The Indian government has pledged to pump US$2.7bn into a new development finance institution (DFI) as part of plans to galvanise infrastructure spending and help the country bounce back from the deleterious effects of Covid-19.

The announcement was made in the country’s annual budget earlier this month, with India’s finance minister Nirmala Sitharaman stating that she would introduce a bill for setting up the new DFI with a starting capital of roughly Rs200bn.

The ambition is to have a lending portfolio of at least Rs5tn (approximately US$69bn) in three years’ time, with the DFI also expected to play a role in funding the government’s National Infrastructure Pipeline (NIP).

Launched in late 2019, the NIP aims to provide roughly US$1.5tn in funding to infrastructure projects in India by 2025, as part of plans to raise India’s GDP to US$5tn by that year and boost living standards in the country.

The NIP is expected to focus on roads and highways, railways, energy and urban infrastructure, with around 70% of funding earmarked for projects in these sectors. The latest budget reveals that the scheme will be expanded from 6,835 projects to 7,400.

Concerns have emerged over a lack of long-term infrastructure financing in India, however, and Sitharaman says there needs to be a “major increase in funding” from both the government and financial sector for the NIP.

Speaking about the need for the new DFI, Mayank Gupta, head of treasury and trade solutions in South Asia at Citi, says that in recent years there’s been an absence of an infrastructure-focused institution in the country.

He points to the fact that previous development institutions – such as ICICI Bank and the Industrial Development Bank of India (IDBI) – have since evolved into commercial banks.

Gupta adds that at the same time there is “limited appetite” amongst commercial lenders for infrastructure financing, which has been further exacerbated by asset-liability mismatches.

Against this backdrop, Sitharaman says that “a professionally managed development financial institution is necessary to act as a provider, enabler and catalyst for infrastructure financing”.

Other steps to bolster support for the NIP in the budget include monetising the operating of brownfield public infrastructure assets – airports and railways, for instance – and providing a “sharp increase” of nearly 35% in capital expenditure.


Welcome budget for exporters

Indian companies have praised the infrastructure drive in the recent budget, saying that the push could help domestic exporters better compete with their foreign counterparts.

Writing in a monthly newsletter, Federation of Indian Export Organisations (FIEO) president, Sharad Kumar Saraf, said: “In order to revive the economy, the budget has rightly focused on augmenting infrastructure, arresting job losses, and supporting industries that provide inputs for infrastructure.”

“A world class infrastructure will go a long way in making our manufacturing and exports competitive, besides reducing the mounting costs of logistics,” he added.

One example of the way infrastructure could help slash logistics costs are the two new dedicated freight railway lines, known as the Western Dedicated Freight Corridor (DFC) and Eastern DFC – both of which are expected to be commissioned by June 2022.

According to a World Bank report on the Eastern DFC in January, these freight corridors will allow India to “reduce its unduly high logistics costs from some 13-15% of GDP, helping it move towards the target of 8%, bringing them more in line with global standards”.

Saraf points also to the decision to privatise the management of seven major ports, as outlined in the budget, which he says would “bring in necessary efficiency, once again curtail costs, and overall benefit the Exim community”.

Meanwhile, away from infrastructure reform and spending, he says that the government’s Production Linked Incentive (PLI) scheme could be a “gamechanger” for Indian companies, and boost technology exports.

The Indian government has previously offered incentives to major foreign companies and domestic firms in three select sectors as part of the PLI, in a bid to turn the country into a manufacturing and export hub.

The PLI initially targeted manufacturers of medical devices and bulk drugs such as penicillin, and in March 2020 the government launched a PLI for large-scale electronics.

As part of that PLI scheme, major smartphone and mobile firms were offered cash incentives of between 4 and 6% on any increased sales they bring in for goods manufactured in India over a five-year period.

One firm that has sought to take advantage of the scheme is Apple, which – having first moved some of its iPhone operations to India in 2017 – has signalled that it will ramp up production as a result of the PLI.

Reuters reported in September that three of Apple’s main manufacturers – Foxconn, Wistron and Pegatron – were all planning on investing nearly US$1bn in a bid to cash in on the US$6.7bn PLI scheme for mobile makers.

Now, with the latest budget, the Indian government has confirmed a November announcement that the PLI has been widened to 10 additional sectors, with Citi’s Gupta noting that electronic vehicles, telecom equipment and semiconductors all stand to gain.

The budget has pledged nearly Rs2tn (approximately US$27.5bn) over the next five years to eligible companies across the various PLI sectors, with the aim of growing manufacturing in double digits on a “sustained basis”.

An October report from consultancy firm McKinsey shows that India’s manufacturing growth has lagged behind other Asian countries such as Vietnam in recent years, despite Prime Minister Narendra Modi’s ‘Make in India’ plan.

According to the report, manufacturing generated 17.4% of India’s GDP in fiscal year 2020, “little more than the 15.3% it had contributed in 2000”.

“By comparison, Vietnam’s manufacturing sector more than doubled its share of GDP during the same interval,” the report adds.