Financing deals for Indian infrastructure projects are surging on market expectations that the next government will come through with at least some of the spending that politicians are promising now during a heated election campaign.
Local-currency loans for projects came to 520 billion rupees (Dh27.55 billion; $7.5 billion) in the quarter to March 31, the highest since 2011, and compared with 144 billion rupees in the previous three months, according to data compiled by Bloomberg.
As India aims to become a $5 trillion economy by 2024, the government is pushing to eliminate bottlenecks to growth, and is responding to voters’ frustration with problems such as an inadequate number of expressways, crowded commutes and congested airports. The ruling Bharatiya Janata Party said it will seek capital investments totalling $1.44 trillion (Dh5.29 trillion) by 2024 if voted back to power next month, while the main opposition Congress party is calling for modernising all outdated rail infrastructure and increasing the length of national highways.
India’s focus on infrastructure will support growth in the sector, though the expansion will be hampered by land acquisition issues, according to Fitch Solutions Macro Research. For lenders, an increase in project financing will give them access to relatively low-risk, mainly government-backed deals for long periods, at a time when they are struggling to deal with the worst non-performing loan ratio among the world’s major economies.
“The pipeline for infra projects is expected to rise after the elections, with many projects likely to be funded by the private sector,” according to Vishal Kotecha, associate director for infrastructure and project finance at India Ratings & Research. “Airports are undergoing significant expansion in capex, which would give an impetus to new financing.”
Infrastructure projects that the government is considering include a national rail freight corridor, a second airport and trans-harbour link in the financial hub Mumbai, a high-speed rail network in western India and a controlled-access highway between Mumbai and Delhi and Nagpur in central India.
“India’s infrastructure requirements are growing at a rapid pace and developing new projects is inevitable,” said Manmohan Singh, head of banking at the Indian unit of Bank of Nova Scotia. “Many banks are likely to increase lending for project financing as there is an increase in activity such as modernisation of six airports and Mumbai’s coastal road project.”
Need for land reforms
Some of the infrastructure projects have faced lengthy delays due to difficulties in land acquisition. If Prime Minister Narendra Modi wins in the elections he may push ahead with land reforms to speed up projects, especially those for roads and rails that cut across rural farmlands.
While loans for infrastructure don’t always deliver high margins to lenders, the typical government-backed structure makes them a safe category of lending, said Siddharth Purohit, analyst at SMC Global Securities Ltd. “Even though the payment cycle can be long, it is assured.”