Investment in Infrastructure: Some facts based on Data

In the previous article, we showed the current scenario of Infrastructure in India, the stages various projects in Infrastructure are in, the investments India would need and the deficits we are facing for the same. Let us dig deeper into the issue and find the gap between the planned and actual investments and what measures Government can take in this regard.

India’s infrastructure spending has fallen well short of its economic growth, with the investment ratio (investment as a percentage of GDP to the GDP growth rate) declining from 50 between 1988 and 1997 to 38 between 1998 and 2007. In the Eleventh Five Year Plan, the government committed to increasing gross capital formation from 4 to 9 percent of GDP during the Plan period. The massive target set by the Eleventh Plan (see Fig. 1 below) would amount to 28 percent of the total infrastructure investment planned by emerging markets and is second only to China’s planned investments. Further, much of this investment, about one-fourth in core infrastructure, is expected to come from the private sector. Improving macro-fundamentals, easier access to and attractive fiscal incentives for private and foreign capital, and greater ability to pay user charges as a result of improved economic growth, are boosting private investment in India’s infrastructure. However, structural and regulatory barriers that impede the flow of domestic capital into infrastructure— asset liability mismatch and exposure limit issues for banks; the high pre-emption of funds from the banking system; investment restrictions on long-term savings mobilises, namely insurance, pension and provident funds; the shallowness of the bond market; and constrained supply of External Commercial Borrowings (ECB) will hamper funding to the sector. Further, the global economic slowdown and rising interest rates make project funding for infrastructure more expensive and financial closure more difficult. All these factors will create a shortfall of US$150 billion to US$190 billion in capital available for infrastructure projects. While most of the shortfall will occur in debt capital, equity flows to PPP projects will also be threatened by various structural barriers.

                                                                         Figure 1

To avert a situation that India can ill afford, the government could consider several policy reforms and interventions to stimulate capital flows into infrastructure. Such measures include various steps to remove bottlenecks to flows from existing sources of capital, for example by allowing banks to raise resources through long- term bonds exempt from statutory reserve requirements, and easing norms for insurance companies and pension funds to invest in infrastructure assets. These measures may also include encouraging new investor groups to invest in emerging infrastructure, such as mutual funds, overseas infrastructure funds and pension funds, and replicating other successful mechanisms to channel funds into the sector. In addition, the government could also consider direct financial participation in infrastructure. This could be through refinance support to infrastructure lending by commercial banks, credit enhancement of infrastructure instruments, or direct investment in hybrid debt or equity issued by infrastructure companies through an Asset Management Company (AMC) structure.

                                                                            Figure 2

While a combination of these initiatives can significantly reduce the gap foreseen between planned and actual investment, the flow of capital may prove insufficient unless supported by government measures to improve creation, uptake and execution of PPP projects. The government and key nodal agencies must address various challenges to project implementation, including land acquisition, risk allocation and contract enforceability, as a means to improve the risk-return equation for private sector players.