Economic growth and infrastructure go hand-in-hand. If the infrastructure is lacking in capacity or it's of poor quality, growth tends to be choked off. It's equally true that high growth automatically tends to lead to demand for better infrastructure.
“Infrastructure” is also a catch-all word that covers a very wide variety of things. Power, energy, telecom, roads, railways, ports, airports, water supply, sewage, urban metro systems, IT penetration - all these are part of the national infrastructure along with “soft” elements like a good education and healthcare system. Ancillary industries such as mining, shipping and heavy engineering and service industries like construction are driven by infra.
One of the common factors across infrastructure sectors is that the capacity building tends to be long-gestation. It takes years to get infra projects up-and-running. Another common factor is that projects are capital-intensive-most infra is very expensive to set up and it takes a long time for a given project to payback. Breakevens of 10-15 years on a given project are not uncommon.
Some projects don't ever have direct payback-for example, most metro systems around the world run at a loss and few urban water supply systems make a profit. But they have strong positive externalities-they enable people to live and work in cities where they can earn higher incomes. That income usually results in higher tax revenues and of course, real estate valuations rise in areas with good infrastructure. Just take a look at what happens to land prices in areas contiguous to a metro project or rentals in areas with stable water supply versus areas that are water-deficient.
There are other common factors between different infra segments. Infra projects are usually land-intensive. They require the acquisition of large chunks of land. They also change environments, often in damaging fashion.
Both those factors-land-intensity and environmental impact-mean that policy has to be very carefully formulated and implemented. The process of land acquisition leads to a host of politically sensitive outcomes. While better infrastructure eventually means more prosperity and better employment opportunities, it also means displacements of local populations. If the compensation is inadequate, and rehabilitation of displaced persons is not done well and with care, that sets up political opposition to projects. That opposition can harden into insurgencies and agitations.
Again, environmental damage has long-term negative impacts on society-there are multiple examples of nations that have had to spend huge sums in cleaning up health hazards such as contaminated water sources and massive air pollution. One Indian example of such disaster would be the massive underground fires that have raged for decades in the Jharia coal-belt. Another is the smog and pollution that leads to so many health problems. Hence, there is need for careful consideration of environmental impact before a project is cleared.
Unfortunately, India has made every possible mistake it could in developing infrastructure. There is no question of doing this purely through government resources - the government doesn't have either the requisite finances or the expertise. Inducing the private sector to develop the infrastructure requires careful planning and consistent policy. That didn't happen - policy flip-flops have meant corruption charges and very uneven results. In some cases, natural resources (coal, spectrum) have been captured by industrial groups which have close links to politicians; in other cases developers have seen projects stalled.
Poor environmental policy has meant some projects that should have received clearances have stalled for years while others have navigated the political system successfully. In the meantime, there are a dozen agitations against various projects and Maoist extremism has certainly exploited the sentiments of displaced people to gain a grip on huge areas. The old land policy created huge scope for corruption and it left massive numbers of disgruntled former land-owners in its wake; the new land acquisition policy may lead to local captures.
The financial system has also come under stress - over `300,000 crore is stuck in stalled projects. Many banks have hit sector lending limits and the bulk of the bad loans within the banking system pertain to some infra project or another. Developers have been forced to halt projects for lack of financing as well. Tapping overseas funds isn't very attractive for an Indian due to the currency risk and FDI norms in infrastructure have also been opaque and not really attracted much interest.
This is the story of the last 15 years and of a series of errors and omissions by various governments at the Centre and the state. Nevertheless development cannot stop. While there is huge political opposition to many projects, there are also huge political consequences to not developing infrastructure. People will scream very loudly for example, if their mobile connections suddenly ceased to work. They will also vote for any government that gives them bijli sadak paani at reasonable rates.
The Twelfth Five Year Plan states very ambitious targets. The investment into infrastructure would need to be of the order of `56 lakh-crore into infrastructure by 2017-18. About 50 per cent of that investment will have to come from the private sector. Obviously those targets will be missed and missed by a distance. But any attempt to achieve them will require a massive rebooting of the entire infrastructure space in terms of policy. If that happens, there could be a big rebound in valuations for all the players in this space.
Let's take a quick walk through the various FYP targets. In roads for instance, the National Highways programme targets building around 15,377 km at a cost of around `60,000 crore. Various state road projects will add upto greater length and overall, to costs of around `80000 crore. In power, around 50,000 MW of conventional thermal and hydel capacity expansion is on the cards. Plus, there's nuclear (which will probably not happen) and of course, there's solar and wind. Expansion of the grid and of distribution systems has to keep pace. This should amount to about `5 lakh crore.
In addition, there's the ports and airports. Capacity expansions are planned at ports and multiple new airport projects are on the anvil. Of course, one doesn't know how many of these will be cleared and we can assume them to over run schedules by many years.
There are also the urban metro projects, as well as massively ambitious railway expansions like the Dedicated Freight Corridors with Smart city hubs, etc. Some of this is work in progress. Plus there are the urban water supply and sewage projects etc. - again work in progress. In energy, there are attempts being made to increase coal production and to encourage exploration and hopefully, production of oil and gas. Apparently the Indian government targets being energy-sufficient by 2030. It may sound unlikely in the wake of the KG-D6 disaster but hope springs eternal.
If even half of these plans fructify, there will be a big revival in the fortunes of the infrastructure segment. The CNX Infra index is a collection of 23 large listed companies, all of which are also traded in the derivatives segment. This includes five construction-developer majors, 11 energy businesses across oil, gas and power, four telecom companies, one private port and three capital goods manufacturers. The index is down 12 per cent in the past year, down 33 per cent in the past three years, and down 12 per cent over the past five years.
India's infrastructure deficit is both a threat and an opportunity. While the Twelfth FYP sounds like fantasy after three years of total inactivity, it isn't actually impossible that some of those targets will be met if policy-makers are determined. There's money to be made for bureaucrats and politicians in building infrastructure. The market has lost faith with this government but it's possible that the next one, whatever its constituents will try. A slow, systematic investment into the CNX Infra constituents might prove to be a good strategy.
This article was originally published on April 18, 2014.
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