India faces a significant challenge in accelerating capex from current levels and from ‘traditional’ sectors
An ‘investment cliff’ appears imminent unless the government can conceptualise and award new projects in ‘new’ sectors. We analyse the scope of investments in ‘traditional’ sectors over the next few years and conclude that capex will slow from current levels.
Current investment is reasonably strong due to ongoing capex on projects approved earlier (FY2010-12). The pipeline of new projects is quite empty.
The issue is not current investment, but future investment:
Our bottom-up analysis of ongoing and proposed capex in various sectors suggests that India faces a significant challenge in accelerating capex from current levels and from ‘traditional’ sectors. Current capex is still quite robust based on several ongoing projects in the power (generation and distribution), roads and steel sectors. In our view, these sectors (and telecom) are unlikely to see investments grow at the same pace as was seen over FY2009-12.
RBI data suggest a rather empty pipeline; 12th Five-Year Plan assumptions seem optimistic:
Data of capex based on projects sanctioned by banks and financial institutions show a dramatic fall in FY2012 compared with FY2010-11. This is likely to result in a slowdown in capex beyond the ongoing capex for projects approved in the past. The 12th Five-Year Plan assumption of $1 trillion capex, which relies heavily on large capex (1.5-3 times 11th Five-Year Plan figures) in ‘traditional’ sectors (power, roads, telecom), appears quite optimistic to us.
New sectors and new ideas the need of the country:
We believe India will need to explore new infrastructure projects to increase productivity and address specific challenges in the economy. We see (1) an energy deficit, (2) poor internal connectivity (limited integration of roadways, railways and waterways) and (3) low quality of urban infrastructure as big challenges for the economy. New projects in these segments can address the challenges, improve productivity and sustain the investment cycle.
Financing and execution challenges can be addressed through innovative solutions:
We believe India will have to explore funding options beyond normal lending by banks to finance infrastructure projects. (1) Use of divestment proceeds to meet the government’s equity or viability gap for public-private partnership (PPP) projects, (2) special infrastructure taxes (pay-before-use) or tolls (pay-and-use), (3) insurance and pension funds and (4) long-term corporate bonds are alternatives and can complement funding by banks.