The government has set the agenda for 2020, which if one has to sum up in one word is “pump-priming”. On the last day of 2019, Finance Minister Nirmala Sitharaman unveiled infrastructure investment plan of a whopping Rs 102 lakh crore for the next five years that is expected to push us into another orbit ($5 trillion and above). The goal is ambitious, to say the least. India spent Rs 80 lakh crore between FY 08-FY19 on infrstructure, of which Rs 51 lakh crore were spent in the last six years alone. Many skeptics have been asking if it is possible to double infrastructure spend of last six years in the next five years? The answer is in the affirmative, but depends completely on our ability to fund this and identify alternative and parallel sources of infrastructure financing.
Traditional sources of funding are limited. A slowing economy, a chocked financial system, a stressed banking sector means funding of proposed massive infrastructure projects requires newer, innovative ideas and yes, the long delayed capital market reforms. India’s debt market is still nascent, driven by government securities. This author in the last 15 years has heard on multiple occasions about India’s corporate bond market being on the cusp of a take-off with capital market reforms on the anvil. Successive Budgets under different governments and at least six different committees under market regulator SEBI and banking regulator RBI have largely failed to provide the much-needed roadmap for corporate bond market. The end result is we struggle to provide alternate funding routes for companies.
In most international markets including the US, trading volumes in debt market are much higher than those in equity market, which ensures enough liquidity with buyers and sellers willing to buy bonds with low credit ratings in the hope of a big payoff. This is the reason companies are able to raise funds across different maturities, including for infrastructure projects which typically have long gestation periods.
This is especially significant since the plan unveiled by the Finance Minister assumes, on a very conservative basis, that the private sector will account for 22% of funding and the government and states will contribute the rest (39% each). In the present slowdown, with state finances being stretched, it is expected corporate funding will be significantly higher.
Globally, a large part of infrastructure financing is done through the corporate bond route and banks and the government are not expected to bear the entire burden. In India, due to the absence of a deep and effective corporate bond market, financing of infrastructure projects such as highways, railway projects, ports and airports ends up becoming the sole responsibility of banks and the government. This leads to many distortions, first and foremost being that banks take long term project exposure on the basis of deposits which are short term (three to five years in maturities). Ballooning bank NPAs have also been a result of this lopsided financial equation.
There are several other reasons for a corporate debt market that is woefully inadequate in addressing India’s needs. As long as there is an opportunity for arbitrage between loans and bonds, as is the case in India, the market is unlikely to take off. Indian lenders prefer providing loans to corporates rather than investing in bonds. There is a reason for this. Lenders have to mark to market their investments in bonds while they have so far had a far greater leeway in being able to make provisions when disbursing loans. The loan market is more non-transparent. To be fair, issuing bonds and selling them down to investors is not only costlier and cumbersome but ensuring liquidity and an easy exit are also difficult in the absence of a diversified set of investors and market makers who can offer constant two-way quotes. Investors, including provident and pension funds, prefer the safety and comfort of sovereign bonds.
Some important measures by the government have tried to address some of these fundamental anomalies. The Bankruptcy Code will ensure corporates cannot take the banking system for granted, ensuring the system will not be skewed against the bond market. The proposed Credit Guarantee Enhancement Corporation will ensure companies are able to boost their credit rating, which will enable them to raise funds at cheaper rates. By allowing repurchase agreements in AA rated bonds or securities, volumes could go up in the corporate bond market, making it viable. Banks cannot and must not take this massive infra cost. A deep and thriving corporate bond market is what India needs. RBI and North Block need to ensure it is implemented.
Gaurie Dwivedi is a senior journalist covering economy, policy and politics.