The Prime Minister in his Independence Day Speech last year had announced a ₹100-lakh crore infrastructure investment over the next five years. In pursuance, a National Infrastructure Pipeline (NIP) of projects has been prepared by a task force, which indicates broad sector-wise investments. Financing investment of this order was seen as the key challenge.
The lockdown has precipitated an economic crisis with revenues declining, and the fiscal deficit rising as funds go to fight the virus and to feed the working poor who lived on daily incomes. When the lockdown is completely lifted (nobody knows when that will be) it is not as if the economy would revert back to where it was in March. Considerable effort would be needed to kick-start the economy. A large relief package would be unavoidable.
But the state of the economy in March itself was a cause of worry as there had been a sharp slowdown over the last year-and-a-half. GDP growth rates had been falling. Exports had been stagnant. Industrial growth rates had been anaemic. Private investment had been on a declining curve. So even if the economy regains the momentum it had in March, that would not be enough. The earlier slowdown would still need to be reversed.
This is where the early implementation of the ambitious NIP of projects becomes critical. And now is the time to think through how to get the implementation of these projects off the ground.
Financing investments
The easy bit is to rank projects in order of priority. Then for each of the projects to be taken up in the first round, prepare detailed project reports, get environmental and other clearances, acquire all the land, get major contract package specifications and bid documents ready. It would cost money, but not too much, and would take time; at least 12-18 months. This can be started now.
But it would need departure from the normal practice in government agencies of taking an investment decision, acquiring the land and getting environmental clearance. Creating project development SPVs (special purpose vehicles) for different sectors would be a good way of getting this work done. This approach was tried successfully for the Ultra Mega Power Projects (UMPPs).
It would be realistic to assume that next year, when these projects would be getting ready for implementation, there would be limited fiscal space with the government. The fiscal deficit would have risen substantially to provide relief and to revive the economy. It would be time to return to fiscal responsibility. The undertakings of the Petroleum and Power Ministries, however, have substantial reserves.
Of late, the government has been getting them to use their reserves for buying other public undertakings and to use the proceeds of these sales to achieve a marginal improvement in the fiscal deficit. Giving up this practice would enable the use of these resources for equity for infrastructure projects. These reserves were created as a result of a conscious policy of having resources for future investment. They would need to put in equity into the infrastructure project SPVs, which are in a different sector. Or, the government could take a special dividend and put it into the project SPVs.
Lending initiatives
Infrastructure investments have special financing needs. They need patient capital as equity and long-term debt. In the mid 1990s, the government promoted the Infrastructure Development Financial Corporation (IDFC) for financing infrastructure. After some meandering, it has become a normal bank. A decade later, the India Infrastructure Finance Company Ltd was created. It has grown and stabilised, but it is still a modest player. Then in 2015, government set up the Investment and Infrastructure Fund. Though this has made a good beginning in tying up international financing and setting up daughter funds, its scale is still too modest.
Without going into the history of each of these initiatives, the fact is that infrastructure, though much better, remains inadequate. This inadequacy contributes to lack of competitiveness. One common feature in the case of these three initiatives has been the mindset, where after setting up these institutions, the government kept an arm’s length and expected them to manage on their own in raising funds, choosing projects to finance and becoming commercially healthy enterprises.
When private investments in infrastructure took off after 2005, the banks ended up doing most of the lending. When many of these ran into difficulty, the banks took the hit. As a result, they have become risk-averse. Private sector lender IL&FS ( Infrastructure Leasing and Financing Services) was ambitious and grew rapidly, till it collapsed last year.
The collapse happened as it was rolling over short-term money for long gestation projects, and when the inflow of short-term money faced a sudden problem, its difficulties spiralled out of control and it collapsed. This in turn precipitated the crisis in the NBFC sector, which then impacted the whole financial sector.
More government involvement
If the NIP is to be implemented, then government would need to reconsider its arm’s length attitude. Sectors like water need long-term debt on concessional interest rates. So do the Smart City Mission and Mass Transport Projects. When the debt repayment is spread over, say 25-40 years, the annual debt payment is far lower and debt servicing is that much easier. Only the government can give the guarantees, implicit as well as explicit, needed to take care of the asset-liability mismatch inherent in providing such long-term debt.
The Japanese have been able to get the big business of the Delhi-Mumbai Freight Corridor Project, and more recently, the Mumbai-Ahmedabad High Speed Train Project, by providing very long-term, low fixed interest rate debt. Conceptually, the Government of India should be able to do the same with a combination of guarantees and interest subsidy. The longer the tenor of the loan, the lower the fund requirement from the budget for interest subsidy in a year. The guarantees involve manageable risk and do not need budgetary resources.
The writer is Distinguished Fellow, TERI, and former Secretary, DIPP. Views are personal