The Union Commerce Minister Piyush Goyal recently hailed India’s record FDI inflows over the last seven years. While FDI has increased from Rs 2.6 lakh crore in FY15 to Rs 4.4 lakh crore in FY21, it conceals an important gap—infrastructure constitutes a very small share compared to services and IT sector. In FY21, services and tech together cornered Rs 2.4 lakh crore whereas infrastructure and construction received only Rs 61,000 crore. This is despite 100% FDI being permitted under the automatic route for sectors like roads, railways, ports and construction.
This situation is worrying, especially at a time when the Union and state governments are embarking on ambitious infrastructure projects to stimulate the economy in the aftermath of Covid-19. The pipeline for projects is large—80,000 kms of roads under Bharatmala, 100% electrification of broad-gauge rail track by 2023, 1,000 kms of metro in cities and 500 GW of renewable energy by 2030. Potentially transformational, these planned infrastructure projects will not take off without sufficient capital funding. The Economic Survey 2018 was prescient in its estimation that India will need Rs 450 lakh crore of investment in infrastructure by 2040. Initiatives to marshal the capital have been announced as well— Rs 6 lakh crore National Monetisation Pipeline over four years and Rs 3 lakh crore National Bank for Financing Infrastructure and Development. However, attracting foreign investment is largely absent from the plan to fund infrastructure. Given the tepid response of foreign investors, the government has been forced to look inwards and set an aggressive disinvestment target of Rs 1.75 lakh crore for FY22.
There ought to be a closer examination of foreign investors’ unwillingness to allocate capital towards infrastructure. In greenfield projects, multiple factors like long gestation periods and delayed completion contribute to a lower rate of return for the foreign investor. Take for instance the statistics ministry’s 2020 report finding that 442 infrastructure projects had a collective cost overrun of Rs 4 lakh crore and 536 projects with an average time overrun of 44 months.
The situation of the road and highways sector is instructive. The Parliamentary Standing Committee on Transport in its report on the highways ministry’s budget for this year noted that 888 road projects of 28,000 kms worth Rs 3 lakh crore are delayed. The primary reasons for delays were land acquisition, delayed payments to contractors and poor planning of utilities among others. However, these reasons are not unique to highways and plague most greenfield infrastructure projects.
Eventually, many such delayed projects are classified as non-performing assets and creditors approach the National Companies Law Tribunal. Here too, they don’t find a timely resolution. The secretary to the corporate affairs ministry noted the need for reducing delays in bankruptcy resolution by the tribunal. The Standing Committee on Finance had noted in August that 71% of cases in NCLT have been pending for more than 180 days, which is a deviation from the objective of the Insolvency and Bankruptcy Code. Further, the recovery rate as of June 2021 was 36%, which is low when compared to the United States’ 59%. High pendency, large backlog and low recovery rates increase the risk perception for foreign investors.
To boost FDI in greenfield projects, the focus must be on two aspects—reducing risk in executing projects and providing a secure exit mechanism in case of failure. Regarding the latter, the Union government should strengthen the NCLT by disallowing post hoc bids during resolution and bringing more flexible resolution plans for infrastructure. Regarding the former, the PM Gati Shakti Master Plan has the potential to improve execution of infrastructure projects.
The plan seeks to centralise all infrastructure projects of 16 different ministries under one portal to synchronise development. Unified GIS-based planning and centralised monitoring have the potential to energise the speed of infrastructure development. However, this coordination cannot be restricted solely to the Union level since states are integral to aspects like land acquisition and environmental and regulatory approvals. For instance, the Ahmedabad-Mumbai bullet train project has been delayed by three years to 2026 because only 30% land has been acquired in Maharashtra. For the master plan to succeed, the Union government will have to coordinate with the states. Its success will also provide a fillip to attracting FDI in greenfield projects.
Given greenfield projects present a higher risk profile, foreign investors may be more attracted to brownfield projects. Such projects offer significantly lower risk with the primary concerns being operations and management. The National Monetisation Pipeline has been designed to monetise Rs 6 lakh crores of brownfield assets and should be leveraged to attract foreign investment. The NMP should also create within itself an Infrastructure Investment Trust (InvIT) pipeline since foreign investors have preferred InvITs as a vehicle. Currently there are 15 registered InvITs, however infrastructure-related PSUs can launch more and aim to raise `8 lakh crore till FY27.
History is replete with examples of infrastructure financing transforming entire economies. After the Great Depression, United States President Roosevelt brought forth the New Deal that created jobs for 90 lakh Americans and built 6 lakh kms of roads, 1 lakh buildings and 75,000 bridges. India faces a similar context—our GDP contracted by 8% last year. However, great infrastructure cannot be built solely on domestic capital and the government would do well to attract foreign investment. Ultimately, the 2.5–3.5x multiplier associated with infrastructure spending would bring back demand and rescue lakhs of households that have slipped back into poverty due to the pandemic.
Lavu Sri Krishna Devarayalu
YSRCP MP from Narasaraopet, Andhra Pradesh
(Assisted by Raghav Katyal, Former LAMP Fellow, and Pallavi Baraya, LAMP Fellow)