India‘s ambitious Make In India programme, to boost local manufacturing, coupled with the rapidly growing retail sector and exponentially growing demand for logistics services are inevitably placing infrastructure improvements at the top of priority lists for successful economic development. Infrastructure inefficiency remains India’s main issue that the country is feverishly struggling to overcome. India has made solid efforts to start filling the infrastructure gap for the past few years. However, while the targets set are heading India in the right direction, India‘s infrastructure vision and ability to execute it remain a challenge for the country.
Nevertheless, India's improved competitiveness index, structural efforts to improve and involve private infrastructure financing, coupled with a restructured taxation system will hopefully help Indiato fill the gap. As a result, India is set to become the world’s third largest construction market by 2025. With, construction industry the most important user of logistics services, investment in the country's infrastructure will continue to present a lurking potential for logistics providers.
This piece is part of the global briefing Key Future Trends in the Global Logistics Industry for 2025, which analyses the prospects of the global logistics industry.
Improvements competitiveness index
The infrastructure gap was historically among the weaker pillars, dragging India's competitiveness compared to its Asian peers. According to the global competitiveness index, for 2015-2016, India isranked 55th out of about 140 countries. The position remains much lower compared to China, Thailand and Indonesia.
India's infrastructure score deteriorated until 2014, as escalating governance scandals and apparently uncontrollable inefficiencies saw businesses lose trust in government and public administration. However, the negative trend was reversed after 2014. Thanks to improved efforts made in infrastructure expansion and the rebound in 2015 and 2016, India’s overall competitiveness score in this period increased by 0.19 points. The two most significant improvements were in infrastructure and in health and primary education pillars, which indicated that the efforts of the recent years have begun to show results.
Successful execution undermines ambitious targets
While the government is setting high targets and is showing strong efforts to make sure India iscatching up with its Asian counterparts, execution capability remains the biggest challenge for successful implementation of India's infrastructure plan. While targets are truly ambitious and the construction growth is leaping in double-digits, the goals are not always being met. As of 1 October 2016, 1,174 projects were awarded by the Transportation Ministry. 37% of these projects were related to road and transportation and 30% to railway infrastructure development. The government also awarded 49 port projects with an investment of USD1.3 trillion in 2016, which will result in a capacity addition of 104 million tonnes. Highway construction reached an impressive 8,144km in 2016; a 33% increase from a year before.
The rate of construction of national highways during the last two financial years, 2015 and 2016, was 16km a day and 22km per day, respectively, which was behind the target of 41km a day. The approval of new highways increased the total to 16,031km, representing 60% growth compared to 2015, yet 45% less than what was set as a target for National Highways Authority. A similar situation was observed in construction of roads in rural areas, where 72% of 12,203km was executed in 2016. Moreover, in April 2017 Prime Minister Narendra Modi criticised the Indian states’ lack of efficiency with capital expenditure on infrastructure. It was noted that while there was a 40% increase in funding allocation to states, between 2015 and 2016, the share of states’ budgets tied to central schemes actually declined from 40% to 25%.
Construction Turnover Growth 2015-2025 in TOP Countries
A search for creative private financing solutions
It would appear that India still encounters difficulties in obtaining the means to eliminate obstacles for expansion. Weak public finances is of course one of the reasons. To bridge the infrastructure gap, the Indian government requires an estimated USD1.15 trillion in infrastructure investments over the next 10 years. However, a heavy debt burden and a large fiscal deficit limits India‘s ability to spend more. Moreover, legal and bureaucratic drawbacks, have crippled India‘s efforts to encourage greater private sector involvement in infrastructure; up until now, public/private partnerships for roads, have not been entirely successful.
India's government is taking steps to be more flexible in a bid to attract private and foreign investors. For example, as traffic density is high and expected return rates are guaranteed, India isplanning to monetise 105 highway projects for about USD22.6 billion in the coming years as part of a new financing model. National High Authority of India's (NHAI) have also issued first rupee-denominated bonds. To enhance infrastructure financing in the county, the National Investment and Infrastructure Fund (NIIF) was created with the main objective to optimise financing of infrastructuredevelopment in commercially viable projects. What is more, India's infrastructure industry isattracting significant interest from international investors. FDI for Construction-Development projects like development of towns, construction of residential or commercial premises, and infrastructurelike roads or bridges, all have no limits in FDI and 100% FDI involvement is permitted.
Another positive factor that we believe will attract more investments in the country is the proposed uniform goods and service tax (GST) in India, which aims to remove the inefficiencies created by different layers of taxes across states. The unified taxation system can significantly benefit manufacturing competiveness with logistics and manufacturing among the biggest beneficiaries. The introduction of GST will also ease tax-related complexities in the construction industry, which should boost activity as well.