Infrastructure to drive renewed growth

Rapid urbanisation, one million people entering the workforce every month and 40 million people joining the middle class annually. For India’s economy to keep up with its vast and swiftly changing demography, last year’s growth rate of 4.5% needs to step up. Infrastructure is predicted to be a key driver.

india_infrasctructure_chennai
India's widely known infrastructure issues are one factor which pundits identify as a growth dampener, resulting in logistics costs at 12–13% of GDP compared to 7–8% in mature countries. Photo: Thorbjørn Hansen

Gurgaon is the picture of modern India. The financial centre in the National Capital Region of Delhi has seen beige residential skyscrapers shoot up by the hundreds in the past few years, and its glass and steel business domiciles house 250 Fortune 500 companies.

“India has the ability to grow at 9% a year on a sustainable basis. It will take a few years and some serious reform to reach that level, but in many ways India is in good shape,” says Adit Jain, an economic analyst and chairman at IMA India, a business information company based in Gurgaon even before its heyday.

While confident in India’s long-term potential, Jain sees little hope of a short-term revival in economic momentum because of a flat investment rate and low credit growth. Before these important indicators improve he sees a recovery as “unlikely”.

To Jain, economic growth to the tune of 8-9% is a sheer necessity to support India’s growing workforce, booming middle class and increasingly urban population. And despite the challenges, he believes it is feasible, predicting that massive multi-billion dollar infrastructure projects throughout the country will fuel the growth.

“I have studied economic development in Asia for the past 20 years, and I have seen physical changes take place when a country’s savings rate went beyond 30%. The changes were better roads, mass transit railway systems, water and sewage systems, ports, airports and telecom. This will happen in India as well,” he says.

The savings rate in India has been some percentage points above 30 for the past few years.

Room to differentiate

Incidentally, India’s widely known infrastructure issues is one factor, besides political reform, which pundits identify as a growth dampener, resulting in logistics costs at 12-13% of GDP compared to 7-8% in mature countries. For the Group’s businesses, however, the challenges also translate into opportunity.

“India is a huge country with a vast hinterland. Several states are two or three times as big and populous as major European countries. That means different stages of development and it brings some complexity. It also gives us room to differentiate and provide value to our customers,” says Franck Dedenis, managing director at Maersk Line India, the market leader with annual volumes of 800,000 containers (FFE).

Maersk Line India generates 60% of the volumes it exports, enabling it to better control the business. Its confidence in the Indian market is reflected in recent investments including enhanced service to Europe, larger vessels on the trades and calls to a larger number of ports.

Buffers create reliability
To Lars Sørensen, regional manager at Damco, South Asia, careful planning is the key to manage India’s complexity – not least in the lesser developed Eastern regions, which are seeing high growth, and where Damco is increasing its business.

“We build buffers into the transportation time and make that visible to the customer. Roads can be bad, and you have the rains. Adding a few days to the schedule works, because what really matters to customers is knowing when they can have the containers. That allows them to plan their production,” he says.

Both Sørensen and Dedenis see a lot of potential in India, and while they are aware of the challenges, they clearly see India as “a great place to be”, as Dedenis puts it. Even during last year’s slowdown, exports grew by 5-6%.

Much has happened
In his Gurgaon office, economic analyst Adit Jain calls for a balanced approach to the infrastructure debate. New infrastructure is needed, but much has already happened, supporting annual growth rates of close to 8% in the first decade of the new millennium.

“It is very easy to sit here and look at the numbers and say that investments or something else should have been higher, but the fact remains that things have improved immensely,” he says.

India has the ability to grow at 9% a year on a sustainable basis. It will take a few years and some serious reform to reach that level, but in many ways India is in good shape.

ADIT JAIN, ECONOMIC ANALYST AND CHAIRMAN AT IMA INDIA