India: Infrastructure - The Investment Opportunities And Potential

Last Updated: 15 October 2010
Article by Ishtiaq Ali

After sixty five years of Indian independence, India is still often referred to as a developing country and its long term growth seems to stagnate at 8%. A direct consequence of this arrested growth in the Indian economy, has been the increase in the inequality between modern, urban India and backward, rural India. If India could capitalize on its vast resources, including an integration of its rural, urban and coastal areas, India would be well placed to increase its economic growth by leaps and bounds. The reality remains that any such integration will only be possible if Indian infrastructure improves. There is a crying need for improved rail, road, port, electricity and telecommunication links.

It is no secret that the Indian infrastructure holds great potential, not least because of the dire need to bring Indian roads, ports and airports up to world standards but also because of the keen national interest in the sector. In order to increase the growth rate in infrastructure, recent annual budgets of the Indian Government supported by various State Governments further encourages investment in the sector. Private sector participation is seen as key to the development and implementation of projects across the country.

As per the national spending plan under the Eleventh Five Year Plan (2006-2007 to 2011-2012), a sum of US$ 354 billion is required to be spent in various infrastructure projects. Such projects are being implemented under Public Private Partnership (PPP) and many projects will be implemented through foreign investments. To achieve long term growth, the Government of India has set an ambitious target of increasing total investment in infrastructure from 5% of GDP in the base year of the Plan 2006-07 to 9% by the year 2011-2012.

Based on the plan, around 30% of the required investment of around Rs. 2,056,150 Crores (US $ 154 billion) is required to be invested through private capital. Such capital is expected to be invested through debt and equity by the private sector under PPP projects.

According to Mr. Pranab Mukherjee, the Indian Union Minister for Finance, India needs to develop a rupee-denominated long term bond market for funding the infrastructure sector that requires an investment of around US$ 459 to US$ 500 billion by 2012. The recent move by the government to issue tax-free infrastructure bonds and US $11 billion debt fund will help the government get about US$ 1 trillion target by 2017. Therefore, infrastructure investment in India is expected to grow dramatically under the Twelfth Five Year Plan (2012-2013 to 2016-2017).

As per public data, the cargo growth in India has been increased to the extent of 5.5% as compared to the 2009 fiscal year. The airports and roads sector have seen an increase in domestic air traffic to the extent of 22%. India has also set a target of adding 78,000 megawatt (mw) of power generation capacity over the five years ending March 2012. As on June 2010, it has added only around 30,000 megawatts.

There is little doubt that, in the face of such demands within the infrastructure sector, the Government of India is very serious in its commitment to implement infrastructure projects. A committee on infrastructure was formed under the leadership of the Prime Minister of India to review the development of such projects, namely power, road, ports, civil aviation and railways and opportunities in such sectors on a quarterly basis.

With every opportunity however, there is often a challenge to overcome. Whilst opportunities in the Indian infrastructure sector abound, there is no doubt that interested investors must take heed of legal and practical implications of venturing into this area.

LEGAL PITFALLS/ISSUES FOR CONSIDERATION

First and foremost, regulatory issues must be considered. India still has exchange controls and investments in this sector that are regulated by the Reserve Bank of India and the Foreign Investment Promotion Board. Whether an investment in the infrastructure sector qualifies for approval under the so called "Direct" route or "Approval" route depends on the sector, e.g, an investment in the road sector can be upto 100% and in telecom it is capped at 74%. The sectoral caps are determined by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.

Another important legal issue to consider is land acquisition related matters as land is the most important component for any infrastructure project. Presently there are many disputes/cases pending before various courts relating to land acquisition. The good news is that the government and courts are not averse to land acquisition per se, however given the socio-economic nature of land disputes in India, delay in land acquisition must be expected and factored into cost and time budgets. It should also be mentioned that in many projects the government itself acquires land upfront and bids the project out so that delays are avoided.

Regulatory issues play an important role for many infrastructure related projects. Over the past decade the role of regulatory authorities, government departments and judicial authorities have been well defined and encroachments into each others territories have been few and far in between. For power, telecom airports, ports and roads, regulators are delivering on expectations and are duly supported by respective government departments and the planning commission. It is important to acquaint oneself with what role each regulator is likely to play before launching into this sector.

Labour and industrial related laws play an important role in labour intensive infrastructure projects. Indian labour laws have not kept pace with India's liberalization and privatization. Trade unionism is also on the rise and thus issues must be approached in a culturally sensitive manner.

Tax issues must also be considered upfront. There is a proposal to bring the Direct Tax Code into operation in a couple of years. The said Code is more exhaustive and transparent in comparison to the extant legislation, i.e, Income Tax Act, 1961. The said Code has an enabling provision whereby the Government of India can enter into treaties with other countries for granting relief in respect of (i) income on which income tax has been paid under the said Code and under the corresponding law in force in that country or (ii) income tax chargeable under the said Code and the corresponding law in force in that country to promote mutual economic relations, trade and investment. The good news however is that tax holidays are granted for many infrastructure projects.

Another positive move has been legislation by State Governments that have been enacted specifically for infrastructure development including providing reliefs and concessions in stamp duty etc.

(e.g. Andhra Pradesh Infrastructure Development Enabling Act, 2001 by the state of Andhra Pradesh, Gujarat Infrastructure Development Board Act, 1999 by the state of Gujarat and Industrial Policy 2005 by the state of Haryana, constitution of Infrastructure Development Corporations in various other states) Governments have been aiming to remove hurdles and facilitate growth of infrastructure in India, specially in power, SEZs, roads, airports, ports etc. The Reserve Bank of India regulates foreign currency inflow and outflow into and out of India with a well defined legal frame work under Foreign Exchange Management Act, 1999 and other policy guidelines framed from time to time. Thus any investment must be carefully considered bearing in mind these exchange control regulations.

Judicial interference cannot be ruled out in policy related matters or in decisions in award of projects made by the government as the same are challenged by filing motivated public interest litigations or by unsuccessful bidders. This has the potential to cause delay in project execution as there are no special tribunals or courts to deal with infrastructure projects.

Last but not least, choosing a suitable partner in India has an important bearing on a successful partnership. The prospective partner should be law compliant and resourceful.

CONCLUSION

Outlook for investment in infrastructure in India is positive. Infrastructure development boosts the economy on a macro level. Industries like steel, cement, bitumen, commercial vehicles (trucks) also grow due to investment in infrastructure apart from the creation of employment for many. Sectors like roads, ports and rail infrastructure are the ones which have huge potential and require massive capital over the next decade or more.

Despite the minor pitfalls, investment in infrastructure is bound to give expected returns. The banking sector in India is positive in its approach for lending to the infrastructure sector backed by regulators. Other sector regulators are tweaking their policies to fit to the needs of entrepreneurs and to provide a level playing field which is an encouraging sign for future investments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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