The coming investment cliff
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
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