Overview of the Indian Infrastructure Sector

8/10/2019 Overview of the Indian Infrastructure Sector

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Overview of the IndianInfrastructure SectorEfficient and widespread infrastructure is pre requisite for countrys economic growth. In recent years Indiais consistently increasing infrastructure spending. Indian government is also offering various incentives suchas liberlisation of FDI norms, tax holidays to mobilise resources from domestic as well as foreign sources.Currently Indias infrastructure spending is 8% of GDP which is required to augment further to sustain economicgrowth. Indias investments in infrastructure in past ten years has made it second fastest growing economyof the world after China.

Regardless of growth in infrastructure sector in recent years India ranks 89th in basic infrastructure as per GlobalCompetition Report 2011-2012 indicating relatively slower developments as compare to other countries of theworld. Indias growing economy holds a huge potential for critical infrastructure developments consisting oftransportation, power and telecommunication. The planning commission in its approach papers has projectedan investment of US$ 1 trillion (assuming growth rate of 9%) during 12th five year plan with at least 50%expected from private sector.

Major highlights of infrastructure sectorCore infrastructure industries growth decelerated to 4.4% in FY12 after growing at constant rate of 6.6%in FY10 and FY11. At the same time GDP at factor cost grew by 6.5% in FY12 against 8.4% in FY11.Net bank credit to infrastructure sector during FY12 stood at Rs 6.2 trillion. The Y-o-Y growth rate hasdeclined sharply to 14% for FY12 as compare to 38% for FY11.Total FDI inflows into major infrastructure have grown by 23.6% during Apr-Dec 2011 as compare to FDIinflows during Apr-Dec 2010. The industry has received US$ bn in infrastructure investment over thepast years. Power (43.6%), non-conventional energy (338%) and telecommunications (49.9 %) were thepreferred sectors for foreign investors.Envisaged investment in infrastructure declined by 52% to Rs 1.0 trillion from Rs 2.2 trillion in theFY11.

Infrastructure Performance

SectorGrowth In %

FY08 FY09 FY10 FY11 FY12 (April-Dec.)

Power 6.3 2.5 6.8 5.7 9.3

Railway revenue-earning freight traffic 9.0 4.9 6.6 3.8 4.7

Cargo handled at major ports 12.0 2.2 5.7 1.6 0.4

Civil AviationExport cargo handled 7.5 3.4 10.4 13.4 -1.1

Import cargo handled 19.7 -5.7 7.9 20.6 1.4

Passengers handled at international terminals 11.9 3.8 5.7 11.5 7.2

Passengers handled at domestic terminals 20.6 -12.1 14.5 16.1 17.5

Telecommunication

Cell Phone Connections 38.3 80.9 47.3 18.0 -51.0

Roads: Up gradation of Highways *

NHAI 164.6 30.9 21.4 -33.3 8.9

NH(O) & BRDB 12.5 17.3 4.0 -6.8 -36.5 Source : Ministry of Statistics and Programme Implementation (MOSPI) and D&B Research* Includes Widening to four lanes & two lanes and Strengthening of existing weak pavement only.Notes: NH (O) stands for National Highways Organization and BRDB for the Border Roads Development Board (BRDB).


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The infrastructure sector during FY12 for the period April to December grew at moderate rate. The growthrate of power sector during FY12 was higher than the growth of FY11. In case of Railway sector slight growthwas seen in revenue from freight traffic. In case of civil aviation passengers handled at domestic terminalsgrew marginally while passenger at international terminals as well as export import cargo handled declinedseverely. Cell phone connections also dropped considerably as compare to prior years growth. In road sectorup gradation of highways by NH (O) and BRDB depicted a negative growth.

Sector wise developments and opportunities

Power : The demand for grid power is expected to grow by 6% p.a. by the end of the 12 th FYP. Capacityaddition in the power sector is about 50,000 to 52,000 MW during the 11th plan. In order to achieve theprojected capacity addition of 1, 03,300 MW and build adequate transmission and distribution capacity,investment to the tune of Rs 11,18,3.75 bn would be required.

Construction : Construction sector has depicted a growth of 6.8% during 2008-2011. During FY12 the sectorgrew by 5.3% as against 8% in FY11. Yet with increase in road tendering in FY12 construction activities areexpected to get a boost.

Ports : FDI upto 100% through automatic route is allowed for construction and maintenance of ports

Telecommunication : The Indian telecom network is the second largest in world after China. The share ofprivate operators has grown tremendously to 86% in December 2011 from 5% in 1999. Telecommunicationinfrastructure poses huge potential considering the enormous growth of wireless connections, and increasingteledensity.

Roads

Railways : Railways sector has grown by 8% during the period of 2008-2011. It currently shares only 36% ofIndias freight traffic which is about 50% in countries like US and China. The vision 2020 has projected aninvestment to the tune of Rs 7,200 bn for the sector. Also PPP have a greater role to play where currently 37%of funds are supported through budgetary support, 35% through internal sources and 37% raised throughEBR.

Civil Aviation : Civil aviation industry in India has grown at an average rate of 18.5% in past seven years.During the period of January to November 2011 domestic passenger traffic handled at Indian airports grewby 19.45% to reach 108.1 mn from 90.5 mn during the same period in 2010. No growth was seen in cargotraffic which was placed at the same level of 0.75 MMT during Jan-Nov 2011. At the same time internationaltraffic (Passengers & Cargo) grew by 7.7% where passenger traffic was placed at 33.6 mn and cargo trafficat 1.4 MMT.

Permitting foreign airlines to invest in domestic airlines and direct import of ATF (aviation turbine fuel) isexpected to provide stimulation to aviation industry.

Performance of Infrastructure Supportive IndustriesAccording to the data released by Ministry of Finance, the index for core infrastructure supportive industrieswhich include crude oil, petroleum refinery products, coal, electricity, cement and finished steel having weightof 37.9 % in the Index of Industrial Production (IIP) depicted the cumulative growth rate of 4.3 % in FY12declining from 6.6% in FY11. During April-May 2012-13, these sectors grew by 3.4 % as compared to 5.0 %during April-May 2011-12.

The most affected sector whose growth hampered adversely in FY12 was natural gas with a growth rate of-8.90% (FY11 10%) followed by crude oil with growth rate of 1% (FY11 11.90%) and steel with 7% growth(FY11 13.20%). Remaining sector assisted in raising infrastructure IIP Index. These include Electricity 8% (FY115.60%), Cement 6.70% (FY11 4.50%), Coal 1.20% (FY11 -0.20%) and Refinery Products 3.20% (FY11 3%).


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Inputs from core industries specially electricity generation determines manufacturing growth. Therefore itis of utmost importance to amplify core sector production. Indian government is also taking steps towardsit. The union budget for 2012-13 has given full exemption from basic customs duty to fuels such as naturalgas, liquefied natural gas, steam coal and uranium concentrate imported for power generation. Viabilitygap funding has been extended to capital investment in fertilizer industry, oil and gas storage and pipelinefacilities for supporting the scheme of public private partnership (PPP) and thereby facilitating necessaryinfrastructure.

Union Budget 2012-2013 gives impetus to infrastructure GrowthRaised the limit for FII investment in long-term corporate bonds issued by the companies in theinfrastructure sector from US$ 5 bn to US$ 25 bn.Qualified Foreign Investors (QFIs) have been allowed to invest a total of US$ 10 bn in Mutual Fund EquitySchemes and US$ 3 bn Mutual fund debt schemes that invest in the infrastructure sector subject to ceilingof US$ 3 bn within the existing limit of US$ 25 bn.External Commercial Borrowings (ECB) have been permitted for refinancing of rupee loans of infrastructureprojects with the condition that at least 25% of such ECB shall be used for repayment of the said rupeeloan and 75% shall be invested in new projects in the infrastructure sector.The existing External Commercial Borrowings (ECB) limits under automatic route were enhanced fromUS$ 500 mn to US$ 750 mn for eligible borrowers.

Infrastructure InvestmentInfrastructure investment defined as electricity, roads and bridges, telecommunications, railways, irrigation,water supply and sanitation, ports, airports, storage and oil-gas pipelines is around 8% of GDP in the lastyear of 11th FYP. The major funding for infrastructure investments was contributed by budgetary support.Commercial banks, NBFCs, Insurance companies and ECB contributed around 40% while 14% of funds wereavailable via Equity and FDI route.

The planning commission has targeted an ambitious investment of Rs 65 lacs crores for the 12th FYP. Toachieve the target infrastructure investment has to be raised to 10% of GDP from current 8%. The averagegrowth rate of Indias gross domestic savings has been over 30% in past 4-5 years. However considering theprojected investment in 12th five year plan and a mismatch between the long term fund requirements andsavings and investments of short span, there is need of having diversified group of investors such as strategicinvestors, private equity funds, pension funds, and sovereign funds to avoid wide funding gap.

Projected Investment in Infrastructure during the Twelfth Five Year Plan

Base YearFY12

FY13 FY14 FY15 FY16 FY17

Total12th

five yearPlan

GDP at FY07 Prices (Rs. bn) 63,143 68,825 75,020 81,772 89,131 97,153 411,901

Infrastructure Investment as % of GDP 8.37% 9.00% 9.50% 9.90% 10.30% 10.70% 9.95%

Infrastructure Investment (Rs. bn. in FY07 prices) 5,283 6,194 7,127 8,095 9,180 10,395 40,992

Infrastructure Investment (Rs. bn. in current prices) 7,218 8,886 10,735 12,803 15,245 18,126 65,795 Source: Mid-Term Appraisal Eleventh Five Year Plan, Planning Commission, GOIWPI inflation used to convert to current prices; FY12 inflation based on PMEAC projection

Yet post the crisis fresh investment in infrastructure has dried up. As per RBI report ,total fixed investment bylarge firms in new projects during FY12 stood at Rs 2.1 trillion recording a drop of 46% led by infrastructureand metal sector as compare to Rs 3.9 trillion in FY11 . Envisaged investment in infrastructure declined by 52%to Rs 1.0 trillion from Rs 2.2 trillion in the FY11, with power and telecom being major contributor in additionto deceleration in roads, ports and airport investment. Envisaged corporate fixed investment in large projectshas dropped to 48.6 % in FY12 from 54.8% in FY11. There is also concern raised regarding materilisation ofprivate sector participation which is expected to be 50% of total investments. Also private sector is facingissues of essential raw material availability such as coal and natural gas.


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Road AheadThe recovery process of Indian economy which began after the financial crisis of 2008 as reflected in theperformance of FY11 is again taking a pause in FY12 owing to global uncertainties. However given the hugedemand for infrastructure development, accelerating savings and investment rates holds a key to revitalizethe economy and achieve growth aspirations. With Indias agenda to enhance infrastructure spending alongwith greater public private collaboration, both domestic and international investors are eying on this segmentof Indian economy.

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Overview of the Indian Infrastructure Sector