Investment in infrastructure generates significant multiplier effects on the economy. This is particularly true for public spending in the form of capital expenditure. An initial investment in infrastructure triggers additional economic activity beyond the direct cost of construction, resulting in broader economic benefits. These benefits include increased employment, enhanced business activity, and higher consumer spending across sectors impacted by improved infrastructure. According to the National Institute of Public Finance and Policy, every rupee spent on infrastructure contributes between 2.5 to 3.5 rupees to GDP.
India has set an ambitious target of becoming a $7 trillion economy by 2030. To achieve this, the country requires a sustained CAGR of 10.1% from 2024 to 2030. Sustaining such growth will demand significant investment from both the government and the private sector. The Union Government has consistently increased its capital expenditure and in the FY-25 budget, allocated ₹11.11 lakh crore for capital expenditure, which accounted for 3.4% of GDP.
Public Sector’s Limitations
However, data on government expenditure suggests that the Centre may fall short of its annual capital expenditure target by around ₹80,000 crore. This shortfall is attributed to spending restrictions during the general elections in the first quarter and disruptions caused by heavy monsoon rainfall in the second quarter. Additionally, state governments have been struggling to fully utilise the Centre’s liberal capex loan facility of ₹1.5 lakh crore for the current financial year. Given the conditionalities tied to some of these facilities, it may be challenging for States to draw the remaining funds in the final months of FY25.
These trends highlight the public sector’s limited capacity to fully utilise the allocated capital budget. Moreover, as both the Centre and states move along a fiscal consolidation path to reduce deficits, sustaining growth and investment momentum will necessitate increased private sector participation in utilising the funds. A two-pronged approach can address this challenge: first, by accelerating Public-Private Partnership (PPP) projects, and second, by improving liquidity for private entities for infrastructure development through both the banking and non-banking sectors.
A Case For PPP Projects
PPP projects offer several advantages in effectively utilising allocated funds while ensuring timely project execution. The private sector’s involvement brings innovative construction techniques, advanced technologies, and better management practices, optimising costs and improving project quality. Additionally, private players take on significant risks related to design, construction, and maintenance, easing the burden on the government. Consequently, PPP projects foster a collaborative environment where both the government and private entities benefit. The PPP model such as the Hybrid Annuity Model used in national highway projects is a good example of the efficient use of public sector investment through collaboration efforts.
In addition to public funding, securing long-term credit for the private sector will be crucial for India’s expanding infrastructural needs. Infrastructure projects usually demand a large initial capital investment and produce revenue streams over longer periods of time. Commercial banks are therefore reluctant to provide lending for infrastructure projects. The asset-liability mismatches along with the perceived risk of non-performing assets add to the persisting challenges in securing funding for such projects. To address these concerns and attain a steady flow of capital, it is important to push policy-driven incentives that encourage banks to allocate a certain “pre-committed” percentage of their loan portfolio towards infrastructure. If made a regulatory requirement, such a carve-out for infrastructure lending norms would compel banks to increase their exposure to critical infrastructure projects while also providing clarity and predictability to private players soliciting funding.
Support Banking
However, the banking sector must also be supported by comprehensive risk mitigation frameworks such as a guarantee of partial credit at the beginning of the project and payment of further credit in instalments, depending on the progress of the project. These factors will help increase the willingness of banks to lend by lowering the default risk that they might encounter in long gestation projects.
Furthermore, a more nuanced policy framework can focus on encouraging banks to collaborate with sovereign funds, and multilateral agencies which may be capable of sharing project risks. It may prove viable to add a mechanism for priority lending to the private sector, especially in the case of PPP infrastructure projects, in order to fast-track the growth of the infrastructural sector in India.
The non-banking sector must also be roped in to facilitate the infra story. The current regulatory framework is not conducive to investment in long-term infra assets and hence most investments in Insurance, PF and Pensions are concentrated in government and semi-government issuances.
Infrastructure project SPV are unable to meet investment criteria laid down by IRDAI and PF guidelines with respect to the underlying credit rating and exposure capping (basis net-worth) requirements. The investment pattern of Insurers, EPFO and NPS would need to be appropriately amended to mandate a certain percentage of the investment assets directly into infrastructure sectors, especially ring-fenced SPVs. Ideally, these institutions should be mandated to invest at least 10% of total assets under their management. This would provide diversification of investment avenues for life insurers, EPFO and NPS and facilitate long-term capital investments directly into sectors like highways, ports, airports, power generation, & energy transition which are developed under a regulatory framework, or through the concession arrangement from the government or any of its agencies.
Every story needs different protagonists to play their part. Improving liquidity for private sector entities to facilitate their contribution to India’s infrastructure growth story is one such protagonist that needs to be given centre stage in our planning.
(The author is a retired IAS officer, former Director of WTO, and currently President of Chintan Research Foundation)
Disclaimer: These are the personal opinions of the author