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Informist, Thursday, Sept. 25, 2025

 

NEW DELHI – Infrastructure development has positively and significantly impacted India's GDP growth, with future policy initiatives likely to focus on increased investment and operations for creation of broad-based infrastructure across the country, the Reserve Bank of India's staff said in an article in the monthly bulletin for September, released Wednesday. Given the large requirement of investment in infrastructure, exploring avenues and ways for financing infrastructure projects assumes importance, it noted while listing a host of financing options. 

 

"Infrastructure is an engine that could drive the Indian growth express further ahead," the RBI staff said. "Besides, given the large requirement of investment in infrastructure, exploring suitable financing options and strategies would enable filling the infrastructure gap faster." Comments in the article do not represent the views of the central bank.

 

According to the article, funding of infrastructure involves various challenges, including asset-liability mismatches arising from high sunk costs and long gestation periods, spike in costs due to delays in approvals, violation of agreements, problems in land acquisition, complicated legal mechanisms regarding distribution of returns, sharing of risks among all stakeholders, and difficulties in price determination. "Absence of developed debt raising market and financial system coupled with default by a non-banking financial company and high non-performing assets of banks in previous decade adversely impacted the funding of infrastructure sector," it said. 

 

To bridge this funding gap, the central bank staff pushed for the National Bank for Financing Infrastructure Development to take the lead in creating more avenues of infrastructure financing gy diversifying its pool of finances to boost disbursements. NaBFID, incorporated in 2021, has been primarily set up to support long-term infrastructure financing in India, including the development of bonds and derivatives markets necessary for infrastructure financing.

 

"With the expansion in scale of large long-term institutional investors like provident funds and insurance companies, it (NaBFID) may tap funding from them," the staff said. "It may also secure a high credit rating to tap global and domestic sources of finance. It may develop its own sustainable financing model to reduce dependence on resources from government," they added. The paper also noted that NaBFID may develop a monitoring mechanism for its financed projects and put in place a system to resolve stressed assets. It may also provide funding for climate resistant low carbon infrastructure and technology to promote sustainable growth. 

 

A second way to bridge the financing gap is to develop the securitisation market, which helps make credit diversified, the RBI staff said. Securitisation is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities. To push the securitisation market, it would be imperative to resolve various constraints and take initiatives such as increasing the transparency through sufficient disclosures, raising demand for receivables for longer tenures, participation of long-term institutional investors, expansion in investor base, development of secondary market, and resolution of tax-related and legal issues including foreclosure laws, they said.

 

The third way to scale up infrastructure financing is to enable urban and local bodies to raise resources like municipal corporations augmenting their capital expenditure through suitable funding mechanisms based on bonds and lands to increase their incomes. "Issuance of municipal bonds including green bonds would enable mobilising finances by municipal corporations on a sustainable basis," the paper said. 

 

Although Indian authorities have been pushing to develop the municipal bond market, much remains to be done. Of late, there has been a rise in municipal bond financing, the central bank staff noted, but added that municipal bond issuances and their market were at a nascent stage. "For enabling the expansion in urban infrastructure, the municipal bond market needs to develop rapidly," they said. "For this, the improvement in financial performance and credit ratings of municipal corporations would be essential." 

 

The article noted that some local bodies have already begun issuance of green bonds to fund sustainable urban development projects but such issuance involves extra cost, which will decline as the market develops. "Moreover, local tax reforms, innovative strategies for augmenting tax and non-tax revenues, revisions in user charges for municipal services and taxes, and performance-linked municipal grants would go a long way in enhancing the magnitude of infrastructure financing," the article said. 

 

The fourth way to fund infrastructure investments is through external commercial borrowing, which can significantly lower cost of projects if timed appropriately. Although, excessive overseas borrowing and adverse exchange rate movements coupled with hedging costs increase indebtedness with the risk of debt trap and pose challenges for the external sector sustainability and financial stability of the country in general, the article noted. "Backing the ECBs with government guarantees for viable infrastructure projects may be helpful," it added. 

 

A fifth option is through sustainable infrastructure funding by banks which, however, hinges on the health of assets. The issue of asset liability mismatches faced by banks in case of infrastructure funding could be resolved if they lend a larger portion at floating rates, the paper suggested. Besides, there is a need for developing alternative sources for funding infrastructure to avoid financial stability risks arising from any stress in assets of the banking system, it said. In this regard, investment bankers can play a significant role in financing infrastructure through provision of innovative ways of funding and acting as a link between government and the private sector. 

 

The paper also said that there is a need to develop a bond market for infrastructure financing which would elongate the maturity profile of debt, reduce maturity mismatches in the books of lenders, broaden the financing base, expand instruments in risk management, enable stronger corporate governance, and minimise the impact of borrowers on financers. "Developing the market for sovereign green bonds may be accorded a priority, as they have a long tenure with lower refinancing risk, contain greenium (premium over plain bonds), impart stable funding source to government for climate related infrastructure and finance the green transition," it said. 

 

The government first issued green bonds in FY23 and since then, these have been a regular fixture in the borrowing calendar. However, the market response so far has been rather disappointing.

 

A final suggestion that the central bank staff offered to bridge the infrastructure financing gap is to access concessional multilateral institutional finance and external commercial borrowing with sovereign guarantees. This should be done while ensuring systemic stability and covering the risks from unhedged portion of funds, they said. 

 

From a policy angle, the paper said there is a need for macroeconomic quantitative assessment of existing infrastructure in the country with region-wise break-up, and the extent of infrastructure requirement. The gap would provide an estimate of investment needed from the private sector and, accordingly, financing of the gap may be done by tapping various avenues.

 

The Narendra Modi government has relied on large capital spending to boost economic growth since the COVID-19 pandemic, especially as private sector investments remain subdued. In the past five years, the government has increased the Centre's capital expenditure more than three times. "The public investment in infrastructure yields larger multipliers than private spending because the former has a potential to increase the productive capacity of the economy, directly as well as indirectly, through crowding in private investment, apart from its positive impact on aggregate demand," the paper said.  End

 

Reported by Priyasmita Dutta

Edited by Avishek Dutta

 

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