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Until the covid pandemic hit, India aspired to become a $5 trillion economy by 2025. While this may still be a worthy goal to chase, the Indian economy will have to bear the brunt of the pandemic for some time. Even before the crisis hit, the government had prioritized the infrastructure sector as the key to its economic growth agenda. And now more than ever, infrastructure development will play a key role.

The 100 trillion National Infrastructure pipeline, establishment of the National Investment and Infrastructure Fund and several schemes to revitalize the transport infrastructure only corroborate the government’s resoluteness to prioritize the sector. Some estimates suggest that a 1% of gross domestic product (GDP) investment in the sector can increase the overall GDP growth rate by 2%.

However, the central government has been shouldering the maximum burden of financing large infrastructure projects in India. Between 2012-13 and 2018-19, the government’s share of infrastructure investment increased from 26% to 41%. In the same period, share of states declined from 45% to 32%.

In the post pandemic era, inopportunely governments have been forced to shift priorities to other sectors that require critical funding such as health, education and employment. Planning large immunization programs and announcing incremental stimulus packages have stressed government budgets extensively.

Overall, it is estimated that India needs to spend 235 trillion on infrastructure development from 2021-30. This is more than thrice the sectoral expenditure of the previous decade (nearly 77 crore). To fulfill this yawning gap, the government has been proactively nudging all the stakeholders such as the private sector, state governments, banks, development finance institutions (DFIs) and foreign institutional investors to fund large-scale Infrastructure projects. Except DFIs, the response from various stakeholders has been lukewarm.

If we look at the private sector, it is distressing to note that the share of private investment in infrastructure has declined from 34% to 23% between fiscal years 2011-15 and fiscal years 2015-20. Overall, the private sector has become cautious on account of delays in project execution, low revenue realization in public-private partnership projects and limited access to debt-financing.

Similarly, domestic banks who were actively lending to the sector in the early 2000s have taken a step back on account of rising non-performing assets, delay in statutory clearances and asset-liability mismatches. Since 2014-15, loans to infrastructure sector as a share of total bank credit has been on a decline: from almost 14%, the share has fallen to below 10% in 2018-19.When ICICI bank, which had historically been at the forefront of credit lending in the sector, announced the closure of its project finance division in 2019, the extent to averseness of domestic banks to lend to the sector truly came to light.

Similarly, if one looks at sovereign wealth funds, pension funds and other institutional investors, they have primarily invested in operating assets with clear revenue profile and have not shown interest in greenfield investments across sub-sectors.

So how do we ensure a robust funding mechanism for India’s infrastructure sector?

With the pandemic, garnering adequate capital for the infrastructure sector seems a mammoth task. The solution lies in setting up a robust financial institution, which can be at the forefront of India’s infrastructure growth story. This is the appropriate time for the country to set up a National Infrastructure Bank. This bank can be formed with a vision of achieving three key objectives First, provide long-term and flexible funding for Infrastructure projects that match the project tenure requirements. Second, act as a platform for attracting private excess global debt capital. Third, bring to the market innovative financial solutions that reduce risk and improve return profiles.

Many countries are thinking in this direction and have started to act. Set up in 2017, Canadian Infrastructure Bank plans to invest and raise more than $35 billion to help build new infrastructure that will accelerate Canada’s transition to a low-carbon economy and strengthen economic growth. In November 2020, the UK announced the establishment of a new infrastructure bank as part of the government’s spending review.

To give India’s infrastructure sector a further boost, a National infrastructure Bank can be the third key element along with the already existing robust project pipeline and favorable public policy.

Suresh Subudhi and Shubhika Bilgrami are, respectively, managing director, and lead knowledge analyst, Boston Consulting Group

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