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Infrastructure in India – An opportunity

It takes just few minutes on a railway station in India to understand what it means when somebody says India lacks Infrastructure. No doubt India has to go a long way as far as achieving infrastructure revolution. The path will be very difficult and will require commitment not only from government but from every citizen of India. What citizens have to do with it? Isn’t building infrastructure government’s job? I think we the people of India now have to come out of this mould of leaving our issues to be resolved by some unknown hand of God. It has to be the society and people of India to come out and build the nation. It will be a painful process and the worst part of it is that those who are going to build it will not be able to enjoy its fruits. Every generation builds for the future generations and that is how nations are built.

Now after philosophy it is time for business. Economics sense says any rational investor will not take up that venture, which cannot provide economic returns. So is there profit in this market? Actually how big is the market? Is there really an opportunity? Well to answer these question just consider this fact that Indian’s eleventh five year plan envisaged Rs 20,00,000 crore requirement for infrastructure development in 5 years completing in 2012. So we are talking about a market which requires investment of tune to 9% of India’s GDP in five years. So at modest 10% return we are talking about Rs 2,00,000 crore profits over the five years i.e. 40,000 crore per year. There are not many industries who can boast of such returns. But are these returns sustainable? Definitely so if we consider the fact that above requirement is expected to remain so in the years to come with growing urban areas, development of rural areas and increasing population.
A back of the envelope analysis of the sector tells us that there are very favourable government policies to encourage investment. There is demand, which is heading north. Competition is yet not fierce. Users are too many and need the services. Suppliers are too eager to cater. So it seems that it is one of the most profitable sectors in India. But then the big question why investments are not coming up. Why it is still lagging?
Infrastructure projects generally require huge investment and generally affect large no. of people while implementation. Risk increases more so when we consider that generally these are long duration projects and for getting the returns investor may have to wait for years. The very nature and structure of this sector makes it a difficult sector to enter.
There are 2 major challenges in infrastructure projects at the moment:
  1. Long term sustainable financing for these mega projects

           – It is easier to get the initial funding, but getting a sustained funding in long term is a challenge,

             which causes stoppage or delays in projects.
           – Sources of funds should be increased within the Indian economy. Currently, Banks are a major 
             source of funding. They themselves face liquidity issues in long term. Apart from Banks, other 
             financial institutions such as insurance companies should also come forward for financing.
           – Government issues infrastructure bonds for raising funds. Banks and other FIs can also look for 
             this option, though ICICI already follows this practice.
           – It is important to start generating some cash flows after some time, so as to keep the interest of 
             debtors in long term
       2. Execution Challenges
           – Land acquisition
           – Environment policies very confusing for the companies right now
           – Delays in approvals from government side

      It is critical for the success of ventures to take care of above issues and create better models for implementation, models that achieve participation and support from public also. That will be most critical factor above all.

      Otherwise years after years we will be standing on the same railways stations wondering why trains get late. And while waiting for the train we will be wondering why India lacks Infrastructure.
      – Dushyant Chaturvedi and Rishi Khanna
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      2 comments on “Infrastructure in India – An opportunity

      1. Mehul Goyal
        October 7, 2010

        >Nice zoint-vensure!Here's to hoping that certain bright individuals from reputed schools will build the future of India the way they see it should be.

      2. Dushyant Chaturvedi
        October 12, 2010

        >Issue is not about just some individuals. It is about attitude towards it. If you take CWG some would have taken it as a waste and what not. But as I see it, the roads, IGI airport and many other things which were built for that is the biggest contribution towards the nation. Next is governane structure. Good policies and implementation can Indai far of. We can assess the scope of improvement by the simple fact that Chian spnds 20% of GDP on infrastructure and we are spending only 6%.

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      This entry was posted on October 5, 2010 by in Consulting, Finance.
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