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“Huge Upgrade” to India’s Roads

 We have an ongoing commentary on India, a country with almost unlimited potential but also with a LOT of problems that have to be resolved first.  Among emerging markets, we are attracted to India primarily for:

1. Its sheer size
2. Its orientation towards domestic consumption vs. exports (this makes the country less susceptible to contagion from global economic crises and weak demand from Western importing countries)
3. The country’s youth — with such a young population, Indian aggregate demand will only grow.

But, as we said, India is not without its problems, which include vast rural poverty and illiteracy, an antiquated caste system that still seems to linger on into the modern age, stifling governmental bureaucracy, a vast educational and wealth divide between the “haves” and “have nots,” and — the focus of this post — truly horrid infrastructure.  

The odd thing is, most of these complaints, including that of poor infrastructure, have been heard since the early days of the British colonial period!

Though only time will tell, it appears that India is finally attempting to do something about its infrastructure, which is already limiting the country’s economic growth.  As the Wall Street Journal reported today (”India’s Road Builder Plans “Huge” Upgrade“):

India’s highways minister said he plans “a quantum jump” in road building in the coming year and this month begins a world tour to try to revive foreign interest in investing in Indian infrastructure.

“This is a paradigm shift, not merely an increase in spending,” Kamal Nath, minister of road transport and highways, said of his building plans.  India has been trying to make $500 billion in upgrades to its crumbling roads, ports and airports — with about one-third of the investment coming from the private sector.

$500 billion will not come close to meeting India’s infrastructure needs.  Much more will be needed if India is to even START bridging the gap between its infrastructure and that of its emerging market rival China.  This means that India needs private investment — and a lot of it.  

The problem, according to Goldman Sachs economist Tushar Poddar, is that India’s infrastructure projects, including highways, remain too high risk with too low an expected return to be attractive to most foreign investors. “The investment opportunity is not great by any stretch of the imagination,” he said.We remain bullish on the Indian consumer, but we realize that reform and investment will be needed for this potential to be realized.   This is something we intend to follow in the years ahead.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy