Indian economy is limited access to cost-effective, long-term capital. As a developing economy with moderate inflation levels, the cost of funds remains relatively high, while maturity tenors tend to be short. To address this gap, IIFCL has taken proactive steps by successfully mobilising long-term funding with tenors of up to 15 years, helping improve the financing environment for infrastructure projects.
Another key hurdle is inadequate capacity for project preparation. It has been widely emphasised that
several cities lack the institutional and technical capabilities needed to develop bankable infrastructure projects. To bridge this gap, comprehensive support is required in several areas, including unified urban planning, access to pooled technical expertise, availability of early-stage funding and the adoption of standardised formats for project appraisal.
Another significant obstacle is the over-dependence on budgetary support. Urban infrastructure is still largely viewed as a public good, and relies heavily on government budgets for financing. This is partly attributable to the low creditworthiness of many municipal bodies, which restricts their ability to access capital markets independently.
ULBs have a weak financial base, with property tax collection – a crucial source of revenue – accounting for less than 1 per cent of the gross domestic product. This indicates significant underutilisation of available fiscal capacity. Therefore, strengthening municipal revenue generation is essential to improve the creditworthiness of ULBs. Enhanced financial strength will enable ULBs to engage in direct market borrowing, including the issuance of municipal bonds.
According to the National Institute of Urban Affairs, approximately 35 per cent of India’s population is currently urban, and another 30 per cent is in the process of urbanising, while around 35 per cent remains rural. Four cities – Ahmedabad, Bangalore, Chennai, and Hyderabad – with currently 5-10 million inhabitants each are projected to become megacities in the coming years. This rising urbanisation, particularly in emerging urban areas, drives greater infrastructure demand, making planned urban development and climate integration critical. Hence, it is imperative that future infrastructure planning aligns closely with these evolving urbanisation trends. Finally, stronger engagement from lenders remains paramount. Financing institutions have acknowledged a notable gap in interaction with municipal bodies. As such, there is an urgent need for greater responsibility and proactive collaboration by financial intermediaries to assist ULBs in structuring viable and bankable projects, thereby fostering more robust infrastructure development at this level.
What measures can be taken to increase infrastructure spending by the states and municipal authorities?
To enable states to significantly scale up their infrastructure spending and complement the centre’s efforts, concrete steps must be taken.
States and ULBs are often constrained by FRBM norms, which limit their ability to adopt innovative financing models such as hybrid annuity models or VGF-based PPPs – models that require significant upfront funding.
To overcome this, there is a pressing need for financing structures that reduce the fiscal burden on states. One effective solution could be the creation of a guarantee-based product, leveraging the existing guarantee frameworks of both the centre and the states that would enhance project bankability, attract private investment and enable wider adoption of innovative infrastructure delivery models without putting undue pressure on state finances.
Strengthening technical and institutional capacity is crucial. Currently, many states face a shortage of technical expertise to effectively plan, execute and monitor large-scale infrastructure projects. To address this challenge, capacity-building programmes should be institutionalised, with a strong emphasis on improving skills in project preparation, financial structuring and project execution.
Another key step is improving access to co-financing and blended finance. States often face limitations in raising capital for infrastructure projects. Co-financing models involving multilateral institutions, the private sector and central schemes should be promoted. Blended finance, which combines public and concessional funds to de-risk projects, can catalyse private investment at the state level. In fact, given IIFCL’s existing funding relationships with the state financial corporations (SFCs) and its growing participation in the municipal bond market, a strategic collaboration is being explored with the World Bank Group, including the Multilateral Investment Guarantee Agency, the International Bank for Reconstruction and Development and the International Finance Corporation (IFC). The objective is to jointly support IIFCL’s sub-sovereign lending programme, which aims to provide long-term, climate-aligned financing to state-level entities, along with ULBs.
There is also a need to enhance creditworthiness and ensure financial autonomy. States and their agencies must improve their credit ratings to attract more long-term financing. Better fiscal management, transparent budgeting and timely audits will help build investor confidence. Moreover, IIFCL’s credit enhancement (CE) facility can help by providing partial guarantees that improve the credit ratings of bonds or loans issued by state-level entities. This makes projects more attractive to investors, lowers borrowing costs, and enables access to private and institutional capital. Therefore, states should actively leverage IIFCL’s CE support in financing PPPs, municipal bonds and large infrastructure projects.
Lastly, strengthening ULBs and municipal finance is crucial. Urban infrastructure, a key component of state-led development, is often constrained by weak municipal finances. Therefore, it is important to empower ULBs through reforms such as property tax collection, user charges and enhanced access to capital markets including municipal bonds.
What is the outlook for the infrastructure financing ecosystem? What trends are likely to shape the sector?
Infrastructure safety is critical. With the rise in extreme weather events, climate-resilient infrastructure must now become the norm. Flood-resistant roads, heat-adaptive buildings and robust drainage systems are no longer optional. Further, disaster risk mitigation must be integrated into the design of all infrastructure projects, especially in vulnerable geographies. Another key priority is urban safety and inclusivity. Infrastructure must protect urban dwellers – particularly women, children, the elderly and differently-abled individuals – through improved lighting, surveillance, emergency response systems and inclusive design. Further, public transport and pedestrian infrastructure should prioritise accessibility and personal safety.
Regarding data and digital infrastructure, safety also means cyber-resilience. As critical infrastructure becomes increasingly digitalised, safeguarding data and ensuring system integrity are vital. Infrastructure development should not only advance economic goals but also promote social well-being and environmental stability. Therefore, a forward-looking infrastructure strategy must integrate safety, sustainability and inclusiveness as core design principles, not as afterthoughts.
“A forward-looking infrastructure creation strategy must integrate safety, sustainability and inclusiveness as core design principles, not as afterthoughts.”
