India's Infrastructure: Chances and Risks for Investments
Eric Heymann et al. | Deutsche Bank Research | February 2008
India's infrastructure is obstructing economic growth. Just the terrible state of the roads and the endless traffic jams cause economic losses amounting to 6 billion US dollars per year. The cities in particular are struggling with increasing traffic chaos and power cuts. At the same time, the number of inhabitants in the cities will increase by 20% over the next seven years. The Indian government has, however, already acknowledged the problem: by 2015, 450 billion dollars should have flowed into projects to improve infrastructure. This will only be possible thanks to private funds, including those of foreign investors. Deutsche Bank Research has analysed the most interesting sectors while also warning against certain risks.
Energy supply
India has only about a third of the power generation capacity of China. At the same time, demand for power is rising by about 10% a year. With an estimated 245 billion dollars in investments, the energy sector is by far the largest infrastructure project. The most significant source of energy is and remains coal (53%), followed by hydraulic power (25%), gas-power plants (10%), renewable energy sources (8%), and nuclear energy (3%). Due to numerous power cuts, many private businesses have now set up power plants of their own to cover their needs. Yet the opening of the energy market is only taking place slowly. Investors are holding back since the energy prices for certain groups (agriculture for instance) are subsidized and kept artificially low.
Transport infrastructure
Both the Indian road and rail networks belong to some of the longest systems in the world. However the country still lacks well constructed freeways and the rail network has been pushing the limits of its capacity for quite some time. Private investment in the road system brings with it the risk that some future users will not be able to pay tolls and that road charge revenues will fail to materialize. Railways demonstrate weaker growth than other means of transport. Private investments can barely amortize through tolls alone. Investment in air and sea travel offers better opportunities. The forecasted growth rate for the volume of freight and passengers is 15 or 11% per year and the triumph of Low-Cost-Carriers has transformed air traffic into an attractive investment area for foreigners. In order to improve its position in global trade, India should recognize the urgent need to develop its harbour capacities, especially regarding container storage.
Telecommunications
This is where there has been by far the most dynamic growth in the last few years. Mobile phone services boast annual growth rates of 75%. In this field, the liberalization that began in 2003 is paying off. Future growth potential for foreign investors is predominantly found in the areas of mobile phone and broadband local area networks. The number of telephone users in rural regions is expected to increase tenfold by 2012.
In comparison with other emerging markets, India's infrastructure still displays many weak points. Yet if the urgent and necessary investments in the infrastructure were to be carried out, the already considerable GDP growth of around 9% could gain up to another two percentage points. One obstruction to foreign investment is political unpredictability, for example with respect to setting electricity and water prices, strong regional differences and specific features within individual domains of infrastructure. Therefore, the areas that appear least interesting to foreign investors also happen to be those where the need for investment is the highest (energy and roads).
This summary was prepared by the Atlantic Community editorial team from "Infrastruktur Indien: 450 Mrd. Gründe, jetzt zu investieren" by Eric Heymann et al. and published here in Deutsche Bank Research.
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Mon, Apr 21st 2008, 17:52
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