An RBI study reckons the multiplier effect of Central government revenue spending to be 0.22, which means a rupee of expenditure increases output by only 22 paise. We also know that it is private household consumption (60 per cent) and private corporate investment (28 per cent) that drive our GDP. Yet we continue to judge our Budgets on what they hold for growth.

But this does not mean that the government has no role to play. The RBI study also states that capital expenditure has a multiplier effect of 3.25, which is then the way to go. Unfortunately over 85 per cent of our Budget spending is on revenue account, most of it committed expenditure which makes it difficult to switch over to spending for asset creation. But a few pronouncements in the Budget, on infrastructure spending and the bond markets, offer some hope that things could change.

The formal launch of National Infrastructure Pipeline (NIP), though announced much earlier, will be a massive capital spending programme if realised. Undoubtedly our infrastructure is in bad shape requiring huge investments and the output effect of such spending will also be significant. The plan is both grand (₹103 trillion) and wide-reaching, covering the whole spectrum of infrastructure — urban, social, and agricultural and industrial.

Unanswered questions

But there are many unanswered questions. First, the financing sources. While the Centre and States will contribute 39 per cent of the cost, the private sector is expected to pick up the remaining 22 per cent (going up to 25 per cent later). Private sector participation in infrastructure thus far has been in relatively ‘commoditised’ sectors such as telecom, power or road projects and even here the experience has been far from satisfactory.

Therefore the challenge of designing bankable projects in sectors such as railways and urban infrastructure (30 per cent of total NIP cost) will be formidable. Likewise, road projects, the perennial favourite, are envisaged to be about 19 per cent of the NIP but with NHAI’s borrowing drastically trimmed (given its already bloated debt), the finance question looms large again.

Perhaps the government hopes sovereign wealth funds will pitch in, which also explains the tax incentives proposed for them. Given our average infrastructure spending of ₹6-7 lakh crore annually and the book size of financing agencies such as IIFCL of around ₹65,000 crore, the NIP has maybe bitten more than it can chew.

The worrying aspect is that the government could push public sector banks to finance them; the consequences in the past have been devastating both for banks and private players — the largest NPAs (non-performing assets) of banks are in infrastructure while private players in telecom, power and roads have been bruised due to a host of problems relating to regulation, pricing and finance. None of these problems has been resolved satisfactorily. Most countries finance infrastructure through markets and not banks. This is where bond markets become crucial.

The issues with Indian debt markets are well known. At the heart of it is culture — the unstated preference for bank loans over market debt, the enhanced disclosures, rating discipline and mark-to-market requirements seem to keep both banks and borrowers away from bonds.

Nevertheless, bond markets (government securities and corporate bonds) have made significant strides over the years but they suffer from many shortcomings which have hampered growth. G-secs are concentrated in only a few maturity buckets and trading is almost entirely in only 10-year G-secs; yields are driven by liquidity and RBI’s OMO operations rather than fundamentals.

Thus the absence of price discovery in G-secs impacts the corporate bond market too, as it needs an un-fragmented yield curve to price in risk, term premia and inflation expectations. Further, the market for corporate bonds is also highly skewed — most of the issuance is by financial intermediaries (NBFCs, HFCs) who use it as an alternative to bank borrowing. Likewise, investors are mostly MFs and banks. With maturities and issuer-ratings also highly concentrated, there is no reliable yield curve.

Clearly, the absence of retail participation limits its growth, which is why the recent success of bond ETFs offers hope. Therefore, rather than only raising the ceiling for FIIs, the need is for bolder steps, especially in the G-secs market which need a wider investor holding especially retail.

The RBI could perhaps nudge banks to wean borrowers away from loans to bonds; the advantages are obvious — greater transparency in pricing, risk and market discipline should improve asset quality while banks also become enabled, with a vibrant secondary market, to fund long gestation projects without the risk of asset-liability mismatches.

The writer is an independent financial consultant

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