Benefits to the Infrastructure Sector from Inclusion in Bond Index

INFRASTRUCTURE development is a prerequisite for realising our vision of reaching the milestone of US $5 trillion GDP by 2025 due to the multiplier effect it would have across sectors such as steel, cement, auto, real estate among others

- Raghav Chandra

Infrastructure projects require long tenure financing that can only be provided by debt funds. For long, the biggest problem with private sector participation in infrastructure projects in India has been the lack of suitable debt capital. Our bond markets were insignificant and clearly not deep enough to attract patient capital, such as from pension and insurance funds. While asset-liability mismatch held back the banks from going far into infrastructure lending, the huge NPAs of public sector banks (the closest equivalent to development financial institutions), caused a virtual dry down in private sector funding. As a consequence, in the last five years the government has hardly launched any PPP projects. Almost all the infrastructure projects today are essentially government funded – under schemes like EPC or HAM. While this has helped the speed of execution, it is not sustainable in the long run.

At present, India has a BBB- rating from S&P Global Ratings for India’s creditworthiness, which is neither too good nor discouraging. However, the recently announced inclusion of India’s sovereign bonds into the important JP Morgan’s Government Bond IndexEmerging Markets (GBI-EM) index is a significant positive recognition of India’s economic credibility and thereby good news for its overall sovereign rating. It could also be the beginning of a new renaissance in private sector investment in infrastructure. It will also assist the government in its various fiscal measures to influence the economy.