There is a serious need for more emphasis to be laid on infrastructure development, particularly transport and logistics, which is likely to play a critical role in realising this ambition.

Consider this: there are about 8,000 urban cities and towns in India. Sustaining a decent growth rate for a large economy like India would require an integrated approach, meaning these centres, spread across different parts of the country, would have to be connected via a network of roads and highways – for instance, in a hub-and-spoke model – to enable seamless movement of people and goods.

At present, the inter-state movement of goods takes a lot of time ostensibly due to complex regulations and delayed clearances. They also involve a significant amount of paperwork and several intermediaries, leading to multiple cargo exchanges, thereby increasing costs and operational inefficiencies.

Lack of end-to-end supply chain visibility and the ability to track and trace the cargo in the logistics ecosystem remains a challenge. These issues have a bearing on the cost of operations for stakeholders.

The current logistics cost is somewhere around 13-14 per cent of GDP, which is relatively high compared to other exporting nations such as China, where it is about 10 per cent of GDP. The government aims to bring it down to 8-10 per cent by 2030.

More Roads Need To Be Built

It is estimated that a 10 per cent reduction in indirect logistics costs will result in a 5-8 per cent rise in exports. For that, the roads and highways and the allied infrastructure, including storage facilities, warehouses and in-land ports, need to be upgraded quickly.

Realising this, the government has increased investment in infrastructure and plans to spend over US$ 1.4 trillion (roughly Rs 116 lakh crore) until 2025 through the National Infrastructure Pipeline.

It has also raised the budgetary allocation over 10-fold for the Ministry of Road Transport and Highways over a decade – from Rs 25,872 crore per year during 2009-14 to Rs 2.70 lakh crore during 2023-24. According to a Moneycontrol report, the ministry has sought a budgetary allocation of Rs 3.25 lakh crore for FY 2024-25, which is about 20 per cent higher on-year.

The increased outlay would present a big opportunity for the transportation and logistics sector, expected to receive about Rs 12 lakh crore (US$ 146 billion) in investments over the next five years, according to an EY report published in December 2023.

The latest Economic Survey has suggested that the construction of national highways/roads has increased over time from 6,061 km in FY16 to 10,457 km in FY22. The ongoing transportation infrastructure projects in various phases of construction are valued at Rs 69 lakh crore. Among these, the top three sectors in terms of value are roads and highways (48 per cent), railways (30 per cent), and urban public transportation (12 per cent). This means approximately 60 per cent of the projects – a significant number – are related to roads and highways.

India's road and highways market is expected to develop at a CAGR of 36.16 per cent between 2016 and 2025. By then the highway network is expected to reach 2 lakh km. The largest beneficiaries of this investment are Maharashtra, Gujarat, Madhya Pradesh, Delhi and Rajasthan, with over 1,000 projects lined up.

Investing In Infrastructure Can Be Appealing

India is especially attractive for infrastructure investments because of its vast population and growth potential. It is expected to be the primary driver of road infrastructure investment in Asia during the medium term.

Currently, India has the world's second-largest road network at 63 lakh km, which includes national highways, state highways, district roads, and rural roads. These roads handle about 64 per cent of goods and 90 per cent of passenger movement. While national highways account for 2 per cent of the total road network, they are burdened with over 40 per cent of the total traffic.

There are several other reasons why sovereign funds should invest in infrastructure. For one, Infrastructure is the most popular sector among state-owned investors. It is a tangible asset with residual value, delivering a long-term stable cash flow that aligns with state-owned investors' intergenerational vision.

Infrastructure also enables state-owned investors to add value to assets and diversify portfolios, as IndInfravit does. Unlike venture finance, infrastructure has a high barrier to entry, preventing competitors from entering the market, and giving toll road operators a monopolistic position.

What Are The Challenges?

Political and regulatory risks in infrastructure projects encompass diverse factors, including delayed approvals throughout the project cycle, community opposition, alterations in asset-specific regulations, and contract term breaches. The denial of government payments violating contractual agreements is also a significant challenge not just for ongoing projects but also for future investments.

Land acquisition poses obstacles, with projects frequently stalled or delayed due to resistance from farmers or local communities. The lack of clarity and impartiality in processes can deter investor resource mobilisation for large road and energy projects.

Another crucial issue is Environmental Impact Assessment (EIA) compliance since safeguards and guidelines evolve during project execution. The capacity of private players emerges as a challenge in executing large infrastructure projects.

Although 100 per cent FDI has been permitted in most transport infrastructure projects, the sector requires the establishment of processes to accelerate clearances and simplification of regulations. A complete rollout of a nationwide single window clearance system by the government will go a long way in resolving the issues.