The Indian Infrastructre Dream or Nightmare!

Back on the 18th of May, 2008 I had written a short piece on the issues facing Indian infrastructure (see the post on India, Infrastructure, Inflation – Impending Doom). Since then the situation has only worsened and could be quite grim from here on. As of today the inflation in India stands at 11.4% (almost triple of that in January). Oil prices have gone up from USD 128 per barrel in May to USD 145 per barrel today (and India has oil subsidies still in place). Sensex is down 24% since then and 36% since January 2008 (with a lot of retail investors having lost most of their savings).

As if this not gloomy enough, the global financial markets are in a turmoil with equity indices witnessing a carnage almost weekly, credit markets seeing spreads at three year highs and housing markets in the US and UK fast heading southwards. Central governments are increasing interest rates to fight inflation which is the first enemy that needs to be defeated. However, in the bargain borrowing has become very expensive in an environment of scarce liquidity, increased risk aversion and exacerbated flight to quality.

In this challenging financial environment there still is some hope for Indian infrastructure companies that have bankable projects. What defines bankable projects though? Acquisition of land, having government approvals in place and securing oftake agreements or annuities does not guarantee project completion. There is a shortage of manpower and EPC contractors. Domestic capital goods industry is running to full capacity and there is queue outside foreign equipment suppliers as well. Thus for a project to be really viable the developer must have an established track record, some amount of in-house EPC capability and a process to get the equipment shipped and received in time. In addition the project budgeting must now account for cost over runs and overshooting completion deadlines. This implies close scrutiny of each and every single project before financial commitment can be made. This in turn also means that there could be a number of projects which have started but will never see the light of day.

Thus while we say that India needs USD 500bn over the next 5 years in infrastructure spend, I am not sure if that number holds any significance any more. The opportunity exists. However, it needs to be reassessed for quality and quantity. This new study will then define what the infrastructure opportunity is truly in India. I only wish and hope that in the beginning when India opened up its economy it would have been foresighted to have a less regulated infrastructure sector. I wish we could have encouraged foreign participation and foreign direct investment into developing our rails, roads, ports and airports. In the absence of having done so, we now have to acknowledge that the development we think should take five years can now actually take seven to ten years. This acknowledgment should be accompanied with the acceptance that there is a cost of raising capital and despite being a family owned business economy we need to part with some of the wealth closely held to our chests. Otherwise the gloom and doom will only deepen and the infrastructure deficit will be ours forever.

India, Infrastructure, Inflation - Impending Doom?

The entire city of Mumbai is dug up. Same is the case with New Delhi, Chennai and Bangalore. All the cities that I have visited in India are seeing a construction boom. Ranging from residential buildings to malls to flyovers there is construction and more construction all around. This is good, really good. India needs to improve or rather install infrastructure.

However, where are we going to fund this infrastructure growth from? Currently, the domestic economy is in a very vulnerable position. A net oil importer, India needs to buy oil at the current prices of USD 128 per barrel to keep moving. The fuel subsidy is digging a hole in the government coffers (most oil companies and refiners are state owned). In a desperate attempt to control losses, the oil companies have stopped issuing new connections for cooking fuel and are even rationing LPG supplied to existing customers.

Foreign exchange reserves are limited and only depleting. Rupee is fast depreciating and becoming less valuable. FII coming into the country is minimal and with the stock markets and rupee being shaky there is little hope of FII flow increasing. FDI is the only source from where we can get some relief. However, why will someone put in money as FDI given the state of the capital account, inflation and the lack of initiative to increase interest rates?

With financial regulators being inflexible and not willing to listen to reason, policies made are stifling SMEs. There is no corporate debt market in India. Whatever little exists, exists as a private placement market. There is no efficient price finding mechanism for borrowers. Local interest rates are very high and offshore borrowing is no longer permitted. Funding via equity can only be limited. Local bank syndications are probably the only borrowing source or the infrastructure funds being raised by the varied financial institutions. But can these institutions put together fund c. USD 350bn (70% of the total USD 500m required in the next 4.5 years)?

These are critical problems facing the economy and the country. With the current prime minister being the leader of economic reform in India, one would have expected better management of the situation. However, it seems that political ambitions and party dictate seem to have superseded the general welfare of the nation. Can India come out of this impending crisis? Is the India shining story still true? Will we lead the world as we believe we are on the way to? Only time will tell, and let us hope that time is kind to the future of India, to our future and to our dreams.