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New roads to progress and more - Views on News from Equitymaster
 
 
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  • Nov 20, 2008

    New roads to progress and more

    New roads to progress
    After national highways, the Indian government's effort to provide all weather road connectivity in rural areas under the Pradhan Mantri Gramin Sadak Yojana (PMGSY) is beginning to bear fruit. It is finally triggering off meaningful socio-economic transformation and rapidly opening up new routes for growth. Quite literally! As per the government body, rural roads are the biggest contributors to poverty alleviation and an investment of Rs 10 m in roads carries the ability to lift 1,650 people above the poverty line. Also, rural connectivity has the potential to add to domestic consumption, which makes up 55% of India's economy, compared to 37% in China.

    As per Bloomberg, the 100 kilometers (62 miles) of rural roads that India is adding each day may save Asia's third-largest economy from the worst of a global recession. New roads built so far under the US$ 27 bn program have brought urban markets within reach of 60 m village dwellers over the past five years, letting them earn money selling fruits, vegetables and milk that would have spoiled otherwise. These villagers are now spending their cash just as the world economy falters. Particularly because they not just have the roads for commuting to the markets but also extra income during the non harvest season due to the employment generation schemes.

    Spending on the road project by the PMGSY was about 5% of GDP in 2007. A vision statement for 2025 drafted by the Ministry of Rural Development estimates that the investment needs to increase from current levels to US$ 8 bn a year until the 14th Five Year Plan (2022-27). Given the Finance Ministry's estimates that inadequate capacity can shelve two percentage points off the nation's growth each year, the emphasis on rural infrastructure seems undeniable.

    Defaults threaten banks in India and China
    Indian banks are dwarfed by their Chinese counterparts when it comes to balance sheet size. However, the same may not be a cause for indignity at a time when global banks with massive sizes have had to counter some of the most colossal problems. As per China Banking Regulatory Commission, Chinese banks' combined assets totaled US$ 8.7 trillion at the end of September 2008. The Reserve Bank Of India (RBI) data revealed that Indian banks had outstanding loans of US$ 510 bn (approx. Rs 25 trillion) at the same time.

    The global credit crunch has seen financial institutions around the world write off nearly US$ 966 bn worth of assets. However, as per the RBI, Indian banks have just US$ 1 bn of toxic western assets out of the total loan portfolio of US$ 510 bn. Retail loans, mortgages, credit cards, auto and consumer durables loans, which were among the fastest-growing segments, are now likely to be major risk areas as bad debts are expected to rise from 2.5% of advances in FY08 to 4% of advances by the end of this fiscal.

    The same may increase provisioning pressure for Indian banks although not putting the banking system at risk due to its fragmented nature and high capitalisation rates. At the same time, while Chinese banks have had average NPA ratio of 5.5% at the end of September 2008, an increase in the same is expected to have a vicious impact on the economy given their balance sheet sizes.

     

     

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