On July 6th 2009, the Government of India presented the Union Budget for 2009-10; a pragmatic one keeping in mind the 9% GDP growth target it has set. The budget is a testimony to the recent election victory for the Indian National Congress led United Progressive Alliance which has been called as a mandate for continuity, stability and prosperity as well as inclusive development and equitable growth by the Prime Minister, Dr. Manmohan Singh.
One of the most significant aspects of the Indian Economy that the budget has focused development efforts on is - ‘Infrastructure development’. The Government has recognized highways and railways as key development areas and has increased the allocation to highway development by 23% and to railways by Rs.50bn in FY2010. Infrastructure is likely to be a clear beneficiary, with the Government alone planning to increase spending from the current 4-5 per cent of GDP to 9 per cent of GDP by 2014 which in our estimates, implies a spending increase from currently around $50bn a year to more than $150bn a year. The Government also announced greater flexibility to IIFCL (a special purpose vehicle) which will, in consultation with banks, devise a scheme for take-out financing in the case of Public Private Partnership (PPP) projects, refinance up to 60% of bank loans for PPP projects and re-finance a total investment of Rs.1 trillion in the infrastructure sector.
India, currently, has a clear and wide gap in its infrastructure. Under-investment in (physical and social) infrastructure is most definitely the single largest impediment to economic growth in our view, with the Planning Commission commenting that the infrastructure gap in the country was holding back economic growth by 1.5 – 2 per cent every year. India has been one of the very few countries which have transformed from an agrarian to services dominated economy, bypassing the manufacturing and industrial growth phases. With a large working population, it is our belief that significant employment opportunities need to be created outside of services, and impetus on infrastructure spending will be one of the major avenues to address this issue.
Infrastructure spending and development remains one of the key controllable actions in the hands of governments worldwide to spur economic activity and growth. Since capital availability remains a constraint in stepping up investment in infrastructure, the government has made it its priority to attract private capital through the public-private partnership model. The government has gone through a bit of a learning curve in refining these investment models and will be able to accelerate the process substantially in the new political environment. For India, it is inherently necessary to spend on infrastructure not only to combat slowdown but also as an investment for long term sustenance of GDP growth at ~7-8%p.a.
Meeting with the Union Minister for Road Transport and Highways
We recently met up with Shri. Kamal Nath, the Union Minister for Road Transport and Highways along with Mr. Brijeshwar Singh, Chairman, National Highway Authority of India (NHAI) who were on a global road show to meet investors to showcase the huge opportunity that the Indian infrastructure space offers. The key takeaways of this meeting were:
The road show clearly highlighted the intent of the government to make / tweak policies to increase private sector participation to take up the infrastructure related spends to 9% of GDP by 2014.
India, in our opinion, continues to be a compelling story, riding on its structurally powerful theme of infrastructure investment, available at reasonable valuations.