Just the right time to invest in Indias infrastructure

A leading Indian entrepreneur weighs up India's incredible infrastructure challenge and why it is the right time for it to attract the much-needed foreign direct investment (FDI). The Indian infrastructure story is at an interesting crossroad. On one hand, being the world's fastest growing major economy, India needs to create fresh capacity in its infrastructure to maintain the growth momentum. On the other hand, the banks, which have been the main source of funds for infrastructure projects, are saddled with mounting levels of stressed assets which have almost choked their ability to lend. And incidentally the infrastructure sector accounts for a major chunk of that stressed assets portfolio. Over-leveraged corporates are finding it difficult to service their debts. Many of the projects have got stuck - some due to procedural delays (be it in terms of providing necessary permits and approvals or in terms of clearing payments) and some due to over-optimistic promoters going wrong with their project calculations. Several of the projects are no longer viable due to time and cost overruns. The worst affected are the micro, small and medium enterprises (MSMEs) to whom big project developers usually subcontract their work. For undertaking such contracts, MSMEs usually take loans with whatever little capital they have. But when they do not receive their due payments in time, they cannot service their loans. In the process, they get penalised, but for no genuine fault of their own. The government is doing its best to improve the situation. Commendable progress has been made on bringing down the time for getting necessary clearances. The government has also stepped up capital expenditure by investing in sectors like roads and railways. A lot of clarity on the indirect tax front is imminent with the roll out of the Goods & Services Tax (GST). Another landmark reform that the government has ushered in is the introduction of the Insolvency & Bankruptcy Code implemented. This Code was long overdue. This was one crucial piece of legislation that was missing from our financial architecture. India's insolvency law remained outdated, mired in confusion with existence of multiple agencies and nowhere in sync with global best practices. Now that the Code is here, its effective implementation will improve the chances of reviving stuck infrastructure projects through timely change in management. Continuity of projects, in turn, will benefit all stakeholders namely MSMEs, lenders, users and the economy as a whole. Thus, all these initiatives greatly add up to improve the ease of doing business in India. Within the next two quarters, I feel the investment climate will vastly improve. India promises long-term growth prospects, a growing domestic market and most importantly stability, which any investor will value. The structural reforms that India has ushered in have caught the attention of the international investor community. The icing on the cake is the healthy competition that has started among the state governments in their bid to attract investments. State government leaderships are now extra accommodative in terms of addressing any investor concern. Thus, growth and development are paramount on the agenda of both the central and state governments. Thus, the time to enter India cannot be any better. For far too long, India has depended mostly on bank finance for infrastructure projects. Such dependence has always caused asset-liability mismatches. It is high time we start exploring other long-term funds, both foreign and domestic. There are numerous Pension Funds (PFs) in the developed nations which are on the lookout for attractive investment propositions. PFs, with large pool of long-term funds, will be the perfect fit for infrastructure projects. Domestically, we need to grow and deepen the corporate bond market and also review the investment norms of our PFs and Insurance Funds so that a part of such funds can fund infrastructure projects. A mechanism needs to be evolved such that pension and insurance funds can be used for refinancing infrastructure projects even when the initial funding is done by banks. Risks get considerably mitigated in the post-construction phase, and thus fund managers of PFs and insurance funds should have no valid reason for shunning infrastructure projects. We urgently need to develop a market for Bid Bonds in India. In several advanced economies, a Bid Bond is a must-have requirement in the construction industry, i.e. the project owner needs the contractor to submit Bid Bonds while submitting their bids. A Bid Bond or a Surety is essentially a three-party agreement that guarantees the completion of a construction project as per the terms of the contract. If the contractor fails to complete the project satisfactorily, the owner of the project may call on the bonding company to step into the shoes of the contractor and complete the project. The biggest advantage for this in the Indian context is that Bid Bond curbs the tendency to present unrealistically low bids to win contracts. An instrument like this is an imperative for a nation like ours where there will be large-scale construction activities in infrastructure and real estate sectors in the coming years. Foreign institutional lenders should ideally assist India in building a market for this instrument. In addition, our policy makers need to revive leasing. Leasing has proved to be the most cost-effective tool for capital creation both in developed and developing nations. However, in India, with leasing being subject to both Sales Tax and Service Tax, this instrument has got virtually killed. Hopefully, once the Goods & Services Tax (GST) comes into force, leasing will once again emerge as a vital tool in infrastructure creation. Indian MSMEs, who are mostly cost conscious players, will benefit the most from leasing. In parallel, the creation of an Indian sovereign fund - namely the National Investment & Infrastructure Fund (NIIF) - introduction of Masala Bonds and fine-tuning the policy framework for investment vehicles like Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) are several other measures which the government has taken towards mobilising more private investments into infrastructure. Hopefully, these vehicles will also be successful in channelising funds from multiple foreign investors. To sum up, the pace of infrastructure creation may have slowed down temporarily. But make no mistake, this government is serious about reforms, and it is taking the right steps forward, in active consultation with industry and other stakeholders. India is poised for a multi-decade growth phases and thus exciting times are ahead for India's infrastructure. Sunil Kanoria is president of the Associated Chambers of Commerce of India [ASSOCHAM] and vice-chairman of Srei Infrastructure Finance Limited.