Consider providing guarantees to financial institutions, policy reforms to help private investment
Union Budget 2022-23: NIP, programs like Gati Shakti can focus on completing economic corridors that will propel India to become a global sourcing hub
Indian Union Budget 2022: Guarantees to financial institutions are important. Image courtesy of CNBC-TV18
India aspires to be a $5 trillion economy and to achieve this goal, creating new infrastructure and upgrading existing infrastructure will be essential. This will increase the overall competitiveness of the country, improve economic activities, create jobs and improve the quality of life as well as the living comfort of people. With the aim of creating world-class infrastructure in key sectors such as roads, railways, airports, ports, energy, social infrastructure, urban infrastructure, rural infrastructure, among others; the Indian government has launched the National Infrastructure Pipeline (NIP) for the period FY 2020-25.
As highlighted in the PIN, the total capital expenditure in the infrastructure sectors in India in the fiscal years 2020 to 2025 is projected at around Rs 111 lakh crore. According to the NIP, about 60% of this capital expenditure should be devoted to energy, roads and urban sectors.
The Government of India’s commitment to creating and improving infrastructure was further strengthened in FY22 through multi-pronged initiatives. The budget committed Rs. 5.54 lakh crore for infrastructure capital expenditure; a new Development Finance Institution (DFI) to expand long-term debt financing at reasonable rates was addressed with the passage of the National Bank Bill for Infrastructure and Development Finance in March 2021; the National Monetization Pipeline (NMP) was released in August 2021, identifying Rs 6 lakh crores of monetizable infrastructure assets over four years.
In line with the past trend, under the 2022-2023 budget, infrastructure development is expected to remain one of the main focus areas. To bolster infrastructure growth, the budget can consider interventions in the following areas:
While the National Monetization Pipeline (NMP) was specified last year and coincides with the implementation period of the National Infrastructure Pipeline, improved governance mechanisms for funding infrastructure initiatives will be required. Increased focus on real estate investment trust (REIT) transactions and infrastructure investment trust (InvIT) transactions in the public space and innovative PPP concession agreements will increase development financing opportunities infrastructures. In addition, the adoption of international contracting standards (eg FIDIC standards) by all ministries of infrastructure can increase the comfort level of developers and investors.
In addition, the budget can emphasize the revitalization of bond and credit markets as well as infrastructure user fees to provide long-term infrastructure financing. Urban infrastructure development will get a boost if local urban bodies are able to take advantage of the municipal bond market. Regulatory overhaul to allow for meaningful participation of Foreign Portfolio Investments (FPIs) and Foreign Direct Investments (FDIs) in Infrastructure Debt Funds (IDFs), Development Finance Institutions (DFIs) and markets securitization will make long-term financing available.
The national infrastructure pipeline highlights the focus on the development of basic infrastructure like housing – especially affordable housing, water, sanitation, roads, railways, electricity, education, health care, etc. Programs like AMRUT 2.0 launched in October 2021, Swachh Bharat Mission 2.0, announced in October 2021, and Gati Shakti Master Plan unveiled in October 2021, indicate the continued focus on basic infrastructure. Much of this development will require private sector investment, particularly in housing, education, health care, etc. Private participation will require political support, transparent approval procedures, incentives and other supportive measures. The real estate sector, which is recovering from the impact of the ongoing pandemic, will need an extension of the reliefs currently granted. The health sector, impacted by the current pandemic, will also require necessary budgetary support.
India’s commitment to net zero emissions by 2070 and its climate targets committed at COP26 in Glasgow, UK will require investments in non-fossil fuels, better farming practices, better sanitation practices , the development of green buildings, the switch to public transport, etc. Necessary incentives can be considered for state governments, the private sector and citizens to take the necessary actions in order to implement the set goal of zero emissions and achieve the basic principles of the Indian National Action Plan on Climate Change (NAPCC). The budget may feature increased incentives for investment in solar and wind power as well as hydrogen fueling initiatives, electric vehicles, and more.
Increased investments will be seen to bridge the urban-rural digital divide. Building on the growth in digital penetration and the spread of 4G in rural India, technology investments for the agricultural sector are expected. The startup ecosystem is expected to play a crucial role in digitizing the agricultural sector and grants and incentives for these businesses will accelerate technology penetration. Additional investments can be considered in shared cloud-based digital infrastructure at the state level as well as at the district level.
Overall, in this budget, we can expect the government to increase its infrastructure investment spending. To stimulate the economy through infrastructure investment, the government may consider providing guarantees to financial institutions and focusing on policy reforms that support private investment. Moreover, the COVID pandemic has shown the opportunity for India to become a global sourcing hub. The National Infrastructure Pipeline (NIP) as well as programs such as Gati Shakti and the focus on completing economic corridors will play an important role in achieving this ambition.
Debashish Biswas is a partner and Sanghamitra Sanyal is a director at Deloitte Touche Tohmatsu India LLP. Views are personal.