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India’s InfrastructureNew Models of Financing
Business Economics BankingNovember 25, 2017
Dr. Shubhada Rao, Chief Economist
2
Infrastructure investment got scaled down in 12th FYP
Source: Deepak Parekh Report
3.94.4
3.5
1.1
2.6
2.2
5.0
7.0
5.7
0
1
2
3
4
5
6
7
8
10th FYP 11th FYP 12th FYP
Investment in Infrastructure (% of GDP)
Private
Public
Total
3
India’s investment ratio has declined in last 5yrs
Source: IMF
Country Investment Ratio (% of GDP, 2016)
US 19.7
UK 17.0
Brazil 17.5
Russia 25.3
Indonesia 34.3
China 44.2
South Africa 19.4
39.6
30.4
0
5
10
15
20
25
30
35
40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
India's Investment Ratio (% of GDP)
4
Cross section of policy reforms gradually yielding outcomes
Institutional
•Goods & Services Tax
•Insolvency & Bankruptcy Code
•Monetary Policy Committee
•NITI Aayog
Macro
•Flexible Inflation Targeting Regime
•Revised FRBM Framework
•FDI liberalization•Fuel price
deregulation•Make in India,
Startup India, Skill India
Micro
•UDAY Scheme•PSU Bank
Recapitalization•Jan Dhan Yojana,
Suraksha BimaYojana
•MUDRA Bank•Smart Cities
Administrative
•Direct Benefits Transfer
•E-Biz Portals•E-Auction of coal
blocks•Keeping food
inflation under check
140
131 130
100
60
70
80
90
100
110
120
130
140
150
Jul-13 to Jun-14 Jul-14 to Jun-15 Jul-15 to Jun-16 Jul-16 to Jun-17
India's rank in World Bank's Ease of Doing Business Assessment
Improvementin Rank
Source: World Bank
Post Demonetization, Cash/GDP ratio has moderated from ~12% to ~10.5%
In Nov-17, Moody’s upgraded India’s long term foreign currency rating to Baa2 from Baa3
In sign of increased financialization, cashless means of transaction is rising at a healthy pace
Progress lacking in the area of land & labourreforms along with adequate job creation
5
India gaining policy stability and credibility
There has been a secular decline in policy uncertainty in India since 2013This is in sharp contrast to rise in policy uncertainty at a global level
0
50
100
150
200
250O
ct-0
4
Oct
-05
Oct
-06
Oct
-07
Oct
-08
Oct
-09
Oct
-10
Oct
-11
Oct
-12
Oct
-13
Oct
-14
Oct
-15
Oct
-16
Oct
-17
Global IndiaEconomic Policy Uncertainty Index (12mma)
Rising Uncertainty
Source: Bloomberg
6
Lot of scope to improve quality of India’s infrastructure
Note: Lower rank is desirable
Global Competitiveness Ranking (WEF, 2017)
India’s Rank Top 3 Countries BRICS Median Rank
OverallInfrastructure
66 HK, Singapore, Netherlands
52
Transport 25 Singapore, UAE, HK
35
Roads 55 UAE, Singapore, Switzerland
64
Railways 28 Switzerland, Japan,HK
30
Port 47 Netherlands, Singapore, HK
66
Air 61 Singapore, HK, UAE
51
Electricity & Telephone
100 HK, Luxembourg, Switzerland
77
7
Public debt has risen since the Global Financial Crisis
Source: IMF
Government Debt/GDP Ratio (%) 2008 2016
Advanced Economies 33.9 46.8
US 73.6 107.1
Developing Economies 78.7 106.3
BRICS (Average) 37.9 47.9
8
Rules based fiscal policy to limit appetite for infra support
The FRBM version 2.0 recommendscodified rules on deficit and debtmanagement for both central and stategovernmentsIts is expected to be implemented fromFY19 onwards
9
Key challenges in Indian infrastructure
Inadequate Approvals
Sub-Optimal Risk Allocation
Inefficient Tender Processes
Funding of Cost Overruns
10
Stylized representation of few infra financing ideas
Infrastructure
Long Term Debt
Monetization
Pooled Finance
FX Risk Hedging
11
Case Study: A successful turnaround for the roads sector
HAM
Assured O&M
payouts
Cost inflation indexed
Cash Support –
40:60
Semi-annual
payments
Reduced funding riskReduced construction riskO&M risk partially mitigated
Compensating for delays
Relaxing Exit Norms
One time fund infusion by NHAI
Upfront land acquisition, clearances
Remedial Actions
12
Typical contractual structure of SPV in project finance
13
Few innovative ideas for infra financing
• Isolation of financial risk and legal protection• Lower funding cost; flexibility of getting listedSPV
• BoT• ToTConcession Models
• Joint Ventures• Equity and Debt Financing
Capital Contribution Models
• Stake sale and Refinancing; InvITs• Power generationMonetization
• Applicable for both public and private domains• Best for small ticket municipal projectsCrowdfunding
14
Thank You!
15
Appendix
16
Transport services have ~5% share in India’s GDP
0
1
2
3
4
5
6
FY12 FY13 FY14 FY15 FY16
Transport share in GDP (%)
Others
Road
Rail
Source: CEIC
17
Investment in rail infra to grow by 7% over next 5yrs
18
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Contacts
Name Designation Email Phone
Shubhada M. Rao Chief Economist [email protected] (+91) 22 3372 9198
Vivek Kumar Senior Economist [email protected] (+91) 22 3372 9059
Yuvika Oberoi Economist [email protected] (+91) 11 6656 9087
Prakriti Shukla Economist [email protected] (+91) 22 3372 9016
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Sanket Tandon Economist [email protected] (+91) 22 3372 9793
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Note: Data in this report has been sourced from CEIC, Bloomberg, GoI Budget Documents & Economic Survey, CGA, PPAC, IMD, RBI, IMF, and YES BANK Limited
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