India’s infra evolution paves the way for economic growth
ECONOMY & POLICY

India’s infra evolution paves the way for economic growth

After years of a weak investment cycle, a sharp pickup in infrastructure investments in India is imminent. While infrastructure creation is necessary, it needs to be sustainable as well, writes Abhinav Sharma, Fund Manager, Tata Asset Management.Today, India sta...
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After years of a weak investment cycle, a sharp pickup in infrastructure investments in India is imminent. While infrastructure creation is necessary, it needs to be sustainable as well, writes Abhinav Sharma, Fund Manager, Tata Asset Management.Today, India stands at a pivotal juncture in its economic development journey. It is the fifth largest economy in the world and Prime Minister Narendra Modi has laid out his goal of India being a developed nation by 2047. A robust and sustainable infrastructure is a pre-condition for this growth.  Infrastructure plays a transformative role in economic development. A well-thought-out and implemented transport, energy and communication infrastructure among others, reduces costs, improves efficiency, enables global competitiveness and reduces inequality. Over the last five decades, there are numerous examples, especially in North and Southeast Asia, where we have seen how infrastructure investments have enabled countries to grow rapidly and significantly raise the standard of living of their population. While the need for efficient infrastructure cannot ever be overstated, it is doubly important for India to upgrade its infrastructure to world-class standards at a rapid pace, if it were to benefit from the diversification of global manufacturing of supply chains away from China. East Asian economies like China, South Korea and Malaysia, in their high growth phase, saw an investment rate, as measured by GFCF (gross fixed capital formation) to GDP, in the range of 35-45 per cent (source: World Bank).  India in contrast had an investment rate of 29 per cent in FY23 end. Thus, to achieve sustainably high growth rates and be a credible manufacturing alternative to China, investment rates need to go up meaningfully and stay at those levels. Things are starting to fall into place though. After years of weak investment cycle, a sharp pickup in infrastructure investments in India is imminent. Flagship government programs in the transport, energy and housing sectors are now well entrenched with a strong focus on execution while the private corporate sector has emerged from its over-leverage problems and is ready to invest. Rising infrastructure investmentsThe government plays the most crucial role in infrastructure development, either as a creator or by acting as an enabler and facilitator. We have seen that on both fronts government commitment has been very strong. Government infrastructure investments as measured by central government capex have gone up 8 times over FY14 to FY24. In FY24 it is expected to be 4.9 per cent of GDP compared with 1.7 per cent of GDP in FY14. Over the same time period, road capex has gone up 7.5 times and railways capex is up by 4.5 times (source: budget documents). Even during the COVID-19 pandemic, the capex push was very high despite running high fiscal deficits showcasing government commitment towards infrastructure creation. Going forward there is a strong focus on hitherto underinvested sectors like railways, urban infrastructure and water. The railways especially are seeing a massive transformation in terms of speed, passenger convenience, connectivity and freight movement. Transformative projects like Mumbai-Ahmedabad high-speed rail are being executed while others are in the pipeline. However, given the government’s social obligations, it is imperative that the private sector plays a larger role in infrastructure creation. Examples of telecom, airports and power sectors show that the private sector when rightly incentivized can create world-class infrastructure at a fast pace. The private corporate sector, post-2008, was saddled with unsustainable debt due to a combination of the global financial crisis, weak demand, overcapacity and policy changes. The focus thus shifted from capex to deleveraging. However, balance sheets have now improved with corporate leverage at 15-year lows. Simultaneously, capacity utilisations have gone up, necessitating capex investments. There is growing evidence of capex momentum across various sectors as can be seen in the fact that listed companies’ capex of FY23 is expected to have reached Rs 7.3 trillion which is a good 33 per cent higher than FY20 (source: ICICI securities). There is now increasing evidence of large corporates committing huge investments towards infrastructure projects.It is here that government’s role as an enabler and facilitator becomes important. The government has taken several measures like corporate tax rate cuts and PLI across various sectors to boost domestic manufacturing. There has also been a conscious and ongoing effort to reduce bottlenecks in execution as evidenced in the focus on ease of doing business. Frameworks and policies have been put in place for increased private sector participation in sectors like roads, ports and power distribution among others. While infrastructure creation is necessary, it is pertinent to point out that it needs to be sustainable as well. India on its part will need to balance its growth needs with sustainability. It’s a tough task but at the same time, it provides opportunities. Climate change concerns have led to the emergence and economic viability of new groundbreaking technologies in renewable energy, electric mobility and hydrogen economy.  Since these are relatively newer technologies, India has a good chance to develop the supporting infrastructure related to these sectors and be a global leader in some of them especially given the focus on diversification of global supply chains. The good news is that the same has been realised by both the government and private sector in India. We have seen PLIs being launched for advanced cell battery storage, solar module manufacturing and electrolysers. The government has also come up with the national hydrogen mission to kickstart the hydrogen economy. It’s a good start and India needs to continue building on this. If successful it can be a game changer for the Indian economy. Various financing modelsInfrastructure assets are long-term in nature and need large upfront investments. They are thus exposed to various challenges related to financing, execution and government policies. With the private sector now deeply involved, it is important to minimise these impediments. It is also equally important to learn from experiences and come up with new innovative ways to counter the problems faced. In this context, two examples from the road and railway sectors are worth pointing out. The road sector has seen an evolution of financing models from contracting EPC (Engineering, Procurement, and Construction) to Annuity to BOT (Build, Operate, Transfer) to HAM (Hybrid Annuity Model) and TOT (Toll, Operate, Transfer). Each financing model is based on learnings from the previous one and today all of them coexist. Each model involves varying degrees of risk thus making it suitable for developers to choose according to their risk appetite. This has led to more private capital coming into the road sector, freeing up valuable government resources. In the railway sector government has gone for long-term contracts in locomotives, coaches and wagons moving away from the earlier practice of awarding shorter-duration contracts. This has given the private sector certainty of orders and hence corporates are now more willing to commit long-term investments in the sector and in the process also help the Make in India initiative.  India’s rising global stature India has set its growth ambitions high and the recently concluded G-20 summit in New Delhi has shown that India’s status as an emerging world power is now widely accepted across the world. Global economic and political trends are in India’s favour and it needs to make the most of it. Best-in-class and sustainable infrastructure is a prerequisite for that. Wheels are in motion to create an infrastructure which matches India’s growth ambitions and its status as a global economic powerhouse. About the author:Abhinav Sharma is the Fund Manager at Tata Asset Management. With over 17 years of industry experience, he is the fund manager for Tata Large Cap Fund, Tata Infrastructure Fund and Tata Ethical Fund. Sharma is qualified as a Bachelor of Technology from IIT - Roorkee and has a Post Graduate Diploma in Management from IIM-Lucknow.

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