By Darius Pandole, Managing Director & CEO, JM Financial Private Equity – The importance of infrastructure for sustained economic development is well recognised. Infrastructure facilities such as roads, railways, metro rails, etc are required to increase the productivity and seamless functioning of various business sectors in India. High transaction costs arising from inadequate and inefficient infrastructure can prevent the economy from realising its full growth potential, regardless of the progress on other fronts.
By Darius Pandole (pictured), Managing Director & CEO, JM Financial Private Equity – The importance of infrastructure for sustained economic development is well recognised. Infrastructure facilities such as roads, railways, metro rails, etc are required to increase the productivity and seamless functioning of various business sectors in India. High transaction costs arising from inadequate and inefficient infrastructure can prevent the economy from realising its full growth potential, regardless of the progress on other fronts.
In the Union Budget 2021, the government has given a massive push to the infrastructure sector by allocating INR2.3 trillion (~USD32 billion) to enhance the transport infrastructure in the country. In addition to the Government push, the private sector is emerging as a key player across various infrastructure segments, ranging from roads and communications to power and airports. Private investment into physical and social infrastructure is key to putting India in a high growth trajectory, which would go a long way towards the government’s objective of becoming a USD5 trillion economy by 2030. A significant portion of this private investment is likely to be funded by private equity (PE) and venture capital (VC) investments in India, which have been growing at a healthy pace and will continue to be a key driver for economic growth in the years ahead. As per an EY report, PE/VC investments in Indian infrastructure and real estate during FY2020-21 are estimated to be USD 11 billion across 67 deals (from a total investment value, across sectors, of approx. USD 55 billion for the year). In addition, during this timeframe, strategic / portfolio investments amounting to approx. USD 20 billion in Reliance Jio will enhance the telecom and data infrastructure in the country.
The opportunity set for investments in infrastructure is massive. India has an immediate requirement for investments estimated at over INR 50 trillion (USD750 billion) across infrastructure in India. For example, huge investments are required in almost every segment of infrastructure such as the national highway network in India (only 25 per cent is four-lane), development/upgradation of airports, initiatives such as ‘Smart Cities Mission’, etc. Further India needs to construct more than 40,000 houses a day until 2022 to achieve it’s ‘Housing for All’ target, providing a massive real estate opportunity which has the potential to catapult India into one of the largest construction markets in the world. Power generation and railways provide opportunities of similar magnitude, with a much-needed focus on clean, sustainable sources of energy to meet our Nationally Determined Contribution (NDC) targets on climate actions.
It is important to recognize that over the years, the infrastructure sector in India has had more than its fair share of problems that need clear solutions to allow for progress. One of the biggest issues is time and cost overruns leading to incomplete projects. These projects are usually left unattended for too long in various stage of development, whereas their on-time completion would set the tone for the efficient execution of new projects. This is evident especially with physical infra projects such as roadways and railways. Focus on physical infrastructure projects will make the movement of resources easier and also provide aid to logistics. Besides resource allocation, it is extremely essential to introduce consistent policies on a pan-India basis. Policy and regulatory inconsistencies tend to hinder the progress of infrastructure projects significantly.
Systemic delays have also impacted the flow of debt capital into the infrastructure sector. While the sector accounts for by far the largest share of gross bank credit to industries (37 per cent), the growth of credit has been sluggish over the last five years (2.5 per cent CAGR), as per published RBI data. A conducive policy framework which allows for faster approvals and clearances, access to adequate manpower, and timely availability of raw material will help curtail delays, thereby improving asset quality and accelerating credit growth in the infrastructure sector. The recent establishment of the National Bank for Financing Infrastructure and Development (NaBFID) is a significant step in that direction, and will help catalyse investments and improve the speed of decision making in the capital-intensive infrastructure sector.
Evolving infrastructure, if executed efficiently, is likely to usher in a transformational change in India in the coming years, in the way people live, travel, work and do business, which will in turn result in continued attractive investment opportunities. Strong policy focus bodes well for the infrastructure sector, as does the continued investor interest even though historical challenges continue. The next few years provide India with the opportunity to capitalise on the momentum and strengthen its infrastructural backbone. Doing so will help us to not only improve our global competitiveness but also unlock our true economic potential to realise our target of becoming a USD 5 trillion economy by the turn of the decade.
Sources: Media reports, DPIIT, PricewaterhouseCoopers, EY, IBEF, RBI
Darius Pandole is Managing Director & CEO – PE & Equity AIFs, JM Financial Ltd, a investment banking firm in India. He has over 25 years of private equity experience in India. Prior to JMFPE, he was a Partner at New Silk Route Advisors (NSR) for close to nine years, and was a member of the early team at NSR that managed the USD 1.4 billion private equity fund, and worked on a number of investments and divestments across sectors, including participating on the board of directors of investee companies.