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Is India's Infrastructure on a Road of Revival?
Mon, 18 Jul Pre-Open

India's GDP grew at 7.6% in 2015-16. Fall in interest rates and soft international commodity prices have helped reign in the country's high inflation so far. However, one sector which is extremely crucial for India's next phase of growth is infrastructure. In a publication report, Reserve Bank of India (RBI) states, a rupee of capital spent by the government on public infrastructure projects results in an additional income being created to the tune of 5.8 rupees, by the fifth year.

The government understands that undertaking capital expenditures projects has a multiplier effect on the economy. Be it on roads, railways, defense, mining. Multiplier effect indicates positive changes in incomes due to specific spending.

But, is the overall spending on infrastructure picking up?

If we segregate infrastructure spending into segments such as asset owners, government spending, private sector spending and housing. One could find that private sector spending has witnessed a decline. A key factor that explains this drop in investment is the current capacity utilization rates. The utilization rates hovering at around 70%, is much lower than the long term average. Improvements in the rates are expected to reach around 80% in next couple of years. This means private investments recovery might be another couple of years away. Another factor impacting private investments is the high leverage that they carry.

The government spending has picked up on infrastructure. It has also has been working to ensure affordable housing and housing for all. Lower commodity prices have resulted in asset owners delaying their capex spending. Thus, while the traditional segments like Oil and Gas aren't supportive of capex due to a slowdown, there are others who have pitched in. India is seeing a renewable energy push. This requires creation of assets, benefitting support industries. Hence, even amidst the slowdown there are certain segments from the ancillary infrastructure segments like cement, engineering, logistics that have done well.

From investment returns point of view, the infrastructure segment continues to underperform over the past few years. Over the last five years, infrastructure index has delivered a negative 9% return. However, one needs to keep an eye out for any signs of private sector capex revival and asset owners who manage to reduce their debt, that will be key positive sign for these companies. While there may be some recovery in sight, one would do well to be patient and prudent while pursuing these opportunities.

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Jun 28, 2017 03:37 PM

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