India: Time for a reboot

Following its recent elections, India is hoping that economic growth can be revived – along with its infrastructure ambitions. Ajay Jain of Indusbridge reports.

When the young Indian democracy went to vote a few weeks back, to elect a new Prime Minister for the 16th time, it was a unique exercise in the history of mankind. In a sweltering Indian summer, a record number of Indians (about the combined population of the US, the UK, Germany and Japan) chose to exercise their franchise.

The outcome was equally exciting in terms of numerical strength. For the first time in three decades, India would not have to go through the anxiety of a politically unstable government reliant on its differently aligned coalition partners. The results for the lower house of the Indian parliament were overwhelmingly towards political stability over the next five years. This could be a defining moment for the Indian economy that has suffered from a lack of confidence among the domestic investing community of late.

It’s important to note that the Indian economy, which was striving for an 8 percent-plus growth rate, came to a grinding halt over the last two years, registering growth rates of 4.5 percent and 4.7 percent consecutively during the first two years of its 12th five-year business plan (FY2013-17).

For the Indian economy to refuel its growth back to desirable targets, and not slip back to the average 4.6 percent of the 1980s, it needs to invest in its infrastructure which has suffered as much from the lack of financial dollars as from the lack of knowledge capital. It’s estimated that India needs to invest 8 to 9 percent of its GDP into its infrastructure build-out for the economy to grow at 7 to 8 percent per annum. In value terms, India will need to invest, on average, $150 billion per year for the remainder of the current business plan.

Half of this amount is expected to come from the private sector, against one-third during the last five-year business plan. On a conservative basis, for new capital expenditure (capex), this means a private investment opportunity of circa $25 billion of equity and circa $50 billion of debt funding per year. Additionally, owing to a fairly successful implementation of the previous business plan, Indian infrastructure presents a significant pipeline of operating assets – estimated at over $100 billion across the capital structure for the private investor.

Today, a number of important macro-economic factors such as trade and fiscal deficits, are well within the defined “red lines”. Equally, the Indian economy has shown great resilience with the Indian rupee recovering by about 15 percent in less than a year before nose-diving to a historical low in September last year on account of the announced tapering by the US Federal Reserve among other internal factors. Similarly, the Indian stock market has clocked a return of about 40 percent during the same period. This has been possible due to a disciplined approach from the Government of India and the Reserve Bank of India in equal measure.

However, there’s a lot of expectation that the new government will accelerate the investment cycle – to reverse the trend of low growth and high inflation. If the first few days of the new government are any indicator, good days may indeed be round the corner.

Lack of investor interest over the last 24 months has been on account of virtually zero decision-making among the key infrastructure ministries such as those dealing with fuel, tariffs, land, the environment et al. The new government has started well by adopting a leaner structure with greater operational freedom given to some very competent bureaucrats and technocrats that the country has always had, accompanied by accountability and decision-making ability within the highest office in the country – that of the Prime Minister.

This should result in efficient and effective decision-making, with several policies and processes already in place. Further, to showcase its business intent, the new team in government will be well placed to undertake some of the following key measures:
• Reduce the subsidy bill on fuel by introducing time-bound market-based pricing. In light of relatively stable oil prices and high shale gas interest in North America, this should not cause inflationary pressure on the economy in terms of keeping the fiscal deficit in check. Simultaneously, oil and gas exploration policies need rigorous review in light of continuing sub-optimal results.
• To realise the true potential of vast coal reserves in the country, a serious re-organisation of Coal India Limited is needed, in addition to inviting foreign and domestic competition in the mining sector. Effective availability of coal is quintessential to the revival of the power sector in India with about 60 percent of capacity comprising coal-based thermal power.
• For better coordination, the new government has combined the portfolios of power, coal and renewable energy under a single minister. However, power to make decisions about tariffs, subsidies and collection rests with the states in India. To avoid expensive restructurings at the state distribution companies (discoms), the states need to be incented to have a disciplined approach towards tariff revisions and collections for the long-term sustainability of the sector.
• Invite private investment in the railways and ports sector in a big way, while adopting an efficient public-private partnership (PPP) framework. Weak hinterland connectivity is a challenge for most Indian ports, reducing accessibility and leading to sub-optimal utilisation of port facilities. To mitigate the problem, the shipping, railways and roads departments could conceptualise a joint approach with the private sector to develop the needed infrastructure simultaneously.
• The roads development programme has been fairly successful with more than 250 operating concessions from the central government-sponsored National Highway Authority of India (NHAI). Yet NHAI has its limitations due to lacking the appropriate level of technical expertise and capacity, especially in dealing with demand for bigger projects and more complex implementation. A faster dispute resolution mechanism and a regulator for the sector are needed immediately, in addition to capacity building at the NHAI.
• Finally, harmonisation of several regulations in the financial services sector is key to inviting long-term private capital in the sector. Sub-optimal tax structures, especially for domestic investors, is another area that needs immediate government attention.

For India to take advantage of its unique demographic dividend, the economy needs to adopt a robust and sustainable growth model, which is critically dependent on infrastructure development in the country. Systems and laws have always existed – implementation and order have not.

Seasoned leadership under the new Prime Minister is expected to put wheels in motion once again to achieve long-term sustainable growth, with the promise of a $5 trillion-strong economy over the next decade or so.

*Ajay Jain is managing partner at Indusbridge Capital Advisors in Mumbai.