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In his address to the nation on 15 August 2019, Prime Minister Narendra Modi promised an investment of 100 trillion over five years in the infrastructure sector. To this end, a task force was constituted to draw up a national infrastructure pipeline (NIP) for each year from 2019-20 to 2024-25. The task force submitted a host of recommendations in its final report to the Union finance ministry in April 2020.

A total investment of 110 trillion was earmarked, with energy, roads, railways, and urban projects accounting for nearly 70% of the outlay. Crucially, the report envisaged that nearly 50% of the total funding for these infrastructure projects would come from governments themselves. It assumed the Centre and states would increase their capital expenditure by 10% each year.

However, nine months later, revenue flows of the Centre and state governments stand disrupted because of the pandemic. This could squeeze the fiscal space available to them to undertake investment expenditure as proposed. Other entities that were supposed to be the principal financiers in the NIP are facing challenges of their own, which leaves the original blueprint in disarray.

Critical infrastructure projects, such as highways and power projects, are capital-intensive. They also have long gestation periods, the time between making investments and realizing revenues. As capital is locked in for a long time, private investors are generally circumspect. Public investment typically drives funding. For NIP, the task force identified around 85% of the funding coming from existing sources, with the Centre (18-20%) and states (24-26%) contributing the bulk of the funds.

Other significant sources that were identified include specialized infrastructure financial institutions such as the India Infrastructure Finance Co. Ltd (IIFCL) and other private non-banking financial companies (NBFCs), with a 15-17% share. Banks were expected to contribute 8-10%. Around 15% was projected as the funding gap, to be met primarily through new sources of funding such as monetization of state and Central assets and lending by new development finance institutions (DFIs). A 6.5% shortfall in funding was projected over the five-year period (see chart 1).

In 2020-21, the Centre earmarked 20,000 crore towards funding for the NIP. As compared to the Centre, states in India invest more in capital assets. In 2019-20, for instance, the combined capital expenditure of states was 2.9% of India’s gross domestic product (GDP), nearly twice that of the Centre (1.6%). However, the pandemic and the ensuing lockdowns have disproportionately affected revenues of states. Delayed payments from the Centre as compensation under the goods and services tax (GST) framework did not help.

The Reserve Bank of India, in its latest report on state finances in October 2020, estimated the consolidated gross fiscal deficit of states in 2020-21 would cross the budgeted 2.8% of GDP to beyond 4% of GDP in the baseline scenario. This could negatively impact expenditure on infrastructure. Since the start of the March 2020 quarter, new project announcements from the central and state governments have decreased drastically, according to data from the Centre for Monitoring of the Indian Economy (see chart 2).

Governments aside, other primary sources of infrastructure financing are enduring their own troubles. The implosion in 2018 of Infrastructure Leasing & Finance Services Ltd, India’s leading infrastructure finance company, was partly the culmination of various issues that plague infrastructure financing in India, such as cost escalations and untimely completion of projects.

Yet, DFIs remain an important source of infrastructure funding. Between 2012-13 and 2017-18, DFIs accounted for around 23% of the average annual infrastructure investment. With several projects grinding to a halt during the lockdown months, these DFIs will also be affected by time and cost overruns (see chart 3).

Banks are another critical source of infrastructure financing. However, in the wake of declining asset quality in the infrastructure sector, they have been more conservative in their lending to infrastructure projects over the past few years. Outstanding bank credit to the infrastructure sector has decreased from 15% of gross non-food credit in 2012-13 to 12.2% in 2018-19 (see chart 4).

Investments in infrastructure have a multiplier effect on economic growth. As the Indian economy moves slowly towards recovery after last year’s contraction, further spending in the sector will be indispensable. Therefore, allocation to infrastructure funding will be keenly watched as the Budget season kicks off. The question is whether, come 1 February, the Centre will make big-ticket allocations in the sector by firming up the grand plans of the NIP.

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