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A US$750 billion gap in India's push for China-like infrastructure
[NEW DELHI] To see the challenge Prime Minister Narendra Modi faces to improve India's ailing infrastructure, ask the state-run company specialising in lending to the sector. It estimates US$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 (US$144 billion) of bank loans to Indian infrastructure projects. The solution is to rethink current funding techniques, according to SB Nayar, the chairman of India Infrastructure Finance Co Ltd.
"There's an enormous requirement," Mr Nayar said in an interview in New Delhi on May 11. "It's very difficult for the current system to meet this." Mr 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 per cent share of infrastructure loans from 3 per cent 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," Mr 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."
Mr 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 US$400 billion at the end of December, about an eighth of the total held by Industrial & Commercial Bank of China Ltd, exchange filings show.
India's goal is US$1 trillion of spending on roads, ports, power and other infrastructure from 2012 to 2017. About 75 per cent of this would need to be financed through debt, according to Mr Nayar, leading to the figure of US$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.
Mr 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.
Mr 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 Mr 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 Ltd.
The S&P BSE India Capital Goods Index of construction and engineering companies is down about 13 per cent since early March, paring its gain this year to 5 per cent.
Market borrowing costs have also advanced recently. Bonds have declined globally ahead of a potential increase in interest rates by the US Federal Reserve.
L&T Infrastructure Finance Co last month sold a 10-year bond at an 8.9 per cent 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 Mr Modi's push to close the gap to China. The latter invests 17 per cent of gross domestic product in infrastructure, compared with India's 5 per cent, 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," Mr Nayar said. "Knowing that banks will step back, we need to make a more active role."