India's Building Boom
By the end of this decade, India is expected to achieve two major milestones – it is set to become the world’s most populous country and its third largest economy.
In anticipation of this, India’s leaders are busy laying the groundwork to sustain its trajectory as an emerging superpower. In February 2023, the Bharatiya Janata Party-led central government hiked national infrastructure spending by 33% to USD 122 billion (the equivalent of double the GDP of Croatia) which will fund, among other things, thousands of kilometres of new roads. Just last month, Prime Minister Narendra Modi opened the first stage of what will be the country's longest expressway, linking the administrative capital Delhi and the country’s financial centre Mumbai. India will also add another 7,000 km of train track to what is already the world’s largest rail network.
Despite this, India’s infrastructure is far behind what is needed to keep up with its ambitious growth targets, and Delhi lacks the necessary funds to finance all the country’s required projects. To fill this gap, India has opened its doors to private capital with the promise of long-term returns through tariffs and toll charges. While international investors are showing strong interest in these opportunities, they should be mindful of the risks involved.
Roadblocks Ahead
As India advances on the world stage, domestic political, social and business challenges weigh heavy on its progress. Below we cover some of the key risks for investors in India’s infrastructure sector.
Corruption. Investors should understand the financial crime risks throughout a project’s lifecycle and put in place relevant safeguards. For example, obtaining government permits to begin a project is notoriously time consuming and complex which can lead to developers making under-the-counter cash payments to government bureaucrats to expedite the process, or risk costly delays. Officials may also, for example, solicit smaller day-to-day payments to process invoices and other paperwork. Understanding how, why and when these payments are sought, as well as their likely value and frequency, is key to preventing them.
Community issues. The process of acquiring land in India is beset with problems. In rural areas – where many infrastructure projects pass through – land is often held by a fragmented patchwork of families and communities. Local officials, village heads and companies often aggregate these land parcels, with some smaller landowners claiming they have been misled or bribed in the process. When disputes occur, families have been forcibly cleared from sites. Similarly, communities near major developments have complained of environmental damage, noise pollution and a lack of access to promised jobs. Such issues can lead to lengthy lawsuits and reputationally damaging coverage from local activists and journalists.
Economic uncertainty. Restrictions on the movement of traffic during the COVID-19 pandemic, haphazard moratoriums by the government on collecting tolls and macro-economic headwinds have all brought financial challenges to India’s infrastructure market. The key is to filter potentially undervalued assets ripe for investment from those with systemic, and potentially unsolvable, issues. Engrained financial challenges can go hand-in-hand with fraud, financial mismanagement and related legal and law enforcement scrutiny.
Politics. Investors should consider the Indian political landscape to ensure that any involvement in, say, an interstate expressway does not put them in the middle of feuding political parties. Narendra Modi and the ruling BJP, for instance, have faced difficulties in negotiating projects in states led by political rivals, such as Tamil Nadu – India’s second wealthiest state. Politically connected businesspeople can rally communities to oppose their rivals’ projects leading to disruption and further delays.
Navigating the Potholes
While at times complex and daunting, India offers opportunities for those who can navigate the risks that come with its infrastructure sector.
There is no one-size-fits-all solution to balancing these risks. Some decide to invest in existing projects through operate-transfer deals; others elect for greenfield opportunities, partnering with local developers who offer access to and a nuanced understanding of the local market. Neither approach is fool proof and both present their own set of challenges.