Nationwide Lockdown to Result in Infra Pipeline Deferment?

The extended 40-day world?s largest lockdown is expected to lead to the deferment of Rs 1.2 trillion investments proposed under the National Infrastructure Pipeline (NIP), a senior analyst at the financial services advisory CARE Ratings has predicted.

?In terms of government revenue, there is going to be a shortfall with the shut-down of economic activity. On the other hand, the government would have to incur sizeable expenditure. Both of these factors would lead to lower expenses towards Capex, Kavita Chacko, Senior Economist, CARE Ratings told INFRASTRUCTURE TODAY over the telephone from Mumbai.

The Central Government in December 2019 unveiled the NIP with an envisaged investment of Rs 1.2 trillion for the period 2020-25. This was in the backdrop of an economic slowdown where the country's economic growth had weakened to an 11-year low. The NIP indicated that the govt was relying on an investment-led revival of the economy. NIP is an important part of India?s target of becoming a $5 trillion economy by 2025.

In January, Chacko and her colleague Urvisha H Jagasheth had published the report, Financing of the National Infrastructure Pipeline FY20-25 to examine the national infrastructure building plan and its probable funding over five-years.

The expenditure on NIP was to be incurred by the central and state governments along with the private sector, and was to cover key infrastructure segments. A sizeable portion of that investment ? nearly 42 per cent ? was to be incurred from FY2021-22.

?Now owing to the sudden and severe disruption caused by the COVID-19 pandemic the government finances would be strained, which in turn would have a bearing on the expenditure incurred towards infrastructure creation,? said Chacko.

?Given the uncertainty associated with the duration of the lockdown and the time taken to return to normalcy, infrastructure investment is expected to be impacted. Even after returning to normalcy, it could take up to three months for a revival in infrastructure investment,? she anticipated.

Chacko said that investment in infrastructure would have to be driven by the government. Only when that happened, would the private sector investment also be motivated to return. Chacko also surmised that initially, the government?s focus would likely be on providing relief to the segments worst-affected by the pandemic.

She, however, refused to immediately single out any specific infra segments as being the hardest hit and felt that all would be impacted in varying degrees.

IMPACT ON INFRASTRUCTURE FINANCING 

Ever since Finance Minister, Nirmala Sitharaman announced the NIP on New Year?s Eve last year, industry observers have almost unanimously described it as a positive move towards infrastructure development. But the unexpected situation arising out of the COVID-19 pandemic is a major disruption and the big question that is now bothering everyone is as to when is normalcy likely to be restored and its likely impact on infrastructure financing.

Banks have been going slow on infrastructure financing as such projects usually have a very long gestation period. In the past, several public sector banks have especially witnessed such loans turning into non-performing assets (NPA)s. However, the country?s central bank, the Reserve Bank of India (RBI), had recently come up with measures to ease liquidity in the banking system and to prompt banking lending. But it remains to be seen if this finds its way into financing infrastructure projects.

?Infrastructure financing would have to be increased from the corporate bond markets. The central bank has also mandated that banks borrowing from the Targeted Long-Term Repos Operations (TLTRO) will have to use these borrowings for investment in corporate debt in primary and secondary markets. This could come to the aid of infrastructure financing,? opined Chacko.

?The External Commercial Borrowings (ECB)s is another avenue for funds given the low-interest rate regime in the developed economies. But the associated foreign exchange associated risks will need to be factored in,? she cautioned.

When the NIP was announced in December, the challenge was how it would be supported given the funding constraints of the government. Both the central and state governments are required to adhere to their respective fiscal deficit targets. According to Chacko, it was a challenge back then and it is an even bigger challenge now that the situation has taken a completely unexpected turn.

-Manish Pant