India's infrastructure grid-lock

I have blogged many times about the gridlock that faces Indian infrastructure sector. Here is the story re-told.

The largest infrastructure firms have limited free cash or space in their balance sheets to take up newer projects. Worse still, they are heavily indebted. Their problems have been exacerbated by their own aggressive bids and the anemic economy. On the other side, their major source of financing, commercial banks, have reached, even breached, their sectoral exposure limits. A large share of these loans have either been restructured or have turned sour. In the absence of large scale recapitalization, they too have limited space on their balance sheets for further lending. In fact, these banks need an estimated $100 bn worth fresh capital by 2018. In other words, both developers and lenders have reached their thresholds. 

One way out is to get foreign capital. But foreign investments in most infrastructure projects suffer from currency mismatch problems - revenues in rupee, debt repayments in foreign currency. In a world of capital-floods and sudden-stops, this is most likely to leave the country badly exposed. The other way out is through government financing. But the fiscally strained central and state governments are in no position to generate the resources required to make any dent on the problem. 

A more sustainable but long-drawn solution is to broaden capital markets and create a market in securitization that would take the project debts and loans off the balance sheets of the developers and banks respectively. This would have to be complemented with strong regulation of the concession contracts so that the service delivery standards are not compromised when original promoters exit the projects. 

Doubtless, there are other problems that have derailed the sector - land acquisition, environmental clearances, policy paralysis, and so on. But, to the extent that financing is arguably the most basic requirement, there are no easy answers to reviving infrastructure investments. For the immediate, there is no alternative to large-scale bank recapitalization in today's Union Budget.