Global credit markets rising to the challenge of India’s sustainable infrastructure ambition
We examine how India’s infrastructure sector is decarbonising and the role of credit markets in the country’s journey to sustainable growth.
India’s infrastructure sector is growing at breakneck speed to support the country’s evolution into a global economic powerhouse, boosted by a INR10 trillion (approximately USD122 billion) 2023-2024 budget commitment for infrastructure spending and several other initiatives.1 However, the decarbonisation of the country’s infrastructure sector is crucial to the Panchamrit commitments made by Prime Minister Modi at COP26,2 which outline India’s journey towards net-zero by 2070.
And the industry as a whole, including many carbon-intensive and hard-to-abate subsectors such as steel and cement, are rising to the occasion.
For example: in the past decade, technological advancements in blast furnace technology have reduced the carbon impact of steelmaking. Increasing mechanisation in cargo handling, and new methods of moving cargo – shifting the dependence on road transport in favour of the country’s vast network of inland waterways – are also helping to cut steel’s carbon footprint. While the general shift to multi-modal transportation for the movement of cargo has resulted in fewer efficiencies and longer turnaround times, industry players see it as a necessary step towards sustainability.
Likewise, the cement industry, which is seeing demand outpace production capacity, is evolving to support India’s sustainable growth ambitions. Product innovation to reduce reliance on limestone consumption, and a transition to renewable energy and alternate fuel generated from waste, are key initiatives the industry is undertaking to become greener.
As the infrastructure subsectors make the shift to cleaner energy sources, India’s renewable energy industry is keeping pace with growing demand. The government has launched various policies to smooth the energy transition, such as the establishment of the National Green Hydrogen Mission,3 and the waiver of transmission fees for hydrogen manufacturing plants in a bid to reduce its production costs.4
Furthermore, the government has committed to add 500 gigawatts of renewable energy capacity by 2030, which will require investments exceeding USD200 billion.5
That number though, is only a portion of the staggering cost of financing India’s USD10 trillion energy transition by 2070,6 a sum that requires multiple pools of capital beyond the capacity of government spending and the domestic credit market.
Cost of transition and liquidity shortfalls threaten progress
In addition to capital shortfalls, fluctuations in the dollar bond market and a widely anticipated extension of the concessional tax regime that has fallen short of expectations7 are adding to cost pressures faced by the industry.
Investors such as the quasi-sovereign National Investment & Infrastructure Fund (NIIF) are aligning their portfolios with the country’s sustainability goals, regarding sustainability as an integral part of the entire investment process, from investment evaluation to portfolio management. Even so, while significant ESG capital is available to fund corporates eager to make the transition, the overall risk appetite for ESG investments has yet to catch up.
For one thing, investors remain reluctant to consider investments that extend beyond the five-to-ten-year horizon, one that is too short for the decarbonisation of the infrastructure sector to take place. The industry’s decarbonisation agenda therefore runs the risk of stalling once funds dry up beyond the 10-year mark.
Meanwhile, credit enhancement schemes aimed at attracting capital from insurers and pension funds have seen few takers due to concerns over Insurance Regulatory and Development Authority of India (IRDAI) regulations.
Indian public sector banks, the biggest source of capital for the renewable energy sector, are hesitant to re-embark on large scale financing projects as they remain haunted by past failed investments in the power sector.8
With these challenges to raising domestic capital, there is scope for international investors to seize the opportunities the drive towards India’s 2070 carbon neutral goals presents.
We remain a capital-hungry country. We have ambitious sustainability targets, and there are plenty of opportunities for global credit markets to step up. Globally, investors are looking more favorably at India due to improved macroeconomic and political stability, and international financing can play a bigger role in funding infrastructure development in India.
Parul Mittal Sinha, Head of Financial Markets, India & Co-Head, Macro Trading, ASEAN & South Asia for Standard Chartered
Plugging the capital gap
Indeed, significant opportunities exist for investors willing to take the plunge. A successful energy transition will not only contribute to India’s sustainability goals, but also enable its ascension to becoming a global green hydrogen supplier,10 leveraging its advantage as a low-cost production base.
However, achieving these gains require investors to first take a long-term view in their portfolios and have a vision that matches their deep pockets. For one thing, investors keen to finance the sustainability agenda need to have an appetite for deeply discounted securities. What’s more, investors and financiers should reorient their view of capex investments such as new manufacturing plants, seeing them as assets that will generate cash flows in the long term, rather than merely as depreciating assets.
Taking this long-term view will enable investors to capitalise on the immense opportunities India’s transition to sustainable infrastructure represents, from developing greenfield projects in the roads sector, to smart meters, and energy transmission and distribution projects.
This article is based on themes discussed during a panel at the Global Credit Conference 2023.
1 https://www.outlookindia.com/business/infrastructure-development-capex-hiked-by-33-to-rs-10-lakh-crore-for-2023-24-finance-minister-news-258557
2 https://pib.gov.in/PressReleseDetail.aspx?PRID=1768712
3 https://www.india.gov.in/spotlight/national-green-hydrogen-mission#
4 https://www.reuters.com/business/sustainable-business/india-extends-transmission-fee-waiver-green-hydrogen-plants-source-2023-04-11/
5 https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/india-aims-to-add-500-gw-of-renewables-by-2030-70713616
6 https://www.business-standard.com/article/economy-policy/india-needs-10-trillion-till-2070-for-energy-transition-at-g20-meeting-123020500740_1.html
7 https://www.ey.com/en_in/tax/india-tax-insights/sunset-clauses-in-india-are-truly-setting
8 https://economictimes.indiatimes.com/industry/energy/power/how-indias-power-story-derailed-blowing-a-rs-1-74-lakh-crore-npa-hole/articleshow/65822950.cms
9 https://www.youtube.com/watch?v=faQh_4ItlJE
10 https://gh2.org/countries/india
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