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Private Sector Capex in Infrastructure
Context:
The Ministry of Statistics and Programme Implementation (MoSPI) will launch its first annual survey on private sector capital expenditure (capex) in October, with results expected by February.
More in News:
- This web-based survey, covering 6,000-7,000 entities, will track past and projected capex over a five-year span.The survey utilises the Ministry of Corporate Affairs’ database, without field enumerators.
- The initiative aligns with the government’s push to boost economic growth by encouraging private investment, as public capex ramps up amidst uncertain private sector revival.
- Though the share of private investment in the economy has increased compared to public investment, private investment in infrastructure remains low.
- India needs to invest 8-10% of its GDP in infrastructure to sustain high single-digit growth rates over the next couple of decades.
State of Private Sector Investment:
- A recent study by the Reserve Bank of India (RBI) has projected the private sector capital expenditure to increase by 54 per cent to ~2.45 trillion in 2024-25 as against ~1.59 trillion in 2023-24.
- In Q1FY25, gross fixed capital formation (a proxy for investments) grew by 7.5%, up from 6.46% in the previous quarter.
- Experts attribute this rise to increased capital expenditure by the private sector and households.
- Private sector Investment in Infrastructure: The private sector needs to increase its role in infrastructure spending, as the government currently bears three-fourths of the costs and aims to double infrastructure investment to around ₹140 trillion by 2030.
Reasons for increased Private investment:
- This rise is due to the rising domestic demand, improved corporate profitability, sustained credit demand, business optimism, and the government’s focus on infrastructure development.
- In 2019, the Centre slashed corporate taxes from 30% to 22% hoping that the move would encourage private investment.
- Current capacity utilisation is around 75%, a threshold where companies typically begin expanding, while a 10% increase in new orders for the October-December 2023 quarter, the highest since July-September 2022, suggests a growing need for capacity expansion.
- Increased Government Expenditure in infrastructure leads to crowding in effect leading to private investment.
- In the fiscal year 2024, the government allocated 3.3% of GDP to infrastructure, with a focus on transport and logistics.
Challenges in increasing Private Capex:
- Private capital formation, after good growth in the last three years, may turn slightly more cautious due to fears of cheaper imports from countries with excess capacity.
- Private sector participation in infrastructure remains limited, with only 35% of investments in urban infrastructure coming from private investors in FY 2020. The private sector often finds social infrastructure projects less appealing due to lower financial returns and greater operational complexities.
Steps taken by Government to boost Investment in Infrastructure:
- Establishing institutional frameworks such as the Insolvency and Bankruptcy Code,National Asset Reconstruction Company Ltd and specialised development financial institutions like Nabfid.
- National Infrastructure Pipeline (NIP) to identify and prioritise large-scale infrastructure projects, aiming to enhance investment and improve project execution.
- Infrastructure Investment Trusts (InvITs)to attract private investment by allowing infrastructure assets to be listed and traded on stock exchanges.
- Public-Private Partnerships (PPPs) to leverage private sector efficiency and capital in the development and management of infrastructure projects.
- To boost infrastructure investment, India has introduced initiatives like the PM Gatishakti National Master Plan, which aims to enhance multi-modal connectivity for efficient movement of goods and people.
- This plan, along with the National Monetisation Plan to unlock value from existing assets, supports the creation of new infrastructure projects through strategic partnerships.
- Additionally, there is a scheme offering states long-term interest-free loans for the development of durable infrastructure.
- The Corporate Affairs Ministry has notified the National Bank for Financing Infrastructure and Development (NaBFID) as a ‘Public Financial Institution’ (PFI) under Company Law, granting it benefits under various laws, including Income Tax and SARFAESI.
- Public Finance Institutions (PFIs) focus on providing general financial services to support public policies, funding public projects, welfare schemes, and essential services such as healthcare, education, and infrastructure.
- In contrast, Development Finance Institutions (DFIs) are specifically established to fund and promote economic development projects. They concentrate on long-term investments in sectors like infrastructure, agriculture, and industry and often target underdeveloped regions.
- NaBFID is a development finance institution that was set up in 2021 to focus on infrastructure funding.
Way Forward:
- The National Bank for Financing Infrastructure and Development (Nabfid) should prioritise post-disbursement credit monitoring, a crucial factor that has been a barrier to achieving optimal outcomes in infrastructure financing.
- Additionally, effective mechanisms must be established for the liquidation and resolution of bad assets, along with developing adequate internal expertise to handle these processes.
