Moody's Investors Service says India's recent reforms do not address all the regulatory, financial and pricing constraints on infrastructure investment, but they could still attract private investment because the policy changes coincide with a conducive financing environment characterised by low global interest rates and falling domestic interest rates.
A Moody's report says that given the Indian government's weak fiscal position, the country's vast infrastructure needs cannot be bridged without private investment.
Infrastructure shortages are a constraint on India's Baa3 sovereign rating because the country's infrastructure is weaker than in comparable emerging markets. This has hurt potential growth, as well as the competitiveness of its export and import-competing sectors, thus contributing to its trade and current account deficits. Moreover, poor infrastructure discourages foreign direct investment inflows, which could finance these deficits and stimulate growth. Infrastructure deficiencies also heighten the supply bottlenecks that fuel inflation.
Nonetheless, Moody's stable outlook on the sovereign rating assumes that infrastructure investments will increase over the next 12--18 months, as the country's medium term demand for infrastructure remains robust despite the recent slowdown in GDP growth.
Domestic demand for infrastructure is fueled by a critical mass of Indian consumers with growing disposable incomes as well as corporations willing to pay for improved infrastructure in order to remain internationally competitive.
Consequently, the private sector may be more interested in investing in Indian infrastructure, as demand for infrastructure and the lowering of regulatory and pricing barriers revives the prospects for profits. Moreover, financing for infrastructure investment may now be easier to obtain, as investors seek real investment assets, against the backdrop of lower interest rates and slower global growth.
However, since policies will only selectively and slowly address current supply constraints, Moody's believes any investment will likely commence as a trickle rather than a surge. Nevertheless, according to the report, even incremental infrastructure improvements will alleviate pressures on the balance of payments and inflation, while enhancing growth and living standards.
The report further notes that while pre-election politics pose risks, these risks are not exclusively negative.
India's fragmented politics have often hindered the economic policy process, regardless of the electoral cycle. Now, as incumbent governments seek to revive sluggish growth ahead of state and national elections in 2013 and 2014, they may accelerate policy implementation in order to attract investment.