A $750 Billion Gap in India’s Push for China-Like Infrastructure
To see the challenge Prime Minister Narendra Modi faces to improve India’s ailing infrastructure, ask the state-run company specializing in lending to the sector. It estimates $750 billion of debt is needed for the task.
That’s more than twice the size of Singapore’s economy, and five times the existing 9.2 trillion rupees ($144 billion) of bank loans to Indian infrastructure projects. The solution is to rethink current funding techniques, according to S.B. Nayar, the chairman of India Infrastructure Finance.
“There’s an enormous requirement,” Nayar said in an interview in New Delhi on May 11. “It’s very difficult for the current system to meet this.”
Nayar said the government should establish more lenders for specific areas of infrastructure, woo private investors — including from overseas — and allow his company to target at least an 8 percent share of infrastructure loans from 3 percent now. Modi’s agenda is focused on stoking investment, including clearing a backlog of 13.5 trillion rupees of stalled projects.
“Banks’ growth isn’t keeping pace with economic growth,” Nayar said. “So there’s a gap. Indian banks have to raise more equity and become more profitable, get more investments, have a bigger balance sheet, lend more.”
Nayar contrasted the growth in the size of China’s banks with comparatively smaller Indian lenders, which are also tackling rising bad debts.
State Bank of India, the nation’s largest lender, had assets of about $400 billion at the end of December, about an eighth of the total held by Industrial & Commercial Bank of China, exchange filings show.
India’s goal is $1 trillion of spending on roads, ports, power and other infrastructure from 2012 to 2017. About 75 percent of this would need to be financed through debt, according to Nayar, leading to the figure of $750 billion.
India Infrastructure Finance, set up by the government in 2006, raises funds at home and abroad and has a loan book of about 280 billion rupees, according to Nayar.
Modi has tried to speed up environmental and other approvals for major projects since taking office a year ago.
His government has said infrastructure outlays will rise 700 billion rupees in the year through March 2016. Other steps include spending 200 billion rupees to establish a fund to spur infrastructure lending and permitting dedicated tax-free bonds.
Nayar also expects further interest-rate cuts by the Reserve Bank of India following a moderation in inflation.
At the same time, some of the initial euphoria about Modi’s development agenda has begun to dissipate.
People need “confidence that investing in infrastructure, they would be in a position to get their money back and adequate returns,” said Hemant Kanoria, chairman of SREI Infrastructure Finance.
The S&P BSE India Capital Goods Index of construction and engineering companies is down about 13 percent since early March, paring its gain this year to 5 percent.
Market borrowing costs have also advanced recently. Bonds have declined globally ahead of a potential increase in interest rates by the U.S. Federal Reserve.
L&T Infrastructure Finance last month sold a 10-year bond at an 8.9 percent coupon, 15 basis points higher than similar debt sold in February, Bloomberg-compiled data shows. The average yield on five-year top-rated rupee corporate bonds is up 17 basis points to 8.51 percent from this year’s low.
Higher yields may hurt Modi’s push to close the gap to China. The latter invests 17 percent of gross domestic product in infrastructure, compared with India’s 5 percent, State Bank of India Chief Economic Adviser Soumya Kanti Ghosh said.
“There will be a huge requirement for railways, ports and shipping, airports and roads,” Nayar said. “Knowing that banks will step back, we need to make a more active role.”
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