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Post-Covid challenges on Infra Financing and its impact on growth

The post covid 19 situation has underlined the urgency and importance of Infra sector development and should trigger all of us into action with a clear intent and commitment to achieve sustainable growth.

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The Covid 19 pandemic is having a widespread and multidimensional impact on our lives. On the economic front, we are facing far-reaching consequences.

Most of the rating agencies and RBI are predicting a sizeable contraction of the economy during 2020-21 (IMF has estimated a negative growth of 10.3% for the current year). For the revival of the economy, a series of measures by way of stimulus package have been announced and are under implementation. The development of infrastructure sector assumes significant importance to play a pivotal role at this stage. 

Infrastructure has been recognized as one of the most important enablers of economic growth. It has a big multiplier effect on the economy, with a direct positive impact on industries like steel, cement, construction equipment etc, while leading to increased employment, cost reduction and an overall improvement in efficiencies. 

While continuing with the medium-term goal of making India ‘A US Dollar 5 Trillion economy’, the immediate concern is the revival of the growth trajectory. As the economic stimulus, by way of liquidity infusion, regulatory forbearance and demand push are short term measures, growth of Infrastructure needs to be given the necessary impetus at this stage for long term Sustainable Development. 

Over a period of time, the government of India has rightly widened the scope of the Infrastructure sector by including new sub’ Sectors/ Activities in the ‘harmonized list of Infra’. At present these are primarily covered under the broad heads of Transport ( including logistics and Railway station Development), Energy, water and sanitation, communication, social and commercial Infrastructure (including Affordable Housing).

Government has taken initiative in the development of highways under ‘Bharat Mala Project’, waterways under ‘Sagar Mala Project’ renewable energy (both solar and wind) and off late Railway Station development. 

Financing of Infrastructure Development in one of the most challenging and crucial issues, especially in the post covid 19 scenario on account of the dearth of resources for the purpose. The National Infrastructure Pipeline (NIP) announced by the government envisages investments of Rs 102 Lakh Crore over the next 5 years. Traditionally, central and state budgetary resources have mainly contributed to expenditure on Infra and in the current situation, there is bound to be a strain on the same. 

Looking to the long term nature of the PPP (Public Private Partnership) projects, ideally speaking, long term sources, like Insurance and pension funds are most suited for this. However, in the absence of a robust and deep bond market in India, a large position of Infrastructure projects has so far been funded by commercial banks and some specialized NBFCs like PFC, REC, IREDA etc. 

However, with the increasing NPA accounts in the Infra Sector in the recent past, the lending by the commercial banks to this sector became muted. As, a spike in NPAs is further expected post covid, the commercial bank finance to infra is likely to be constrained. 

There is thus a requirement for creating additional avenues for the funding Infrastructure sector and setting up of a new “Development Financial Institution” specifically focused on this sector is the need of the hour. The government set up NIIF in 2015 as an ‘Infra specific Investment Fund’ which is at present managing around US Dollar 4 Billion of capital commitments in their three funds, and further progress in the same is expected.

Of late Infrastructure Debt Funds (IDF), INVITs, Credit Enhancement Facility and TOT (Toll Operate Transfer) model of NHAI have also emerged as alternate sources of funding, particularly for completed, well-running projects and they need to be further encouraged to bridge the gap of funding. 

To create a success story in Infra Sector, all the stakeholders i.e. Developers, EPC contractors, Banks/ funding Institutions, State and central Govt Agencies will need to collaborate and create the right kind of ecosystem to meet the current gigantic requirements. The post covid 19 situation has underlined the urgency and importance of Infra sector development and should trigger all of us into action with a clear intent and commitment to achieve sustainable growth.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Jyoti Prakash Gadia

The author is Managing Director at Resurgent India

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