India Infrastructure Opportunity
Investing in India
India is one of the largest and most exciting emerging market growth stories in the world. It is the fourth largest economy by purchasing power and the second fastest growing economy in Asia with a population of 1.1 billion of which 54% are under 25 years of age. The judicial system of India is based on the English system, and its jurisprudence is derived from the common law.
In the period between 2003 and 2008, the Indian economy grew in real terms at a compound rate of 8.5% per annum1. The country achieved real GDP growth of 9.0% in FY2007 and 6.2% in FY2008 2. The Government of India is targeting real GDP growth in the range of 8% to 9% per annum for the period FY2007 to FY2012 3.
The Indian economy has undergone fundamental changes over the last decade. Growth in investor interest is driven by strong economic growth, low interest rates, rising foreign exchange reserves, quality and cost competitiveness and encouraging Government policy-making. The infancy of large scale private equity fundraising in the region for infrastructure investment offers investors the additional advantage of early entry into such a dynamic market.
Investing in Infrastructure Assets
Infrastructure assets form one of the principal foundations of a modern economy and are essential for achieving sustainable economic growth.
Infrastructure projects create assets and utilities that improve the quality of life for people - the basic necessities of everyday life - clean drinking water, safe modes for transportation, airports, utilities, power and electricity, hospitals and medical infrastructure, schools and colleges and other social infrastructure. Infrastructure projects are secured asset classes that generate stable and predictable equity earnings in the long-term. They have built in mechanisms to factor macro-economic issues like inflation and have low to moderate risk profile. Such projects have high barriers to entry and in the long-term have capital growth opportunities and sustainable competitive advantage.
Infrastructure has historically been financed, built and operated by the Government of India due to the large costs and also due to the monopolistic characteristics of these assets. The trend towards private sector financing and development of infrastructure is occurring in India today. This presents investors with a significant opportunity to invest in the foundation of a rapidly expanding economy through funding the development of new infrastructure or the acquisition of operational assets alongside private sector developers from the Government of India.
The strong level of economic growth achieved in India in recent years has led to an expansion of industry, commerce and per-capita incomes. This in turn has fuelled demand for infrastructure services including energy, transportation, telecom, water supply and other urban infrastructure.
In comparison, the level of investment in infrastructure as a percentage of GDP declined substantially from a peak of 6% in the early 1990's to a 30 year low of 3.3% of GDP in 2003 4. Since 2003, investment in infrastructure has recovered and is estimated to increase to 4.8% of GDP by 2009 5.
India Infrastructure Investment (as a percentage of GDP)
Source : Broker research gross capital formation in energy, airports, seaports, roads and telecom has been used as a proxy for infrastructure spending.
The Government of India has recognised the importance of infrastructure development and private sector capital to sustain long-term economic growth. It estimates an investment need in the region of USD 500 billion over the coming five years, predominantly in the power and transport infrastructure sectors. To support this target, the Government of India has introduced a number of measures supportive of private sector investment. Such measures include the removal of restrictions on foreign direct investment, changes to legislation, introduction of model concession agreements and provision of financial assistance to increase the attractiveness of investment in the sector.
1 Source: Economic Intelligence Unit
2 RBI Estimate
3 Source: Planning Commission, Government of India
4 Broker research. Gross capital formation in energy, airports, seaports, roads and telecom has been used as a proxy for infrastructure spending
5 Broker research
