India has an ambitious goal to spend $1 trillion on infrastructure over the next five years, but the country's high interest rates, growing public debt and ongoing policy issues threaten to put the brakes on foreign investments.
India's gross domestic product grew by 6.9% during its 2011-12 fiscal year ending in March after achieving 8.4% growth in 2010-11 and 8.0% growth in 2009-10, according to government statistics. India's GDP is expected to grow by just 5.7% in the next year and 6.9% the following year, forecasts HSBC, which downgraded its estimates earlier this month.
Though India's growth rate still seems high compared to other countries, the slowdown has decreased confidence in the construction sector. Construction professionals partly blame policy paralysis as major contracts recently have been held up in land-acquisition and environmental reviews that were not completed before contractors were selected. Some projects, such as the Delhi airport metro, have suffered from safety concerns. High interest rates, debt and delay risks also have discouraged foreign-owned firms from investing in public-private partnerships (PPPs), which over the past decade boosted the infrastructure sector in India.
Speaking at the India Construction Festival held on Sept. 12-15 in New Delhi, A.K. Upadhyay, India's road and highway secretary, admitted that "investors are stretched." After lackluster PPP bids came in earlier this year, the National Highways Authority of India (NHAI) is turning to engineer-procure-construct (EPC) cash contracts to deliver its next round of projects, he added.
Within the next month, NHAI plans to release around 40 new EPC highway projects totaling 2,485 miles and worth approximately $3 billion. According to one government official, who asked not to be identified in this story because he is not authorized to speak on the topic, corruption, among other factors, has led the government to review its policies on concessions.
"The government is not shying away from PPP," explained the source. "Privatization is being encouraged but with a caution: We are not opening up with a free hand—we are opening up gradually."
Meanwhile, on Sept. 14, India's national policymakers lowered subsidies on diesel fuel and relaxed regulations on foreign retail ownership, tactics meant to reduce public debt and boost outside investment. Interest rates in India average between 10% and 14%, according to attendees, who were encouraged that the actions might lead to cheaper loan terms.
India increasingly relies on newer roads to untangle traffic and enable its national economic engine. For example, the country last month opened a $2.4-billion, 103-mile highway between New Delhi and Agra, site of the Taj Mahal. A boon to tourism, the six-lane Yamuna Expressway reduces round-trip travel times to under four hours from at least six.
Increasing diesel taxes will put more cash in the government's highway coffers while encouraging policymakers to lower interest rates.
"I believe the crack of dawn is here," said Pratap Padode, editor-in-chief and managing director of ASAPP Media Pvt. Ltd., speaking of the new policy direction at the construction summit. Organized by ASAPP, the meeting drew about 500 construction professionals from around the world.
"I'll keep my fingers crossed," Vikram Sharma, managing director and chief executive officer of Kobelco Construction Equipment Pvt. Ltd., told ENR. "Maybe a year from now we will be talking about something else. We all know that there is tremendous opportunity."
During its current five-year plan, India hopes to build between 3,100 and 3,700 miles of highways per year through 2017. Last year, India contracted to build 4,970 miles of road, all of which were under PPP contracts. However, two-thirds of those projects remain unfinished and tied up in government review.
Government officials were hopeful that the current round of EPC contracts will help shake loose private investment again.
"We believe that once these projects are rolled out, then you will have some infusion of cash into the system," said Upadhyay, the highway secretary. "And that will give a big boost to the industry."