Abstract
The global financial malaise has had a significant feed-through effect to
India. According to a report in
late October in India' s daily Business
Standard, the interest rates for project financing operations rose to
14%
-16% from 9%-11% before the summer. This jeopardises the financial viability
of highway projects
worth over US$2bn, which in turn represent
approximately 40% of projects that have been approved by
the National
Highways Authority. This of course will delay the realisation of the
government' s ambitions
to fast track highway construction through the
National Highway Development Programme, the first
phase - the
multi-billion dollar ' Golden Quadrilateral' programme.
India' s
infrastructure sector has registered strong growth in recent years, with 2006
and 2007 witnessing
real construction sector growth of 20% and 14% per
annum respectively, thanks to strong activity by both
private and public
sources. This development has been spurred by a virtuous cycle of strong
economic
growth, rising government revenues and foreign investment, which
has begun to pull the under-developed
infrastructure sector up by its
bootstraps. However, this progress is now threatened by the global
financial
crisis and economic downturn, which has seen foreign investment
flows to the country reverse. Exports
are also under pressure, undermining
economic growth and government revenues. As such, future funding
for
infrastructure from both the public sector and the private sector is very much
threatened.
The government is attempting to find ways to underpin the
infrastructure sector, and the economy as a
whole. One proposal is for the
government to subsidise loans by effectively setting a ceiling lending
rate
and absorbing the costs of the higher rates. But the government' s
ability to fund such projects has its
limits, given its own significant
(and growing) fiscal constraints. In this context, rating agency Fitch has
expressed considerable concerns about the outlook for the infrastructure
sector, especially given that
many key projects require imminent
refunding. This pending refinancing and debt re-structuring ' could
not
have come at a worse time' , according to the rating agency.
On the plus
side, multilateral support is significant. As reported in December 2008, India
was granted a
new US$3bn loan from the World Bank for infrastructure
spending. For the time being, we have revised
down our forecast for real
growth in India' s construction sector to 5.7% in 2009, from a previous
forecast
of over 10%. We estimate real construction sector growth in 2008
to have been just under 9%, compared
to just over 14% in 2007. For 2010,
we currently forecast that real construction sector growth will
rebound to
9%.
Risks to our forecasts are very much to the downside. Much depends on
how prolonged the recession in
developed markets lasts, and whether the
financial crisis will resurface. Our core global scenario
envisages a
recovery in most key markets in 2010, but the outlook is extremely uncertain
and this
scenario is by no means guaranteed. Indeed, the US (and other
economies) could remain in recession in
2010, further starving India of
export revenues and capital to finance its infrastructure development,
just
at a time when major projects are due to be refinanced. As such,
there is a particularly severe downside
risk to our 2010 infrastructure
forecasts.
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