With Indian Prime Minister Narendra Modi’s election came the expectation he would cut the red tape strangling India’s many billion dollars worth of infrastructure projects. Now the “burden of expectations” is a heavy weight on the Modi Government with little relief in sight. One year back, Indian Prime Minister Narendra Modi rode into office on the back of a huge electoral win for his Bharatiya Janata Party and amidst even more outsized expectations of what he would do. Modi pledged to break through bureaucratic red tape, usher in a new era of domestic and foreign investment and super-charge the country’s sputtering economy.
Prime Minister Narendra Modi
Prime Minister Narendra Modi
Nowhere were hopes higher than in infrastructure. Bloomberg at the time estimated that state-level bureaucrats alone were holding up a staggering $230 billion worth of projects. At least half of those were infrastructure-related, according to another survey. Just after Modi came to power, Indian companies that specialized in infrastructure and construction saw their stocks soar on the belief that the new government would unleash development. When it comes to moving goods and powering factories, India suffers from often-abysmal conditions. The previous finance minister, P Chidambaram, warned the World Bank in 2013 there was a $1 trillion “infrastructure deficit” that needed to be plugged in five years if India were to successfully shimmy up the global economic pole. What’s more, India needed to rely on private-sector investment for at least half that sum, the country’s national planning commission estimated. Public private partnership, or PPP, was the watchword. The hoped-for surge in investments never came. “Investors remain skeptical,” said Dhiraj Nayyar, a New Delhi-based economist. “Investment hasn’t picked up.” The country once again is grappling with bleak infrastructure prospects. “Power plants, highways, railways and seaports, meant to be the engines of India’s economic growth, are now its Achilles heel,” said a recent report in the country’s leading magazine, India Today. Evidence of stalled or stillborn projects litters the landscape. Private investment has been so paltry that the government changed tack. In a late-February budget speech, Finance Minister Arun Jaitley pledged the government will spend an additional 700 billion rupees ($11.4 billion) in infrastructure this year, betting that private investment will follow. Among other measures, the government will create a new National Investment in Infrastructure Fund and seed it with an initial equivalent of $3.25 billion. That fund, in turn, will invest in public infrastructure finance companies. It’s questionable whether that kind of approach, can jumpstart necessary investment. Promises to Keep There are many explanations as to what happened. Or, more properly, didn’t happen. While it’s unfair to simply blame the government for not producing, it must bear some responsibility, especially as Modi was the one who promised he would make sure the infrastructure improved dramatically. “The burden of expectations is getting larger every day,” said Nayyar. While it’s possible the Modi administration can turn this around, there are many reasons why India will have a tough time attracting infrastructure investment. Here are some: The domestic private sector is tapped out. “A number of companies involved in infrastructure are massively leveraged,” said one Indian fund manager. “They’re already spread so thin and they don’t have the balance sheets to do more. Nothing is happening.” Projects from the days of the previous government experienced delays that stretched into years and, as Nayyar characterized it, “those guys are trying to get out of that hole. They don’t have the capabilities to make more investments.” Add to that the plight of domestic banks. They are over-stretched themselves and can’t – or won’t make additional infrastructure loans. Stock market investors were extremely bullish on prospects for big infrastructure companies when the Modi government took office. Those days are gone. Reliance Infrastructure, for example, has lost almost half its market capitalization in the year since. Foreign investors will wait and see. At a recent panel on the subject of infrastructure investment, Rahul Mody, managing director of Ambit Corporate Finance, pointed out that cash-rich, long-term investors such as sovereign wealth funds and pension funds want projects that are up-and-running and have an operational track record. They’re just not interested in placing a bet on construction, especially given India’s poor record of timeliness. They’re wary. Bureaucracy Alive and Well The bureaucracy is alive and well. India is a federal system and the country’s 29 states retain significant power. That almost inevitably means that state and sometimes local-level bureaucrats can hold up projects almost indefinitely through permitting and conflicting regulations. Many states remain leery of private-investment; a few are ideologically opposed. What’s more, several regional political parties are coalition partners with the BJP so the Modi government is reluctant to take them on if they oppose a particular project. And bloated and inefficient public companies won’t go down without a fight. Government entities control many infrastructure-related operations, either at the state or national level. While the Modi government talks about de-nationalizing, that’s easier said than done. Unions are strong. Workers rightly worry about job loss if privatization takes place. State electricity boards, for example, control power distribution. Most are bankrupt after decades of subsidizing rates. Transmission losses top 30%. When he was governor of Gujarat state, Modi gained a reputation for breaking through bureaucratic logjams. He privatized the Gujarat electricity board, but he can’t do it to other states as prime minister. Rail presents another major infrastructure hurdle. The world’s fourth largest rail network is one of the most antiquated as well. The Modi government announced a blueprint for modernization, promising $137 billion over five years, $16 billion allocated for this coming fiscal year. Where it will get the funds is another matter. Last year, the government opened certain rail projects such as high-speed rail to 100% foreign ownership, although it’s hard to fathom commercial ventures will even consider such an undertaking. (Most infrastructure projects require Indian participation, often as a majority stakeholder.) Inefficient doesn’t begin to describe the railroads. Government-run Indian Railways is the country’s largest single employer and a bureaucratic kingdom unto itself. Just getting land can take forever. It’s common for land acquisition necessary for big infrastructure projects to be a lengthy and corruption-riddled affair. The Modi government is sponsoring a bill that would make these purchases less burdensome, doing away with such onerous requirements as a “social impact” assessment or requiring that 80% of landowners agree to the project before it can go through. While the BJP has the numbers to carry the bill in the lower house of parliament, the upper house is a different story. The opposition Congress Party opposes the legislation, arguing it is anti-farmer and anti-poor. Highway Projects Saying it will happen isn’t enough. In late April, the cabinet cleared three major highway projects that will cost a total of more than $800 million. All depend on the public private partnership, the same cost-sharing arrangement the previous government pushed. Companies must recover costs through toll charges. No word on what companies – if any—might be interested. For three decades, the Southern state of Kerala has dithered over a major seaport called Vizhinjam. In February, bids were due and the state government was embarrassed to discover no one tendered. It extended the period another two months. In late April, the state government announced Gujarat-based Adani Ports was the lone bidder for the approximately $1 billion project.