India needs immediate steps to scale the impasse its growth story faces - finding the order of funds needed for a massive infrastructure buildout that can help realise its vaunted ambition.
Spending on infrastructure remains heavily dependent on governments. And there is only so much the governments can do, especially amid the COVID-19 pandemic, as health and social needs would need sharper focus.
To be sure, allocation to infrastructure was under pressure even before the pandemic gripped the nation. Union Budget 2020-21 had marked the first ever on-year drop in allocation, with internal and extra-budgetary resources (IEBR) for the sector declining a good 700 basis points from 65% of the total outlay in the revised estimates for fiscal 2020 to 58%.
The difficulties in raising external funds for infrastructure need no reiteration. Allocation to the roads and highways sector, which typically accounts for almost a third of the infrastructure outlay, was flat in the last budget due to a reduction in IEBR to ease the dependence of the National Highways Authority of India (NHAI) on external borrowings.
It swings the klieg lights on the private sector.
The share of private spending, however, has fallen over the years - from around 26% in fiscal year 2010 to nearly 17% in fiscal 2020 - leaving state funds to shoulder 44% and central funds around 39% of the burden. Public-private partnership (PPP) models have failed to take off in most infrastructure sectors - save for airports and roads - as private entities have had to bear the bulk of the risks in these models.
This calls for a quick course correction. Here are 7 steps that can help:
- First, create a central funding institution to improve private participation in infrastructure projects.
- Second, develop a pre-packed mechanism and roadmap for divestment of public projects post-achievement of commercial operations to long-term capital, such as those of insurance companies and pension funds. This will help recycle public capital for reinvestment in infrastructure, even as the holdings of insurance companies in infrastructure investment trusts goes up beyond the prescribed 5%.
- Third, issue tax-free bonds from infrastructure authorities (such as NHAI and REC) to the public.
- Fourth, set up an infrastructure-focused stressed assets fund on the lines of SWAMIH for completion of projects stuck at the fag-end of their construction lifecycle.
- Fifth, relax the risk weightage of loans for infrastructure to allow higher lending, and potentially mandate bank lending to infrastructure on the lines of priority sector lending.
- Sixth, increase the deduction limit for homebuyers on home loan interest.
- Seventh, continue the steps announced under the Atmanirbhar package, such as monthly payment for contractors on bill submission, reduced performance security on contracts, and replacement of earnest money deposit for the next couple of years.
(The author is Director, CRISIL Research.)