The infrastructure sector is poised for take-off, but project financing and skills development will remain key challenges, says Sachin Sandhir.
India recently replaced China as the fastest growing economy, according to the International Monetary Fund (IMF). However, the Indian economy is beginning to show fault lines. In the April to June quarter of this year, economic growth slowed down to an annual rate of 7.1 per cent, the slowest rate in two years. Finance Minister Arun Jaitley has made it clear that the country needs to invest in infrastructure development to sustain rapid growth.
But the sector is gradually transforming, with a diverse set of innovative and sustainable schemes and projects, the scale of which ranges from micro projects at villages to mega projects spanning across nations. Investments in Indian infrastructure have been increasing (as a percentage of GDP) over the period, and this has been a vital component of national and state budgets.
The infrastructure sector received a massive push after the Modi Government came to power in May 2014. The government has said that it will invest $1 trillion in developing infrastructure in the 12th Plan period. In the current budget, the government announced an investment of Rs 2.21 lakh crore for the infrastructure sector. Of this, about Rs 97,000 crore has been allocated for the roads sector alone. The government claims that it is building 20 km of roads per day.
Revival of stalled road projects is another priority for the government. The Centre has asked banks to invest funds equivalent to government equity in some stalled highway projects. The move seems to have paid off. Almost 85 per cent of the 70 stuck road projects have been put back on track.
There are plans to build more airports, sea ports, generate more power, and seek private sector participation and foreign investment in rail infrastructure. Rail infrastructure is seeing a massive upgradation. This will include new tracks, 400 new stations, a $15 billion bullet train service and a $12.5 billion dedicated freight corridor. Companies from Japan, Canada and the UAE have shown interest in investing in India´s dedicated freight rail corridor.
Foreign investors have also shown interest in India´s renewable energy sector, after the government announced plans to increase green energy capacity from 30 GW to 100 GW by 2022.
While all these efforts to revive the infrastructure sector will go a long way in boosting demand and generating employment, we are still faced with the larger issue of finding ways to fund the sector.
In Jaitley´s words, India needs over $1.5 trillion to fill the infrastructure gap in the country. The government is working on finding new ways to fund the sector. The Reserve Bank of India´s revised guidelines for External Commercial Borrowings (ECBs) for the nfrastructure sector should make it easy for the sector to borrow from overseas markets.
The government has also set up a Rs 40,000 crore sovereign wealth fund, the National Investment and Infrastructure Fund (NIIF), to provide equity support to revive stalled infrastructure projects and kick-start new ones. The government has a 49 per cent minority stake in the fund, and the remaining stake will be with public sector units and foreign investors.
This should send out a strong message to foreign investors that the government is serious about developing the infrastructure sector.
Public-private partnership (PPP) will also be crucial for funding the sector. The government has come out with guidelines to resolve disputes in PPP contracts and renegotiate PPP concession agreements. It has also announced a new system of credit ratings for infrastructure projects.
In the last two years, the real estate and construction sectors have also seen many crucial reforms. The long pending Real Estate (Regulation and Development) Act, 2016, was passed by both houses of Parliament in May this year. This law is expected to improve transparency and accountability in the sector - apart from providing investor confidence - required to bring in more foreign direct investment. In 2015, foreign private equity firms invested a significant $2 billion in the Indian real estate sector.
FDI norms have been relaxed, allowing for 100 per cent FDI in townships, housing, special economic zones, built-up infrastructure, and construction development projects through the automatic route.
Affordable housing, which is where the bulk of demand for housing lies, got a boost this year when the government announced an additional exemption of Rs 50,000 for first-time home buyers and 100 per cent income and service tax exemption for construction of houses up to 30 sq m in four metro cities and 60 sq m for other cities. Hopefully, this will help in increasing supply of affordable homes.
Government schemes such as Housing for All, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), and Smart Cities, are expected to reinvigorate the real estate sector.
Housing for All has a target of constructing 2 crore houses for the urban poor by 2022 at the rate of 30 lakh houses per year. AMRUT is more about ensuring basic infrastructure services such as water supply, sewerage, stormwater drains, transport and development of green spaces. The upcoming Smart Cities, which have garnered a lot of attention, are expected to offer a lot of opportunities for real estate development.
A RICS whitepaper on Smart Cities released in July this year, talks about the potential for high-volume real estate development in these key urban centres. This is because the largest share of the proposed capital investment in Smart Cities - almost 89 per cent - has been allocated for built environment (urban development and housing, buildings, waterfront development, etc), transportation, water, wastewater management and energy.
Efforts have also been made to revive the ailing construction sector, which has many stalled projects. Banks have a large exposure to the construction sector, and almost half of the loans to the sector are under stress.
Recently, India´s planning think tank Niti Aayog put forward a proposal, according to which government agencies would pay 75 per cent of arbitration award amount to an escrow account against a margin-free bank guarantee in cases where the award is challenged.
This amount can be used to repay bank loans or for execution of ongoing projects. It is expected that this measure will allow recovery of loans and speed up execution of projects.
While the government has invested in reviving the infrastructure sector, it should also look at widening the pool of skilled professionals. By 2022, the Indian infrastructure sector is likely to have a shortage of around 3 million project professionals. This pool of trained professionals is needed across various job levels in the infrastructure value chain. But currently, only a few educational institutions offer dedicated courses in infrastructure management to meet this requirement.
We require trained professionals who are job-ready from day one. To make the dream of providing better civic services to all, creating 100 Smart Cities and making ´Make in India´ a success, the industry needs skilled talent for specific roles. If employers tie-up with education providers to train and educate the required talent, a lot of money and time can be saved. This linkage will help the industry to overcome skill shortage and improve productivity, and in turn will also help the institutes in developing relevant curriculum and provide for internships and site visits.
About the author:
Sachin Sandhir, Global Managing Director-Emerging Business, RICS, has been a part of the real estate industry for close to 17 years, and has worked with leading organisations such as DLF, Jones Lang LaSalle, Blackrock solutions (erstwhile Helix Financial) and Ansal Properties.