The infrastructure sector remains one of the crucial drivers of social and economic growth while India continues its journey towards Viksit Bharat. Recognizing its importance in accelerating growth, the Government of India has undertaken a slew of measures to create an enabling environment for infrastructure investments. For instance, in the 2023-24 Budget speech, the Hon’ble Finance Minister announced that an expert committee would review the Harmonized Master List (HML) of Infrastructure to recommend the infrastructure classification and financing framework suitable for Amrit Kaal.
Subsequently, new sectors have been announced in this budget. Such continuity of policy interventions helps to create a conducive environment. This year, the Government of India has increased the allocation for effective capital expenditure to Rs 15.5 lakh crore from Rs 13.2 lakh crore, a significant 17 per cent increase from FY 2024-25 (RE). Apart from the augmented capex allocation, other targeted measures have been proposed that could catalyse private investment and create an enabling infrastructure financing environment. The targeted measures outlined in the budget can partly shift the onus of infrastructure financing from public to private sources.
To attract more private sector investments in the infrastructure sector, the relevant line ministries and states will be developing a project pipeline which can be implemented in Public Private Partnership (PPP) mode. The proposed pipeline of bankable projects will provide the necessary opportunity for the potential investors that the National Infrastructure Pipeline (NIP) was unable to provide. PPPs will further bring in technological advancement and operational & management efficiency, which will eventually result in improved service delivery. States have been encouraged to use the IIPDF scheme to fund the development and structuring of PPP projects. In this context, it is pertinent to mention that setting up a partial credit enhancement facility for corporate bonds by NaBFID, which is a AAA-rated Development Finance Institution, will enable the infrastructure companies/Special Purpose Vehicles (SPV) to raise funds at a lower rate. The reduced cost of capital will enhance the attractiveness of the PPP mode of implementation for infrastructure projects. This intervention can have a multiplier impact on infrastructure development.
To encourage states to increase capital expenditure and undertake infrastructure development initiatives, an allocation of Rs 1.50 lakh crore has been earmarked for 50-year interest-free loans. States can further leverage the newly proposed Urban Challenge Fund (UCF) to establish cities as growth hubs and for their creative redevelopment. For this FY, a corpus of Rs 10,000 crore has been proposed under this fund. The fund will be financing 25 per cent of the cost of bankable projects, with a condition that a minimum of 50 per cent of the total contributions for these projects are to be received from other sources like bonds, banks and PPPs. Considering the proposed 25 per cent financing would be in the nature of Grant in-Aid, this will reduce the initial investment requirement, thereby improving the commercial viability of the urban sector projects in the country.
The government has also renewed its focus on the social and commercial infrastructure sector to ensure inclusive economic growth. Establishing SWAMIH Fund 2.0 as a blended facility with contributions from the Government, banks, and private investors will enable the completion of dwelling units in stressed housing projects. Approximately 1 lakh home buyers have investments in such stressed housing projects. Furthermore, concessional MUDRA loans will be offered on favourable terms to promote the homestay ecosystem. This step will provide much-needed aid to the tourism sector, which will have a significant impact on generating local employment and boosting regional economic growth.
The addition of large ships and hotels in the top 50 tourist destinations in the HML will grant these sectors access to long-term capital from domestic infrastructure-focused financing institutions, DFIs. This will also enable them to raise funds from SWFs and pension funds at competitive rates because these funds are exempted from taxes for infrastructure investments. To reduce the cost of intermediation and improve the information availability for conducting due diligence, the government has also announced that it will provide private investors access to the relevant data and maps through the PM Gati Shakti Portal.
A maritime development fund with a corpus of Rs 25,000 crore has been proposed to support the Industry’s long-term financing needs. With up to a 49% government contribution, this fund can anchor as a collaborative investment platform for international and Indian investors in the ships and waterways sector.
The proposed National Asset Monetization 2.0 (NMP 2.0), coupled with necessary regulation and fiscal policies, intends to infuse about Rs. 10 lakh crore more into greenfield investments. Continuing the success of NMP 1.0, NMP 2.0 is also expected to attract substantial investments from SWFs and foreign pension funds as the tax exemption for them has been extended until 2030 in this budget. In addition, NMP 2.0 may create space for developing Infrastructure Asset-Backed Securities (IABS) as an asset class in the secondary market to tap into domestic institutional investors.
The initiatives/interventions proposed in the union budget will have a long-lasting impact on the overall infrastructure financing landscape. The majority of these steps are targeted either to reduce the cost of capital for private investors or to lower the initial investment requirement for greenfield projects. However, the implementation of the proposed interventions has a few dependencies which need to be addressed. For instance, NaBFID needs to rapidly develop a credit enhancement product aligned with the market requirements and investors’ preferences. Similarly, to achieve the underlying objective of the Urban
Challenge Fund, the municipalities need to undertake comprehensive reforms to improve their creditworthiness and own source revenue share. The disbursement of the UCF is proposed to be linked with commercial fundraising, and currently, only a handful of municipalities have an investment-grade credit rating, which may limit the offtake of this fund. Therefore, adequate capacity-building interventions are needed to support the budget announcements to ensure that the key budget initiatives have the resources necessary for success.
(This is an authored article by Mohammad Athar (Saif) and Probal Ghosh. Saif is a Partner and Leader Capital Projects and Infrastructure Development and Probal is Managing Director - Capital Projects & Infrastructure, PwC India. Haider Saikh, Associate Director Capital Projects & Infrastructure, PwC India also contributed to the article.)
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