Driver of Indian Economy

Infrastructure is the back bone of every economy. Infrastructure contributes a great deal too sustained economic development. Country with good infrastructure can be classified as a developed country whereas the other countries have little finance to spend on such luxuries and hence, keep struggling in the developing class of nations. Indian infrastructure growth started with much delay but when it started its journey it made a remarkable growth. If we make an analysis of the 5 years trend of infrastructure growth in Indian economy we find a remarkable growth prospect led by huge untapped demand.

Growth of the infrastructure is driven primarily by effective demand for projects and proper usage of funds. Many South-East Asian countries, and even developed countries such as the UK, have shown impressive progress by following the public-private-partnership (PPP) model. The 1998-99 Budget announced by the BJP government has given a major boost to infrastructure development, particularly in energy and power, transport and communications, by stepping up public expenditure in these sectors. This also increased government spending on infrastructure which was expected to boost India’s sluggish economy. The journey of the infrastructure was slow due to the lack of a clear policy frame work for private sector participation has hampered the badly-needed infrastructure.

If we measure the growth of infrastructure in India with a quick look we find:

• Infrastructure sector grows 3.7% in Aug 2003

• Infrastructure sector growth doubles to 9% in May 2004

• Infrastructure sector grows 10.2% in June 2005

• Infrastructure sector grow 8.7% in July 2007.

In the below chart we find the investments made in various infrastructure segments.

All we get in the above sector a consistency in the growth of the Indian infrastructure growth. Now we all know that when infrastructure grows all other sectors like banks, cement, metal etc grows with them. We have seen justification of this that period. After recession we have found that from November 2008 dark days to shining days of November 2009 the country’s infrastructure sector expanded 5.3%.

In 2009 the growth of 5.3% in infrastructure sector was also driven by the large loans worth Rs 20,000-30,000 crore by banks. This money is excluding the funds raised via QIP and ECB and FCCB etc.

Loans from World Bank and Asian Development Bank were also the prime contributor of finance to the sector.

• India, which already has $19.57 billion in World Bank loans that are supporting 68 developments, infrastructure and other projects. World Bank has even committed to provide a total loan of $7billion to Indian infrastructure growth.

• The sum is three times the average $2.3 billion the Bank has loaned India annually over the past four years.

The below chart shows the loans made by World Bank to India in dollar terms.

For the current Fiscal Year the chart shows total commitment amount to date. Total lending includes IBRD, IDA, GEF/GEF Medium size/Carbon Offset projects.

We find from the above chart that World Bank vault opened from 2006 with a small pie of loan. In 2007 we find a growth of loans by 164.49% within 1year time frame. That’s why we got such a new scale of growth return on our investments in equities and other assets classes during that time period. When recession hit the Indian shore we find a dramatic fall but yet higher loans compared to 2006 period. In 2009 we also get a similar picture and in 2010 it’s forecasted to break past all the historical loan growth.

The below chart shows the number of projects that have attracted loans from World Bank.

For the current Fiscal Year the chart shows the number of approved projects to date. Data update frequency: monthly. I don’t need to add any word here of analysis as the chart is beyond of any words.

What is expected in 2010 from policy ends?

• Relaxation in the norms relating to infrastructure lending and 70% of loan loss coverage ratio are likely to top the agenda when bankers meet Reserve Bank of India on January 14,This will be held before the quarterly policy review.

• They may also ask for some easing in the guidelines announced for banks.

• Public-private partnership (PPP) programmes to be developed.

• Significant political, fiscal and institutional hurdles must be overcome to move from traditional procurement to public-private sector collaboration.

• A competitive and transparent bidding process, as we have seen in the past particularly in 2009 that their were number of projects where their were only one bidder at that point of time due to lack of proper pricing and bidding process.

• Developing skilled professionals within the government.

• Developing and training to bring expertise to manage the PPP procurement and implementation of the project.

• A System designed to balance risk allocation, and

• Effective mechanisms for payment structure.

Where domestic growth is hidden from 2010 to another decade?

• The National Highways Development Project (NHDP) to upgrade major roads in India to be a higher demand generator.

• NHDP projects would be supplemented by some state level projects like the ring roads in Andhra Pradesh and village connectivity roads in Rajasthan.

• The Bharat Nirman Programme, in addition, would entail a total investment of Rs 1, 74,000 crore.

Metro Rail projects in Mumbai, Bangalore, Hyderabad and also the second phase development of Metro Rail in Delhi.

Building of international airports at Bangalore, Chennai and Hyderabad, and modernization of airports at Mumbai and Delhi would entail total investment of around Rs 40,000 crore.

• Building of international airports at Bangalore, Chennai and Hyderabad, and modernization of airports at Mumbai and Delhi would entail total investment of around Rs 40,000 crore.

The new decade of Indian economy will witness massive changements in the infrastructure segment. Followed with growth of other core sectors. The only deciding factor that will bring the growth is the policy changements mentioned earlier followed with flow of funds expected to come in 2010 . if any  of these two goes wrong then the Indian infrastructure growth will be slower and more time consuming.

Author: Indranil Sen Gupta
Financial, Economic Writer and Research Analyst