By Rishabh Diwakar
Introduction
Booming Economy
Although the growth rate of the Indian economy has slowed down to 5% (FY13), Indias economic confidence grew by 8 percentage points to 68% in month of January as compared to December making it the second most economically confident country in the world. New reforms over FDI, FII, banking, energy etc. are trying to take the Indian economy to a fast track. Reforms to promote investments like FDI and FIIs are also key indicators of strong growth.
A developing country and a fast growing economy increases individual income level leading to an increase in the demand for housing, retail and commercial infrastructure in the country.
Real State of Indian Infrastructure
Indian is the second most populated country in the world and over the next few years the population growth rate is expected to be 1.6%. The growth rate of Indian real estate has been at par with the growth in population, but still a house remains a dream for about 78 million. Also the trend of nuclear families in India has been increasing and this has led to the increase in the demand for houses by leaps and bounds. The expansion of villages into towns and towns into cities has also contributed to the increase in real estates demand.
India being a fast developing country will have to spend trillions of rupees for modernization and expansion of water, electricity and transportation systems in order to achieve a developed nations crown. In India only 31% of the total population uses improved sanitation and 88% of the total population has access to drinking water. (Source: UNICEF)
India’s real estate sector has always been a newsmaker in melee of headlines around IT, retail, telecomm, but Indian power sector made a headline by lighting a blackout over half the country. The event has been marked in the Indian power sector with red letters and exposed the paralyzed Indian infrastructure. This incident revealed the true identity of the Indian power sector and its weaknesses.
Key Demand Factors
The demand for infrastructure in India is huge. Expansion and Modernization of utilities have created a huge demand for better and robust infrastructure. Urbanization, burgeoning middle class, booming service sector and increasing disposable income has also added to demand of infrastructure. Also improved access to financing has exploded the homebuyers. In the recent past the nationally average term for mortgage was 8 years, now it is 20 years.
The Challenge
Even though the flow of investment for infrastructure has greatly improved still there are other challenges that encounter the infrastructure projects.
Financing
Each infrastructure project comes with a huge capital expenditure and huge capital expenditure brings high risks and high expected returns. Long gestation periods and disrupted cash inflow have always been a major problem for any infrastructure project. Previously the projects were carried out by the government and no proper viability of the projects was checked. Enrons Dabhol Power plant failure (2001) is one such example of the ignorance of the state government in infrastructure project. Also tariffs on all infrastructure projects were regulated and private operators were not free to fix or adjust the tariffs at will. This discouraged many private players.
Risks associated with infra projects pose another serious challenge in financing and implementing infrastructure projects such as market risk, operational risk, environment risk, human rights risk, commercial risk and construction risk.
Today the facilities for infrastructure financing have undergone several changes since early 90s. Public agencies are sought to be accountable for the financial viability of projects undertaken by the state governments. Private investments are encouraged and shown a great interest in investing in infrastructure project. India being a high developing country has also attracted many foreign investments.
Regulatory Framework
India lacks regulatory framework for infrastructure. Several projects overrun cost and time because of the state or central government policies like land acquisition, environment clearances, finance approvals etc.
Solution
Two important steps are required for the Indian Infrastructure Sector. Firstly, we need to setup an independent regulatory body like SEBI for infrastructure. The primary role of this body would be to attract private investments and protect the investor from various risks. Secondly, we need to have an authority which should take care of sovereign obstacles. The basic role of this body will be to remove the obstacles for public projects and monitor the development of the project.
The new PPP (Public Private Partnership) model has a lot of potential to carry out various infrastructure projects and provide better infrastructure for each sector. Success stories of Gujarat Solar Innovative Project, Delhi Metro Rail Project showcase the power of PPP.
References
Indian economy Overview, May2013 retrieved from
http://www.ibef.org/india-at-a-glance/India-diverse-democratic-dynamic/indian-economy-overview.aspx
India, retrieved from www.unicef.org/india