The Indian government needs to make a provision of Rs.26 trillion for the next five years, beginning 2015, to finance all its infrastructure projects, according to a recent paper on infrastructure financing by the PHD Chamber of Commerce and Industry and CRISIL Ratings.
The paper said it was necessary to make provision for financing the infrastructure projects in order to provide a boost to the government’s ‘Make in India’ drive and also put the country on a growth trajectory of between 7 and 8 per cent. It stressed on liberalising the investment norms for pension funds and insurance companies so that their large corpuses could be utilised by the government for part financing of the infrastructure projects.
Out of the Rs.26 trillion financing required for the infrastructure projects, the paper estimated close to 80 per cent would go to power, roads and urban infrastructure.
In the power sector, generation would continue to account for the largest share of the investments, while in the road sector, the investments were going to be driven towards building national highways and state roads, it said.
With regard to urban infrastructure, the paper pointed out that municipal bodies were likely to need significant investments for constructing urban roads, expansion of transport system and revamping of water supply and sewerage infrastructure.
The paper said 70 per cent of the projected investments for infrastructure financing would have to be funded through debt, with banks remaining the largest source of finance. External Commercial Borrowings could be another source of funds to the extent of 14 per cent of the projected requirement, it suggested, adding the balance was expected to come through bonds issuance provided the bond market further deepened through critical measures by RBI and SEBI.
The paper said it would be difficult for banks alone to finance the infrastructure projects since rapid growth in lending to the sector posed the risk of assets liability mismatch.
The tenure of infrastructure project loans range from 10 to 15 years while bank deposits, the main source of funds, typically have a maturity of less than three years. Several banks are also nearing the group exposure limits set by RBI for lending to large infrastructure players.
The paper recommended that insurance companies and pension funds, which have large corpuses, should be geared up so that they emerged as large players in the corporate bond market. With further easing of investment norms, their corpuses could be utilised suitably for infrastructure financing, it said.