The government is displaying growing optimism on India’s economic revival and its effect on infrastructure investment in the country. The government has pegged infrastructure investment for 2009–10 at 7.5% of the gross domestic product (GDP) and at 7.94% and 8.37% for 2010–11 and 2011–12, respectively.
With nearly one-third of planned investment expected to come from the private sector, the public-private partnership (PPP) model will remain a key growth driver. Despite execution related concerns, we remain positive on India’s infrastructure sector considering the recovery in economic growth and corporate capital expenditure, along with political stability and improved fund availability.
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According to the government, the Indian economy is poised to grow at 7.2% in 2009–10, 8.5% in 2010–11 and 9% in 2011–12. For 2009–10, the total investment in infrastructure is estimated at 7.5% of GDP. The government aims to increase this to 7.94% and 8.37% in 2010–11 and 2011–12, respectively.
Infrastructure development is expected to garner a total investment of Rs20.5 trillion (revised estimates) over the 11th Five-Year Plan; of this, approximately 36% (Rs7.4 trillion) is likely to come from private participation, especially in the road and power sectors. This marks a change in composition of projected public-private investment from 70:30 to 64:36. However, the gross investment target remains largely unchanged.
The private sector contribution for the first two years of the 11th Plan stood at 34.32% and 33.73%, respectively, higher than the planned target of 30%. The government is in the process of setting up a committee to attract more private sector participation in railways, health and education.
On the whole, investments and performance across sectors during the first three years of the 11th Plan have fallen woefully short of expectations, primarily due to the global economic turmoil as well as delays in contract awarding and securing clearances. Investment in infrastructure during these three years stood at approximately Rs8,000 billion; of this, 45% was financed through budgetary support and the balance through a combination of debt (41%) and equity (14%), including foreign direct investment.
The targeted infrastructure investment for the 12th Plan is at Rs40,984 billion—assuming infrastructure gross capital formation (GCF) of 9.95% of GDP—is nearly double that of the 11th Plan.
But there are several challenges outlined that could affect growth for the sector, such as execution delays, delay in land acquisition, lack of depth in the bond market, insufficient participation from insurance/pension funds, delays in securing environmental/other regulatory clearances, lack of long-term financing to support PPP projects and poor availability of skilled/trained labour.
Our prospects remain unshaken. Past trends indicate that government investment targets are usually unduly optimistic. We, therefore, believe that execution—rather than funding of projects—would be the key challenge ahead.
Graphics by Yogesh Kumar / Mint