Planning Commission’s XIIth Plan projection of $1tn infra investment relies on traditional sectors like oil & gas, power, roads—but old horses can only take us so far
Sanjeev Prasad, Akhilesh Tilotia & Sunita Baldawa
We believe India may have to approach the next investment cycle differently with respect to (1) the type of projects, (2) financing of projects and (3) institutional frameworks for investment. The ‘traditional’ sectors of power, roads and telecom may not provide the necessary impetus to the investment cycle. India will require ‘new’ sectors to lead the next investment cycle.
We see a potential decline in investment after the next 18-24 months unless the Indian government can conceptualise and award new investment projects quickly. Ongoing capex is still reasonably strong and reflects investments in projects that had been conceived a few years ago and in which construction had commenced over the past 1-3 years. We highlight the following points to support our somewhat contentious view.
RBI’s data on project sanctions by banks suggest a sharp decline in capex. RBI’s data on project costs for projects that received financial assistance from banks and financial institutions show a sharp decline in financial assistance in FY2012 compared with FY2010-11 figures (see Graph 1). This would suggest a slowdown in capex after 1-2 years when ongoing projects (that received financial sanctions over FY2008-11) are completed in the next 24-36 months. In our view, the Planning Commission’s projections of $1 trillion of investment in the infrastructure segment during the Twelfth Five Year Plan (FY2013-17) appear quite optimistic. We view the three-fold increase in investment in the telecom sector and two-fold increase in the power sector compared to the Eleventh Five Year Plan period (FY2008-12) as difficult to achieve, given a likely slowdown in capex in both sectors.
Telecom capex was spurred in FY2009-11 by the start of operations by new players subsequent to the granting of new 2G licenses and expansion by incumbent operators into new markets (semi-urban and rural). New subscriber additions have slowed subsequently with penetration reaching reasonably high levels (74.7% in August 2012).
In the power sector, India may achieve its Twelfth Plan target of 88 GW though the bigger challenge may be to ensure viable operations of recently commissioned and forthcoming power plants given lack of adequate fuel (coal or gas). The Twelfth Plan figure of $322 billion appears high in the context of 88 GW