Infrastructure Sector On A High As Govt Spending Goes Up But Project Delays May Spoil The Party

Government Expenditure Fuels Infra Spendings

Although the Economic Survey of 2023-24 highlighted the importance of building world-class infrastructure to meet the long-term development goals of the Indian economy, it is well-known that there are large gaps in infrastructure investment across sectors.

The survey brought out two important facts about infrastructure financing in India. First, though quite a few innovations in infrastructure financing have been tried in recent years, capital expenditure by the Union and State Governments still plays the central role in funding large-scale infrastructure projects.

Second, with the emergence of new funding instruments and strategies, the infrastructure financing space has turned complex. Moreover, given the different statistical definitions and patterns by different agencies, it isn't easy to aggregate the total flow of funds to infrastructure in any given year.

Combined capital expenditure of the central and state governments soared in recent times. This fuelled the recent infrastructure thrust in India – the surge in connectivity projects being the prime beneficiary.

Bank And ECB Borrowings By Infra Are Substantial

The net flow of funds to infrastructure sectors through bank credit between March 2023 and March 2024 was around Rs 79,000 crore. But this amount is much less than the gross budgetary support by the Union Government for either railways or roads.

The net flow of bank credit to infra sectors between March 2020 and March 2024 was concentrated in a few sectors like roads, airports, and power. The bank credit growth in infrastructure in FY24 recovered to 6.5 per cent from 2.3 per cent in FY23.

In all outstanding bank credit to infrastructure in March 2024, stood at a substantial Rs 13 lakh crore. Rising public expenditure on infrastructure has also made other channels of infrastructure financing active.

Around Rs 39,024 crore was raised by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in FY24, more than five times compared to FY23, supported by the Government's thrust on infrastructure development.

REITs have raised a total of Rs 18,840 crore between 2019 and 2024, while InvITs raised Rs 1,11,294 crore in the last five years (2019-2024). The much larger corpus mobilised by the InvITs is a clear recognition that the market has significant apetite for the government's infra push.

Total cumulative inflow of external commercial borrowing (ECB) to infra sectors during the period between FY20 and FY24 is US$ 32.7 billion, which is more than Rs 2.6 lakh crore at the current exchange rate.

Capital Market Participation In Infra Is Also Significant 

A good part of the infrastructure financing also comes from domestic capital and stock markets. The domestic capital market debt component was quite high at more than Rs 1.6 lakh crore in FY20. It has come down in the following years but is still around Rs 0.8 lakh crore in FY24.

This decreasing trend shows a possible reluctance of private lenders to provide money to certain infra sectors. Contrast this with the mounting bank credit to infra, and then the infra sector’s dependence on public sector (PSU) banks to get credit comes to the fore.

The contribution of equity issuance in infra financing, on the other hand, is around Rs 0.2 lakh crore. So, private capital does not seem too enthusiastic to participate in financing infrastructure, while the government and PSU banks inject the bulk of money.

Will India Face Another NPA Crisis Redux?

This lopsided financing of infrastructure sectors brings back the memory of mounting non-performing assets (NPAs) in the banking sector, in the aftermath of the 2008 financial crisis. The consistent growth after 2004 was fuelled by similar credit disbursal to infra by the PSU banks.

But post-2008, banks, particularly the public sector ones, started reeling under mounting NPAs in their balance sheets. The central bank’s sustained supervision of bad loans in the banking sector started.

However, the problem was somewhat resolved mostly by a massive exerciser in writing off debts by the banks. Most of the bad loans were on the balance sheets of the PSU banks. Therefore, the central government had to bear a substantial part of the burden, using public money.

In December 2023, answering a question in Rajya Sabha the Minister of State for Finance informed that even in the last five financial years the banks have written off Rs 10.57 lakh crore worth debt from their balance sheets.

Does it mean that the Indian economy would have another bad loan redux?

Some analysts believe that this time it's different. The central government is aggressively pumping money into infra by increasing capital expenditure. Since the time the pandemic arrived, this capital expenditure has been the main engine of GDP growth. Therefore, it is expected that it will continue.

The major vehicles of this injection process are the public sector enterprises (PSEs) in infra sectors. Many infra projects are launched in power, roads, and telecom via these PSEs. The recent surge in stock prices and market valuations of these PSEs is a direct fallout of that.

Essentially these analysts mean to say that since more government money has been employed in infrastructure in the last 4-5 years, the risk factor this time is not on the PSU banks, rather it is on the central government balance sheet. But that too is not a desirable situation.

If many big infra projects get stalled due to any reason like the earlier episode, the substantial debt component (as can be observed in the data) is bound to negatively affect not only some of the banks’ balance sheets but also the capital market.

With domestic consumption and private investment yet to get back to the role of real growth drivers, government's capital expenditure keeps the rising GDP story alive and kicking. However, at some point in time fiscal consolidation concerns are bound to take over. Then it will be difficult for the government to continue allocating capital expenditure, as it is doing now.

Capital expenditure-driven GDP growth model cannot have a long shelf life, and its expiry date may spell trouble across the financial sector.