It’s time for the government to trigger the Kenyesian multiplier in the infrastructure space in an environment where the existing capital starved banking system, bogged down by the non-performing asset mess, has stepped back while investment cycle in the private sector hasn’t revived yet.
“Private investment in the infrastructure space would remain slow and the bulk of the push to the sector must come from the government. I think the government has the resources with it. It is now just a question of execution and how fast that can happen,” says Sunil Kanoria, vice-chairman, Srei Infrastructure Finance.
With risk appetite virtually vanished from the banking sector, Kanoria says banks would pass through a cycle of four-five years by when government investments would create enough capital formation in the economy to bring down their NPA woes.
“Then only the risk appetite of the banking system would improve,” he said.
Before that happens, Partha Ray, Professor of Economics at IIM Calcutta and former Director of Department of Economic and Policy Research of Reserve Bank of India, makes a case for recapitalising the banks.
“It’s an understatement to say that infrastructure sector is in a mess. And in the Financial Stability Report issued by RBI as recently as in December 2016 has looked into the risk profiles of select industries has particularly singled out sectors like steel, telecom and power. With the accumulation of non-performing assets, at this juncture, there is an urgent need for the government to infuse significant capital into the public sector banks,” he says.
But from where would the government get that money?
In the forthcoming Budget the money, Ray said, can come from the non-tax revenue out of the money deposited in the banks, taxation of the non-white portion of the bank deposits (made after demonetisation was implemented) and also from divestment of insurance companies which was recently announced.
“A part of this inflow should be used to recapitalise the PSU banks.”
Need for the government to step is also because of another challenge in the form of increasing scarcity of long term global capital needed to fund infrastructure.
“We believe most of the developed economies are going into a developing phase. Meaning, they need to invest heavily to revive their own crumbling infrastructure, highlighted in some way in US President Donald Trump’s inaugural address. India would find it difficult to attract long term funds from there,” Kanoria says.
“Long-term overseas funds like Brookfield, Macquarie or Canada Pension Plan Investment Board have come and invested but they are not here in large numbers and government can surely provide incentives to these players. One ideal avenue where they can invest is the Infrastructure Investment Trust,” said Vikash Sharda, associate director, infrastructure, PwC.
There is also a case of making the debt market more vibrant and there has been many recommendations given to the government which can be considered, he added.
The banks, the IIMC professor says, would be forced to come out of the comfort zone of low risk retail lending and restart investing in infrastructure sector.
The Bad bank hasn’t seen the light of the day and other standard solution models like debt recovery tribunals or asset restructuring companies are not working. While government owned banks of late have been focusing mostly on retail lending, that space is being increasingly taken away by NBFCs and the now emerging fintech companies which would force banks to go back to big-ticket lending again.