India's GDP is estimated to shrink in between 5-15% due to the lockdown.
The infrastructure sector is a major victim of this downturn.
Banks remain unwilling to lend while the private sector has long been disillusioned from it. In this backdrop, it is natural to doubt the viability of the national infra pipeline project.
First of all, what is the national infrastructure pipeline (NIP)?
Addressing the nation on the 74th Independence Day, the Prime Minister announced the national infrastructure pipeline Project with an expected investment of over Rs 111 lakh crore between FY20-25.
Around 6,835 projects have been identified to be implemented based on the public-private partnership. Around 18-20% of the pipeline is expected to be financed through the central government budget, 24-26% is to be contributed by states.
Around 31% of the required resources would be raised through debt from bond markets and 4-10% as equity from private developers and global investors.
So, what's the problem?
The idea sounds solid on paper but in reality, funding to infra space has become a hornet's nest that no one wants to touch. As the situation stands today, lockdown and the economic downturn has dealt a body blow to India's infrastructure sector. Bank's apprehension to lend has brought the cycle virtually to stand still.
Banks are staring at high rate of potential default and loan restructuring due to the deteriorated business sentiments. Convincing them to restart lending to the infra sector is a very difficult task in the current scenario.
The interest of private players since long has completely waned off from the infra space. Delay from the government in clearing dues and prolonged project completion cycles have created a disillusion for them.
On one hand where private players are unwilling to enter, public sector players like NHAI are already high on debt due to the excess funding to the financially unviable projects in the past. NHAI’s debt servicing cost had shot up to Rs 19,000 crore in FY20 from Rs 9,532 crore in FY18.
Given the revenue deficiency and cash strapped environment, funding is going to be difficult even for central and state governments.
...And the solution?
Funding remains the major constraint for the government as India's GDP is set to shrink in FY21 while the fiscal deficit is shooting up. As per CGA data, India's fiscal deficit was at 4.59% of GDP, higher them the government’s revised target of 3.8%. It puts a big question mark on the viability of the entire NIP project.
However, India's debt to GDP ratio is still lower than many developing nations. The debt to GDP ratio at 125% has remained constant for India from 2007 to 2019, which is a major silver lining. India could look to expand its fiscal deficit to achieve its infra targets.
The government is also actively hunting for fresh capital. It has set up a committee to find resources for its Rs 111 lakh crore infrastructure plan which is studying the possibility of setting up development finance institutions (DFIs). The proposed DFIs could tap banks, financial markets, and global investors. The committee is also mulling other options like Asset recycling, InvITs and toll-operate-transfer models to accumulate the funds.
Many experts think that though the amount of Rs 111 lakh crore prima facie looks large, it is just a routine expense that any government of the day ought to do. Hence, there is no additional allocations made by the government towards infra push.
Opinions also remain divided on expanding the fiscal deficit. As India's GDP is set to shrink, the fiscal deficit is likely to expand up to 6-7%; Insufficient stimulus package and further need to boost demand will require the government to put money in hands of consumers. It will leave no room for further infra spending.
Hence, although the effort remains worth appreciating, we have #Mandi outlook on the NIP till the flow of money and credit cycle improves in the economy.