Greetings from Team Carnelian!
“American roads are not good because America is rich, but America is rich because American roads are good” – Former US president JF Kennedy.
The above statement from Former US President JF Kennedy beautifully highlights the importance of Infrastructure in the development and wealth creation of a country. Historically, India has suffered from its poor infrastructure. There has been a fair bit of skepticism from investors about India's ability to build infrastructure at scale. Indeed, historically physical infrastructure has lagged the economic needs, with constraints such as financial means to invest & lack of a coordinated policy approach to execute large projects in a time-bound manner.
However, “This time it’s different”, India's infrastructure story is on a firm footing. In last decade, India’s mindset has decisively moved from incremental mindset to exponential mindset. India is focusing on building out large-scale infrastructure throughout the country at the rapid pace with huge sense of urgence, which is starting to be reflected in the improved efficiencies in the country.
The budgetary allocation toward infrastructure has increased from 12% in 2009-10 to 23% in 2024-25.
More importantly, infrastructure spends are now better targeted and potentially more productive. As can be seen from the chart below our Rail freight speed has increased from 25.9km/hr to 37.8km/hr with Dedicated freight corridors (DFC) being established govt is targeting to take it to 80km/hr. Further, port turnaround time has reduced from 10 days to 3 days which is close to China’s 2.5 days all this was possible because of increased efficiency and productivity.
As India is traveling its journey toward Viksit Bharat one such mega theme which will play out is “Infrastructure” which we would like highlight through this letter.
History of India’s Infra push
India’s infra push started in big way in the year 1999 when we launched the ambitious Golden Quadrilateral modelled around the National Highway System of the US. This led to a virtuous cycle of economic prosperity thus leading to the start of private capex cycle. We saw India’s largest engineering company L&T see its stock price multiply 20 times, BHEL largest power equipment manufacturer multiply 20 times, Siemens largest industrial solutions by 29 times during the period of 2003-2007. We also saw global growth acting as tailwind leading to a massive rise in corporate profitability. Similarly this time, we believe infra spends by government will lead to a spiral effect on private capex picking up.
India is where China was in the year 2007.
Massive infrastructure spend has been a crucial differentiator for China, and a key driver of Chinese labour productivity. It is estimated that during the 30 years post Chinese economic reforms (in late 1970s), spending on infrastructure ranged between 10-20% of its GDP.Highly productive and cheap labour, emerging infrastructure, strong foreign inflows, and rising ease of doing business created a virtuous cycle of growth. As the China growth story peaked, there is a great opportunity for India to shift gears and grab the vacuum. It is estimated that in 2024, infrastructure projects of INR 19.5 tn will be delivered, a rise of 7X compared to 2015, and 18X in 2010.
Currently India's GDP as of CY23 had reached USD 3.7tn, similar to China's GDP size in CY07.
Infrastructure spends during Amritkaal
Infrastructure spend has huge multiplier effect on economic growth of any country. During 1870 – 1890, US spent ~30% of GDP i.e., USD 4bn to develop its rail network & transcontinental railroad – called “Railroad boom” which transformed USA economy in following decades. India is railway capex is estimated to increase 17x from USD 0.1tn to USD 1.7tn (~40% of the GDP) during Amritkaal period. Apart from this, India is building roads, ports, airport, urban infrastructure, defence infrastructure, and many more. India is also making huge investment in renewable power both solar and wind which is not only reducing energy cost but also carbon footprint.
Some of the other initiatives of the government which will have huge impact on India’s infrastructure story are:
The National Infrastructure Pipeline: The National Infrastructure Pipeline (NIP), introduced in 2019 emphasizes social and infrastructure projects including energy, roads, railways, and urban development projects worth INR 102 lakh crores.
PM Gati Shakti: India is now building out efficient infrastructure though implementation of PM Gati Shakti (PMGS) – with USD13 tn national master plan. PMGS aims to lend more Gati (speed) and Shakti (power) by connecting all concerned departments on one platform.
The National Logistics Policy: It aims that by 2030 to reduce the logistical cost to about 8% of the GDP down from current 13-14%. Further, it aims to place India in the top 25 countries in the World Logistics performance Index. And lastly improve efficiency by creating a data driven support system.
Several ministries have rolled out sector-specific long-term infrastructure plans – e.g., Bharatmala for roads, the national rail plan, Sagarmala for port connectivity, Power for All, waterways development program, etc. – to scale up infrastructure in the country. This is at the margin helping goods move faster and at more affordable cost than seen in the past. We are already seeing the fruits of the efforts reflected in the various segments.
We feel all these initiatives will bring down the logistics cost making it at par with China as well with the developed countries, thus fulfilling PM vision of Viksit Bharat by 2047.
Infrastructure spends have a multiplier effect on economy. India’s infrastructure spend is expected to be INR 143 lakh cr (USD1.8tn) between 2024-2030, driven by roads, railways, energy & urban infra. Infrastructure spending will lead to GDP multiply by ~2.4x, based on past inferences, i.e., USD1.8tn spending will add USD 4.3tn in the GDP. This will create a lot of wealth creation opportunities for companies who are Infrastructure Enablers and Asset Owners across Roads, Railways, Ports, Airports, Urban Infrastructure. As infrastructure is built, lots of Technological capabilities get built in the country which has enabling effect on the manufacturing sector.
Sector rerating
Another interesting aspect of the sector is significant policy reforms reducing the execution risk. Historically, Government policies often led to uncertain outlook and long working capital cycles. All this has changed and set to reduce historical risks associated with the sector significantly.
We will be looking for the right companies in right space which can offer great risk reward in this sector.
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