ICRA: National Infrastructure Pipeline investments to fall short of target in first two years; significant step-up will be required in balance four years

ICRA
The Government's plan of a massive increase in investment with the target of ₹111 lakh crore under the National Infrastructure Pipeline (NIP) between FY2020-FY2025 is likely to see severe near-term headwinds due to the Covid-19 pandemic. While even prior to the Covid-19 pandemic, the NIP was already quite ambitious and challenging, but it seemed achievable with a significant push towards infrastructure. As per an ICRA note, Covid-19 has now made it a daunting task to achieve the target. The Government's priority will be to fight the pandemic and the disruption caused. With the fiscal constraints, the investment in infrastructure may get pushed back – particularly from the state governments. Investments from the private sector are also likely to be deferred or scaled-down in the current environment.

According to Shubham Jain, Senior Vice-President and Group-Head, Corporate Ratings, ICRA, “In the current environment, the infrastructure investment in FY2021 would fall short of the plan, and consequently to achieve the NIP target a significant step-up of investments will be required in the later part of the plan. Against the total infrastructure investment of ₹36 lakh crore envisaged in the first two years of NIP (FY2020-FY2021), the actual investment is likely to range between ₹24-27 lakh crore. Consequently, to achieve the targeted investments in the remaining four years (FY2022-FY2025), an average annual investment of over ₹21 lakh crore will be required.”

The total infrastructure investment in India, between FY2013 to FY2019, stood at ₹57 lakh crore. Compared with this, the NIP has planned an investment of over ₹111 lakh crore during FY2020 to FY2025 – which is higher by 109%. About 39% of the projects will be implemented by the Centre, 40% by the state governments, and the balance 21% by the private sector. The NIP envisions a significant scale-up of investments from FY2021 onwards with an investment of ₹21.5 lakh crore in FY2021 compared to ₹10 lakh crore of investments made in FY2019.

ICRA mentions that the overall funding mix for the NIP is likely to be through the Central and the state budget, borrowings and private sector participation. About 42-46% of the pipeline is expected to be financed through the Centre's and the state's budget; 29-35% through debt raised from banks/infra NBFCs/bond markets, and 7-15% from private developers' equity, external aid from multilateral and bilateral agencies and internal accruals of PSUs, etc. There is a financing gap of 15-17% estimated, of which 6-8% is estimated to be bridged by asset monetisation and new development finance institutions (DFIs). The source of funding for the balance 10% remains uncertain as of now.

Amongst the identified sources of financing the NIP, the state's budgetary capital outlay is likely to remain lower than projected in the near to medium term as spending on social and healthcare is likely to take precedence over infrastructure capex. Credit availability, which has been challenging for the infrastructure sector, is likely to be another area where the growth could be lower than projected. These factors could lead to a wider financing gap than envisaged.

Shubham Jain added: “To bridge the infrastructure financing deficit, leveraging the Central Road and Infrastructure Fund (CRIF), the National Investment and Infrastructure Fund (NIIF), and the Infrastructure Investment Trust (InvITs) could support to some extent. The CRIF is a significant source of funds with an annual cash flow stream of ₹1.2 lakh crore, and efficient channelising of the same could provide a large financing source. NIIF has seen healthy interest from long-term investors and can help in mobilising significant equity for the infrastructure sector. Similarly, InvITs have shown the potential of channelising long-term capital (like pension and insurance fund) into the infrastructure sector.”

At a time when the overall economic growth is slowing, increasing investment in infrastructure can be a trigger for boosting growth. Further, execution of infrastructure projects also provides employment to a large number of labourers and hence is crucial for economic recovery. As infrastructure projects have a high dependence on the construction sector for execution; over the medium to long term as the infrastructure investment is scaled up, construction players are also likely to see increased business opportunities.

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