Infrastructure Funding Gap
The answer to the success of the NIP lies in institutional investors backing projects at the development stage of their life cycle, while domestic retail investors participate in the secondary market for operational and revenue generating assets.
At the heart of the government’s plans to make India a $5 trillion economy, lies the timely completion of 9,364 projects valued at approximately $1.9 trillion projects lined up under the National Infrastructure Pipeline (NIP) 2019-25. In particular, the success of India’s manufacturing sector and the focus on “Make in India” are directly influenced by how strong the backbone of India’s infrastructure is built. However, the biggest challenge to implement this pipeline might be the huge financing gap, which is estimated to be more than 5 per cent of the GDP. To bridge the gap in infrastructure development, access to the massive pool of global institutional capital for under construction projects is key.
To its credit, the Government has left the field wide open for the private sector to seize up this once in a lifetime opportunity and complete these projects on a mission mode. However, it is a no brainer that domestic capital – both the public and private sector put together – may find it difficult to meet the funding requirement of this quantum. With an annual investment requirement of approximately INR 1.4 trillion (BE 2022-23), it is probable that conventional sources of finance may face a shortfall in meeting this massive funding need. Neither the government with its borrowing program of over INR 14.31 trillion in the current fiscal, nor the domestic institutional investors could match such a massive demand for finance to fund the infrastructure pipeline, leaving behind a huge funding gap to the tune of 5 per cent of the GDP.
The Government’s hands are tied as it is already straying away from its fiscal glide path risking slippages in sovereign ratings. On the other hand, a handful of domestic financial institutions which are into long-term project financing might not have the capital required to meet the funding requirement to complete these projects. Thus, a way forward to solve this financing puzzle may be to tap into the massive pool of finance from global endowment funds, SWFs, pension funds, insurance funds etc. that remain abundant at a global scale despite major central banks’ pivot to policy normalization and repeated hikes in the interest rates.
Interestingly, there are silver tints in the cloud. Firstly, infrastructure projects in India offer a right fit into the investment thesis of global institutional investors given their steady long-term revenue models and reduced volatility. Secondly, foreign investors such as infra-focused funds, insurance companies and pension funds, who look for opportunities to invest in long-term assets have shown keen interests in investing in such assets as evident from the success of ReITs and InvITs. Therefore, a robust pipeline of viable projects in the infrastructure space will indeed lure them to double down on India’s evolving infrastructure growth story.
Even though the pension funds and sovereign wealth funds are investing in India, they are investing in completed and operational assets which are already revenue generating. However, to unleash the maximum potential which can be derived from foreign capital, the focus should shift towards deployment of these funds in projects in their development stage. With significant enhancement in the concessionary framework, if developers package projects in a manner which mitigates risks for capital providers, under construction projects might appeal to foreign investors strongly. Additionally, with opportunities in the secondary market for stable and operational projects being limited, international investors should look for participation at an earlier stage of the project’s life, to secure long-term revenue generating projects for their portfolio. Retail investors, family offices, HNIs may invest into operational assets with low leverage and these assets could give investors the potential to earn higher returns without taking on additional risks. Hence, this route may prove to be a win-win for all; fast-tracked infrastructure development in the economy, rewarding long term investments for global investors and risk mitigation in the investment portfolios of retail investors in our country.
Nevertheless, India may turn its infrastructure story inside out if developers are able to undertake successful financial engineering and structure appealing financial instruments for institutional investors. If this is achieved, NIP may be considered as a ‘mission accomplished’ and the country will be breezing close to the $ 5 trillion economy mark.