India requires $2.2 trillion in infrastructure investment to become $7 trillion economy by 2030: Knight Frank India

India requires $2.2 trillion in infrastructure investment to become $7 trillion economy by 2030: Knight Frank India

 

• Investment opportunity of US$ 324 Bn of private capital in Indian infrastructure development
• New investment avenues for private capital in sectors like renewable energy, data centres, roads and highway

Mumbai, December 12, 2024: Knight Frank, India's leading real estate consultancy, in its latest report India Infrastructure: Reviving Private Investments cited that an estimated investment of USD 2.2 trillion (tn) into infrastructure development is imperative to support India's GDP size to expand to USD 7 tn by 2030. To achieve an economic size of USD 7tn by 2030, India's economy is required to grow at a CAGR of 10.1% between 2024-2030.  

The central and state governments' heavy reliance on infrastructure investments could strain fiscal deficit targets. Private participation in infrastructure development in India has decreased significantly, from USD 160 bn (46.4% of total investments) between 2009-13 to USD 39.2 bn (7.2%) between 2019-23. This shift has led to a larger share of government-led investments, potentially widening the fiscal deficit. Maintaining a controlled fiscal deficit is crucial for long-term economic stability and effective debt management. The central government aims to reduce its gross fiscal deficit to below 4.5% by 2025. Increasing private sector participation in infrastructure development would help balance fiscal deficit targets. By increasing the private participation in infrastructure development, the government can redirect the expenditure towards other key segments of economic growth such as – public healthcare, strengthening human capital, debt payments, etc which will support long term growth of the economy.

The investment opportunity for private participation in infrastructure development in India ranges between USD 103.2 bn to USD 324 bn. As explained in the below scenarios.

Scenario 1: At an existing investment share composition of Centre (51.2%), State (44.1%), Private (4.7%), the estimated gross fiscal deficit in 2030 will still be 4.7%, which is above the government's defined fiscal deficit threshold. The private participation in infrastructure development in India amounts to USD 103.2 bn until 2030. However, the share of private investment in this composition is negligible and needs to expand.

Scenario 2: An 10% top up in private investments in infrastructure to 14.7% brings the potential opportunity amount to USD 324 bn, an annual average of USD 54 bn until 2030. This will potentially support the government to maintain healthy fiscal balances. While this volume may seem formidable, similar large-scale investments are already being undertaken in peer economies. It is still lesser than an annual average of private investments received by China prior to the COVID-19 pandemic, wherein the annual average of private investments in infrastructure projects amounted to USD 118 bn.

On a sector-wise analysis, renewable energy, data centres, roads and highways, warehousing and logistics have significant potential to attract private investments. However, supported by a rapid urbanisation and shifting demographics, sectors such as – urban mass transit, airports, power distribution etc hold massive investment opportunities. 

 

Shifting shares of investments in infrastructure under two varied scenarios and its impact on the central government's gross fiscal deficit

Scenario		Composition		Share		Investment Opportunity for Private Participation (USD bn)
Scenario 1		Existing Composition		Centre (51.2%), state (44.1%), Private (4.7%)		103
Scenario 2		10% increase in private investments		Centre (46.2%), states (39.1%), Private (14.7%)		323.5

Source: Knight Frank Research

Shishir Baijal, Chairman and Managing Director, Knight Frank India said, "Strong impetus on infrastructural development and increased budgetary allocation by the government has led to India's ranking in the Logistics Performance Index (LPI) improving from 54 in 2014 to 38 in 2023. In the last few years, there has been an aggressive push by the policy makers to significantly expand India's infrastructure. This widens the scope for private players to actively participate in India's infrastructure development and economic growth. However, there are certain bottlenecks limiting this scope. Hence, radical measures are required to induce a higher allocation of private investments towards infrastructure development to balance fiscal prudence to the government's budget and bring inclusive and long term sustainable economic growth in the country."

 

Cross Country Comparison of India's Physical Infrastructure with China

In the report Knight Frank has compared India's 2023 infrastructure to China's 2007, when both had similar GDP sizes of ~ USD 3.7 tn. In 2023, India leads in areas like railway electrification, international air passengers, and national highways but lags in electricity generation, consumption, expressways, and high-speed rails when compared to China 2007. China's significant infrastructure investments since the early 2000s correlate with its high average GDP growth rate of 10.2% between 2000-10. For India to achieve its ambitious economic growth targets, massive infrastructure investments are necessary.

Infrastructure availability in India 2023 ahead of China 2007 in some and lags in others

 

Need to deepen urban mass transport infrastructure for sustainable cities

Currently, India is witnessing one of the fastest paces of urbanisation. Between 2013-23, urban population in India grew by 14% compared to 8.4% globally (Source: World Bank). India's urban population grew by 14% between 2013-23, compared to 8.4% globally, leading to congestion and pollution. This growth necessitates expanding mass transport infrastructure like metro rails, high-speed rails, and electric buses. A robust public transport network with last-mile connectivity can reduce carbon emissions and help achieve India's net zero target by 2070. Currently, the top 8 cities have 848 km of operational metro, but the proportion of metro rail to metropolitan area is 0.03, below the Asia average of 0.25. While Delhi has metro connectivity on par with global standards, other cities like Gurgaon, Bengaluru, and Hyderabad etc need similar development.

  

Challenges for private participation in infrastructure investments in India

Currently, the private sector participation in infrastructure development in India is inadequate. Between 2009-13, the PPP models elevated the interest of private participants in infrastructure development in India. However, post that period, the private players have been facing some key challenges which has resulted in their tepid participation. Challenges such as project delays, cost overruns and clearance issues deter private investment, increasing reliance on government budgets and potentially leading to fiscal stress.

Delays in project execution, leading to significant cost overruns, have emerged as a major obstacle to private sector participation, particularly in the road infrastructure sector. Such delays escalate project costs and diminish the expected returns on investment for private developers and investors. Notably, the infrastructure sector bears the brunt of these delays, accounting for a staggering 95% of all project delays across industries.

 

Revenue risk and the underperformance of the project has been cited as another key issue. Some of the factors. This is specific in projects which involve traffic such as – roads, urban transport, airports etc. Revenue underperformance of Indian metros (except Delhi and Mumbai) in comparison to their DPRs underscores this issue.

Financing challenges: Infrastructure projects require long-term financing, typically provided by banks and NBFCs. However, due to long gestation periods, high risks, and stringent lending norms, banks have limited appetite for such credit. The complexity of these projects, coupled with risks like delays, cost overruns, and regulatory changes, increases the likelihood of non-performing assets (NPAs) and creates an asset-liability mismatch for banks. As a result, despite an aggressive push for infrastructure, lending growth from commercial banks and NBFCs has remained low, with a CAGR of just 2.9% between FY 2019-23.

Limited funding mechanisms: Funding for infrastructure in India relies on FDI, private equity, ECBs and emerging mechanisms like InvITs. Despite allowing 100% FDI in key sectors, FDI inflows have been low, totalling USD 84 billion from FY 2014-2024, far behind China's USD 164 billion in 2023. The absence of adequate foreign investment driven by long project timelines and delayed returns has led the government to explore asset monetization and disinvestment. Meanwhile private equity, debt funding and ECBs remain subdued and InvITs, though growing, have yet to gain significant traction.

Rajeev Vijay, Executive Director - Government and Infrastructure Advisory, Knight Frank India said, "India stands at the cusp of a transformative era in infrastructure development. By harnessing the power of private investment, we can accelerate our journey towards achieving our ambitious economic growth targets. The synergy between public and private sectors will not only enhance our infrastructure but also drive sustainable and inclusive growth of the country. With robust infrastructure as the backbone, we can unlock new opportunities, and boost productivity. It is recommended that strategic policies and incentives be introduced to attract and encourage private sector participation, ensuring a stronger collaboration."

Recommendations to revive private participation

Some of the key challenges private developers and investors face include – cost overruns due to delay in project approvals, limited access to finance, and risks associated with revenue generations. Hence, India needs to adopt rigorous policy measures, which can reduce these risks such that it invites active private participation. In this report, some of the key recommendations include:

a.  Speedy implementation of the projects through provision of fast-track approvals and clear timelines, strengthening the coordination between government agencies, effective land acquisition process, and adoption of technology for efficient project management. Countries such as Singapore, have these active policies due to which most approvals are completed within 3-6 months for small scale projects and about a year for large scale projects.

b.  Provision of sovereign guarantees: The associated risks in infrastructure projects can be provided through government guarantees which can protect investors against political, regulatory, revenue, and demand risks, ensuring a minimum return on their investments. Some measures are active in peer economies such as Indonesia, South Korea etc. Provision of guarantees in Airports, MRTS, expressways etc has enabled active private participation under PPP model in these countries.

c.   Deepening long term capital for infrastructure projects: Currently, domestic lending institutions which includes commercial banks and NBFCs are as well the key sources of financing infrastructure projects in India. As of FY 2022-23, the outstanding loan of banks and NBFCs in India towards the infrastructure sector stood at Rs 12 trn (USD 150 bn), having grown at a CAGR of 5.1% over the decade. In the decade between FY 2013-14 to FY 2022-23, merely USD 16 bn of financing has been raised by SCB and NBFCs in India, which is just 1.8% of the total investments (public + private) into infrastructure development. Infrastructure focused financing institutions such as NaBFID, IIFCL, NIIF etc are providing adequate funding and financing for infrastructure projects, there is still a need to deepen the capital support coming from them.

d.  Leveraging untapped financial products: Unlike global counterparts, the use of insurance and pension funds for financing infrastructure projects is very limited in India. Domestic pension fund corpus under National Pension System Trust is Rs 12.96 trn as on Sep 30, 2024 and an additional corpus of Rs 21.3 trn (FY 23) with EPFO provides adequate alternative funding opportunity for infrastructure investments in India. The long-term investment horizon of the pension funds matches with the long concession period of the infrastructure projects, thus providing a long-term investment opportunity. With clear regulations, and return guarantees, pension funds in India have massive potential to be routed into infrastructure development.

 

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