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Opportunities in infrastructure-I - Views on News from Equitymaster
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  • May 6, 2008

    Opportunities in infrastructure-I

    This is Part I of this series of articles we shall be writing on the opportunities available in the Indian infrastructure space.

    The Eleventh five year plan (FY08 to FY12) is targeted to attain a sustainable GDP growth rate of 9% per annum. There is consensus that infrastructure inadequacies would constitute a constraint in realising this development potential. To overcome this constraint, an ambitious programme of infrastructure investment, involving both public and private sector, has been developed for this plan period by the Planning Commission of India (PCI).

    Certain infrastructure related initiatives, such as Bharat Nirman for rural development, as well as sectoral initiatives, such as the National Highways Development Programme (NHDP), the Airport Financing Plan, and the National Maritime Development Programme and the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) have been strengthened as compared to the previous years' plan. In this article, we will go through PCI's estimates for infrastructure spending during the XIth plan period and compare them to the Xth plan (FY03-FY07).

    As per PCI's estimates, for India's GDP to grow annually at an average of 9%, the GCF (Gross Capital Formation) in infrastructure should be increased to levels in excess of 11% by the end of the FY12 (around 5% currently). Realistically, however, starting from a GCF level of less than 5% of GDP observed in FY05, such a rapid change in the structure of investments may not be feasible. Moreover, it may not be a necessary condition for achieving a 9% growth since many East Asian countries may have invested more than is essential and while 10% investment is desirable, India could try to achieve it over a longer period. Taking these factors into account, a GCF in infrastructure of around 9% of GDP by the end of the XIth plan seems to be more realistic.

    A look at the estimates
    As seen the table below, the thrust on power and electricity continues to remain top priority for the government. In order to achieve its objective of "Power for all" by 2012, the government has estimated an increase of 111% in spending towards power projects during the XIth plan (as compared to the Xth plan spending towards the sector). The other vital infra sectors (see table below) have also been allotted significant increases during the current plan period. The PCI also estimates private sector share in total infrastructure spending to increase from 18% in Xth Plan to 30% in the current one.

    As can be seen from the table below, barring electricity and storage, the government's share in investments is seen dropping in favour of private participation. This PPP (public-private participation) route adopted by the government (especially seen in the electricity, road, telecom, port and airport sectors) is seen as the way to increase private sector's participation in infrastructure spending going forward. This we see as a positive, as it will help a faster development along with the de-bottlenecking of certain sectors. However, investments in irrigation, rural roads and other roads in backward and remote areas and water supply and sanitation sectors will be almost entirely undertaken by the government.

    Planning Commission's estimates of infrastructure spending
    (Rs bn)
    Xth Plan
    Share (%) in
    Xth plan
    % of
    total Exp.
    XIth Plan
    Share (%) in
    XIth plan
    % of
    total Exp.
    Increase (%)
    over Xth plan
    Electricity 2,919 - 33% 6,165 - 30% 111%
    Public 2,000 69% 4,540 74% 127%
    Private 918 31% 1,625 26% 77%
    Roads 1,449 - 16% 3,118 - 15% 115%
    Public 1,379 95% 1,993 64% 45%
    Private 70 5% 1,125 36% 1507%
    Telecom 1,234 - 14% 2,670 - 13% 116%
    Public 790 64% 893 33% 13%
    Private 444 36% 1,777 67% 300%
    Railways 1,197 - 14% 2,580 - 13% 116%
    Public 1,194 100% 2,075 80% 74%
    Private 3 0% 505 20% 16336%
    Irrigation 1,115 - 13% 2,231 - 11% 100%
    Public 1,115 100% 2,231 100% 100%
    Water Supply
    & Sanitation
    648 - 7% 1,991 - 10% 207%
    Public 638 98% 1,937 97% 204%
    Private 10 2% 54 3% 430%
    Ports 41 - 0% 739 - 4% 1705%
    Public 22 53% 195 26% 791%
    Private 19 47% 545 74% 2751%
    Airports 68 - 1% 347 - 2% 413%
    Public 38 57% 136 39% 254%
    Private 29 43% 212 61% 621%
    Storage 48 - 1% 224 - 1% 364%
    Public 14 30% 112 50% 676%
    Private 34 70% 112 50% 231%
    Gas 87 - 1% 205 - 1% 135%
    Public 87 100% 140 68% 60%
    Private N.A. - 65 32% -
    Total 8,805 - 100% 20,272 - 100% 130%
    Public 7,178 82% 14,252 70% 99%
    Private 1,627 18% 6,020 30% 270%

    The total expenditure in the infrastructure space during these five years of the current plan has been estimated to increase by 130% to over Rs 20.2 trillion in absolute terms as compared to the Xth 5-year plan total of Rs 8.8 trillion. This shall open up tremendous opportunities for companies operating in this space ones that are executing the projects and others that are providing resources like equipments, fuel and manpower.

    However, while these plans look grand and when achieved can take India to the next level of growth, execution will remain an issue. This is especially considering the past track record of such plans, shortage of manpower across industries, rising commodity prices that have led to escalation in project costs and equipment shortages. Some leading engineering majors have, in fact, recorded losses on certain projects in the latest quarter on account of execution delays due to equipment and manpower shortages and have also seen their margins getting impacted.

    Starting next article onwards of this series, we will be looking at each of these sectors individually and the kind of opportunities that India Inc. has therein.
    Opportunities in Infrastructure Article Series - Next article | All Articles



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