India Infrastructure Report Q1 2009

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.