At the end of August 2014, India’s central bank, the Reserve Bank of India, released its annual report, a summary of the third largest Asian economy’s macroeconomic priorities and dilemmas. Hidden amid the hard data and policy recommendations was the observation: “The Indian economy stands at crossroads that could take it from a slow bumpy lane to a faster highway.”

Such analogies flew thick and fast in India in 2014. Sluggish governmental decision making, corruption scandals and reams of red tape, combined with the continuing effects of the global financial crisis, confined India to the slow lane. Economic growth halved from 10.3% in 2010 to 5% in 2013.

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Moreover, taken at face value, the Reserve Bank of India’s highway quip described a real problem in India, where rapid industrialisation and unbridled population growth have placed tremendous stress on a timeworn infrastructure system. In 2013, analysts at EY suggested that infrastructure bottlenecks prune India’s GDP by at least 2% annually as businesses cope with daily power blowouts and transportation chaos.

But the election of pro-business politician Narendra Modi as prime minister in May 2014 propelled investor expectations to an all-time high. Mr Modi’s reformist decision making, it was hoped, would set India on track to double-digit growth again.

Slow beginning

At first glance, the government seems to have taken appeals for better infrastructure to heart. Overall state funding on infrastructure was increased by $11bn in the 2015 budget, with separate allocations made for roads, railway, ports, power and other essential projects.

In addition to high-profile projects begun over the past five years – including a national highway system connecting the country's four largest cities, modern airports and metro systems in New Delhi, Bangalore, Mumbai and Hyderabad – Mr Modi unveiled plans to build 8500 kilometres of highways, set up high-speed rail links between major cities and upgrade major airports.

While the government clearly prioritises infrastructure development, Arvind Mahajan, who leads the infrastructure and government services practice at KPMG India, maintains this is just the start. “It is commonly said that investment worth $1000bn is needed to upgrade India’s infrastructure so that it can support the expanding manufacturing and service industries. That figure is now outdated,” he says. Perhaps more significantly, more than 50% of this investment would have to come from the private sector and a significant proportion of that from foreign investors, adds Mr Mahajan.

Lifting restrictions

In an attempt to accelerate infrastructure modernisation, the Indian cabinet voted last year to lift restrictions on FDI. It permitted 100% FDI for land transport support services such as handling cargo, the construction and maintenance of roads, bridges and highways, and for ports.

Significantly, it also opened up the cash-strapped Indian railway system to 100% FDI. India’s railways, the world’s third largest train system, carry 23 million passengers and 2.65 million tonnes of freight on 19,000 trains each day. But with the bulk of its revenue spent on operational costs, little is left to modernise the creaking infrastructure. With the help of FDI in public-private partnerships (PPPs), the Indian government is hoping to upgrade existing stations and embark on new projects, such as high-speed train systems, suburban corridors and dedicated freight lines.

However, Shilan Shah, an economist at consultancy Capital Economics, points out that the relaxation of FDI permissions has not yet translated to higher levels of investment. “We may see an uptick in a few months but the general feeling is that the lifting of restrictions alone will not be sufficient. There needs to be reform more generally, particularly in land acquisition,” he says.

India’s stringent land laws cost the country's economy billions of dollars in potential investment as big projects such as dams and roads get mired in lengthy, arduous land acquisition processes. A new land acquisition bill, introduced by the previous parliament, will allow companies to quickly acquire large parcels of land for certain categories of projects. But the bill has been challenged on humanitarian grounds by activists and no consensus has been reached in parliament.

Historical inefficiencies

Regulatory inefficiencies are a common complaint from foreign investors hoping to benefit from India’s substantial market. While infrastructure was opened to private investment during a period of economic liberalisation in the early 1990s, in the 24 years since only about $94m has been invested in the country's transport sector by private investors, according to the World Bank, and most of this has been via PPPs.

Neeraj Sharma, a partner at auditing firm Walker Chandiok & Co, says that while there were great expectations for PPP projects in Indian infrastructure when the first few were announced, they have not been very successful. Projects have often failed to get off the ground or have stalled indefinitely. The World Bank estimates that between 1990 and 2013, 5% of infrastructure projects with private participation were cancelled.

Mr Sharma blames this on a tough regulatory environment where projects often take two to three years just to get government approval. “There is a lack of co-operation between different government bodies, especially when projects stretch across multiple states. There is also a lack of trust among government officials of the private sector, which leads to conflicts and further delays.”

Others reiterate this point about competition and distrust while explaining the failure to build better highways. Currently the national highways, with a total length of 70,934 kilometres, constitute about 2% of the entire road network in India, yet they carry 40% of the total road traffic. Two-thirds of India’s freight travels by road. 

Traffic jams, long waits and laborious paperwork add to the cost of doing business in India and remain a significant impediment to Mr Modi’s 'Make in India' campaign, aimed at reviving India’s languishing manufacturing industry. But government endeavours to collaborate with the private sector on road building have largely failed.

Dhiraj Mathur, partner and executive director of PwC India’s tax and regulatory services practice, explains that the due diligence on national highway projects was often carelessly conducted. “Recurring disagreements between the regulators and operators of these roads on the number of vehicles expected to be passing through and the toll to be collected meant that these projects were indefinitely delayed,” he says.

Recovering economy

Yet analysts and businessmen in India are optimistic about upcoming opportunities. According to Mr Mahajan, infrastructure plans suffered a setback when the global economic crisis hit. “The cost of projects increased and the toll issue created more conflicts because, especially in India, tolls are very sensitive to income. But now the economy is recovering,” he says.

Referring to the investment by French utility GDF Suez in a power plant in the Indian state of Andhra Pradesh, Mr Mahajan says: “More projects are being suggested on an annuity basis, so that they can be paid off over a period of 50 years and are less sensitive to upheaval in the larger economy.”

Several Spanish companies, including Isolux Corsán, have received clearances from the government to invest in India’s roads. Others from Malaysia and China are evaluating or have already invested in the national highway project.

Another prospective project for foreign investors is the plan to build 100 smart cities across the country, requiring the help of companies specialising in waste management, transportation, power and IT infrastructure.

Mr Mathur says: “The government is still debating what exactly the smart cities will involve but it is committed to the project and to improving India’s infrastructure. Within the year, we should have a better idea and then foreign investment should flow in.”