Executive summary

Capital expenditure (capex) in the infrastructure sector is expected to total Rs 33-35 lakh crore in fiscals 2025 and 2026, driven by the power, road, and railway sectors.

The central and state governments together are likely to fund three-fourths of this capex, with the balance expected to be met by the private sector. While the government’s capex spend will largely be through budgetary outlays, the private sector will rely significantly on debt.

Overall, we expect Rs 10-12 lakh crore of cumulative debt funding requirement in fiscals 2025 and 2026, accounting for a third of the infrastructure capex, mainly led by the power and road sectors. The financial ecosystem is well placed to fund the debt requirement for the expected capex outlay. Financial institutions (FIs)1, predominantly government-backed, are expected to maintain their funding momentum.

Banks, having significantly improved their balance sheets, are in a position to ramp up funding to the infrastructure sector. The bond market and external commercial borrowings (ECBs) will continue to supplement the debt financing to the sector.

Infrastructure sector has seen a sharp improvement in the credit profile of underlying assets – both in terms of probability of default (PD) and loss-given default (LGD). Policy measures, such as better risk sharing in concession agreements, increasing share of central counterparties, and more stringent insolvency laws, have aided the improvement in credit profiles.

Moreover, innovative vehicles providing diversification and structural benefits, such as infrastructure investment trusts (InvITs) and restricted groups (RGs), will continue to enhance the credit profile of infrastructure assets.

Currently, the bond market plays a limited role in funding the infrastructure sector. However, in the long run, it may have to step up funding to the sector.

The structural improvement in the credit profile of infrastructure assets and further benefits provided by pooling vehicles make the sector amenable to bond market investors.

In addition, policy push encouraging patient capital investors to fund long gestation infrastructure projects will help.

The draft project finance norms released by the Reserve Bank of India (RBI) will be a key monitorable for infrastructure financing depending on their final contours.