One of the key highlights of the Narendra Modi government’s Budget for 2021-22 is the major boost to infrastructure. The emphasis on infrastructure spending in place of cash handouts will likely spur economic activity and give an impetus to employment generation. The Budget has laid out a comprehensive plan for asset monetisation that will act as a tool for financing new infrastructure.
The Modi government, in 2019 had set an ambitious target of Rs 100 lakh crore to be invested in infrastructure over five years. Towards this objective, a National Infrastructure Pipeline (NIP) was launched on 31 December 2019. The NIP had 6,500 projects with a total investment of Rs 103 lakh crore.
The proposals in the Budget are towards increasing the funding for the NIP. This is to be achieved through three channels: higher capital expenditure by both central and state governments, boost to asset monetisation and through setting up of a Development Finance Institution (DFI). The Budget has proposed a sharp increase in capital expenditure to Rs 5.54 lakh crore. This is 34.5 per cent more than the amount allocated last year.
Setting up Development Finance Institutions
The DFI is proposed to be set up with a capital of Rs 20,000 crore and is expected to have a lending portfolio of Rs 5 lakh crore within three years’ time. A Bill for setting up a DFI, the ‘National Bank for Financing Infrastructure and Development’ (NaBFID) has been listed in the ongoing Parliamentary session. However, the details of its management and mode of financing will hold the key.
The proposal to set up a DFI would help in reducing the burden on banks to finance India’s mounting infrastructure financing requirement. DFIs do not accept public deposits. They have to raise long-term sources of financing. So, the lack of sustainable source of long-term funds can prove to be a constraint on the activity of the DFI.
This is not the first time India has announced the setting up of DFI. In the 1950s, DFIs were set up to cater to the long-term financing needs of the industrial sector. At that time, DFIs received subsidised credit from the government and the Reserve Bank of India (RBI). The bonds issued by DFIs were subscribed by banks as they qualified as Statutory Liquidity Ratio or SLR investment by banks. As the subsidised credit was withdrawn, the DFIs struggled to raise funds in the absence of a deep and liquid bond market. Hopefully, this time, the setting up of the DFI would be followed by a review of regulatory restrictions that inhibit the development of a vibrant and liquid market for bonds. This would facilitate the DFI to raise long-term financing for infrastructure at competitive rates.
Getting money for infrastructure
Significant steps towards facilitating foreign investments in infrastructure have been announced in the Budget. The government has allowed Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) to raise debt financing from Foreign Portfolio Investors (FPIs). While this was announced in the Budget of 2019, raising financing from FPIs hit a roadblock as regulations did not allow FPIs to invest in debt issued by trusts. The Budget of 2021 proposes to move the legislative amendments to operationalise the earlier proposals to allow REITs and InvITs to raise debt from FPIs. This would enable these vehicles to attract greater foreign capital into infrastructure and real estate sectors. Steps have been announced to encourage Sovereign Wealth Funds and Pension Funds to invest in infrastructure.
The National Highways Authority of India (NHAI) has been monetising its assets through toll, operate and transfer (TOT) model. A new mode of asset monetisation through InvIT has been proposed in the Budget to monetise roads by the NHAI. Investors can invest in the units of InvITS and NHAI will get an upfront money back for making fresh investments. Monetisation of oil and gas pipelines, airports, infrastructure assets owned by Railways can generate huge sums of money for infrastructure financing. Monetisation of non-core assets such as the huge chunks of land with public sector enterprises can also free up funds for infrastructure financing. A Special Purpose Vehicle to fast-track the sale of non-core assets has been proposed in the Budget. These are all significant developments and if implemented timely can foster investment in infrastructure.
Another mode through which the government can garner funds for infrastructure is through disinvestment. The government has approved a strategic disinvestment policy. This is expected to give a fillip to the Modi government’s disinvestment agenda. The proposal to disinvest two public sector banks in addition to IDBI is a positive step in this direction.
Radhika Pandey is a consultant at National Institute of Public Finance and Policy. Views are personal.