Prasanna V. Salian, Divya Satija
Infrastructure financing is sine quo non for promoting and sustaining rapid economic growth. India’s investments in infrastructure have been growing over the years, from Rs. 24 lakh crores between 2008 and 2012, to Rs. 56.2 lakh crore between 2013 and 2019. During this period, around 70 per cent of the infrastructure financing was sourced from the public sector and remaining was funded by the private sector – a sub-optimal mix for sustaining infrastructure financing in India.
India aims to achieve the target of becoming a $5 trillion economy by 2025 and infrastructure development has an important role to play. As per the National Infrastructure Pipeline (NIP), the total capital expenditure in infrastructure sectors in India is projected at around Rs. 111 lakh crore ($1.5 trillion) between 2020 and 2025.
However, there are some challenges to achieving these targets including (a) challenge of stressed assets faced by banks and infra-NBFCs, (b) limited private sector finance, (c) low adoption of sustainable and climate resilient development practices, (d) limited social infrastructure and (e) reduced external demand, industrial production, investment and employment, due to the COVID-19 pandemic.
Role of Institutional Financing
To overcome these challenges a combination of reforms, institutional finance and strong institutional technical assistance is needed. Infrastructure sector received adequate attention in the Union Budget 2021, with special focus on monetizing operating public infrastructure assets, foreign participation through InVITS and REITs route and proposed sharp increase in capital expenditure at Rs 5.54 lakh crores, which is 34.5 per cent higher than the budget estimate 2020-21. Together these will continue to create plethora of fresh investment opportunities, which can bring about trade and development that supports economic growth.
The Union Budget 2021 announcement on setting up of a Development Financial Institution (DFI) to provide, enable and catalyze infrastructure financing is a positive move. However, considering the huge infrastructure financing need, a more diversified approach, that is, cooperation with Multilateral Development Banks (MDBs) is also an effective way forward. MDBs are well-positioned in transforming infrastructure needs into technically feasible and financially viable projects while creating financing platforms for institutional capital to enter at scale.
Capable of fulfilling common global financial needs, they generate impact at a large scale by (i) addressing sustainable development (ii) connecting borders and economies and (iii) bridging infrastructure investment gaps etc. Though, MDBs are only a small part of the overall infrastructure financing ecosystem, still they play a crucial role by providing innovative financing instruments, technical assistance and facilitate crowding in private sector investments in infrastructure.
Among the MDBs, the new generation banks such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), focus mainly on infrastructure investments including traditional sovereign loans, non-sovereign operations and technical assistance. They have built up a sizeable infrastructure investment portfolio over last five years amounting to $22 billion for AIIB and around $25 billion for NDB. In India $5.4 billion worth of projects are being financed by the AIIB and $6.9 billion worth of projects by the NDB. In addition, there are huge bankable projects of India in pipeline. Due to the large and robust capital base, the potential lending capacity of these parallel institutions can be very substantial. The modus operandi of these banks is “lean banking structure” with a small efficient management team and highly skilled staff. They are less bureaucratic, flexible and respond to client demands with agility. Progressing to expand their presence in the area of development financing and effective governance, these Banks have grown at a rapid pace, thereby creating a niche in the market.
India is the second largest shareholder in the AIIB and an equal shareholder along with other BRICS members, with 20 per cent stake in the NDB. By virtue of being the key shareholder, India is actively involved in formation of the Banks’ key policies, governance structures, etc. This has contributed to the growth and business, Banks’ engagements with other MDBs and market presence of these young banks.
Considering the huge resource requirements for infrastructure development and long-term finance to support long gestation projects, India will benefit from further leveraging its partnerships with MDBs like the AIIB and NDB. This will help in promoting innovation and structural transformation and enhance financing of infrastructure. This opens avenue for a win-win situation for both India and these new MDBs. To conclude, we see these MDBs playing a proactive role in fostering collaboration and cooperation, which, in turn, will fast-track infrastructure financing in member countries including India.
Prasanna V. Salian, Divya Satija