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The revised fiscal deficit estimates for this fiscal at 3.5% of GDP, and the expected number for next fiscal at 3.3% is a cautionary tale. If taken along with state level deficits, which have worsened over the past couple of years, the combined deficit has reached very high levels.
Given India’s infrastructure build-out needs of Rs 50 lakh crore over the next five years and given the Budget’s focus on social spend like healthcare, rural economy and agriculture, it is essential to explore alternative means of financing and attract private capital for funding infrastructure especially in roads, power and urban infrastructure. Moreover, infrastructure projects are predominantly financed through banks in India. This high bank exposure has resulted in many problems for the banking sector and further constrained available credit for infrastructure. And the budget has done well to recognize the need for alternative means of infra finance.
A well-functioning corporate debt market could be the key to meet requirements of the corporate sector for long-term capital investment and asset creation. However, bond investors are credit risk averse and prevented by regulations/ internal policies from investing in issuances rated less than ‘AA’. It is in this context, the budget has recognised the imperative towards deepening the bond market by widening the issuances to ‘A’ category.
Going forward, with the nascent stage of bond market participation in Infrastructure, setting up a strong credit enhancement fund supported by sovereign/quasi-sovereign entities will help. Progressively, as the market becomes deeper, this will also enable private mono-line insurance companies, who could provide the required credit wrap for a pre-determined fee to participate and strengthen the eco-system needed to reduce reliance on commercial bank financing.
Also monetisation of mature infra assets through various means such as Infrastructure Investment Trusts (InvITs) can help attract more long-term capital market investors.
The announcement that the National Highways Authority of India will raise equity from the market for its mature road assets, by organising its road assets into special purpose vehicles and use innovative monetising structures such as toll, operate and transfer (TOT) and InvITs is welcome.
The Finance Minister in his speech also announced that the government would initiate monetising select central public sector enterprises assets using InvITs from next year. InvITs will help the government to monetise invested equity in their operational assets and realize market value. This will go a long way in recycling capital and bring down the pressure on the fiscal deficit parameters.
However, addressing the overall infra financing needs will also require operationalization of Institutions and Instruments with sovereign backing to (i) expedite recycling of locked up capital invested by Banks in Infrastructure and (ii) to bridge risk appetite of capital market Investors that can bring in ‘patient’ long term capital and help scale-up flow of funds into Infrastructure.
Credit enhancement instruments such as bond guarantee funds, innovative means of refinancing such as securitisation of infra loans and revitalizing the partial credit guarantee scheme will be helpful in attracting the right kind of investors. For states, it is imperative to create state-level infrastructure funds and/or sector-specific corporatized entities to scale up infrastructure investment in a sustainable manner. Some states like Tamil Nadu have adopted this approach and others need to follow.
- By Sudip Sural, Senior Director, CRISIL Infrastructure Advisory