By Taponeel Mukherjee
Given the varied use of government spending, the question remains on how important it is to focus on the “basic” infrastructure services such as roads, electricity and water — the classic troika of “sadak-bijli-paani”.
Essentially, “basic” infrastructure such as roads, water and electricity are critical drivers of economic growth. Creating the “basic” backbone infrastructure not only delivers value through the usage of the asset or service but, inter alia, offers even greater value through the ecosystem that can be built around the core assets.
A recent tweet by Vinayak Chatterjee, Chairman, Feedback Infra Group, illustrates an example of the value-creation through building “basic” infrastructure: “As per Power Ministry, 15 states now have 100% household electrification. Likely consequences are also emerging like increased sales of electrical appliances.” It drives home the point that electrification infrastructure has a critical impact on creating value through multiplier effects on the economy, boosting demand for goods and services down the consumption chain.
For all the talk of FMCG companies accessing rural markets, consumer durable companies would do well to pay more attention to the infrastructure creation trends in the economy. For example, increased electrification creates entirely new markets for electronic goods-focused consumer durables companies.
However, the creation of a new market is not limited only to the product being sold. Given the relatively higher ticket-value nature of consumer durables, there is a new market for lending businesses as well. This opportunity in the lending space is to finance some part of the consumption trend. This opportunity is applicable mainly to well-entrenched incumbent lending institutions looking for the next phase of growth.
For instance, there might be a Non-Banking Financial Company (NBFC) with a significant business in financing the two-wheeler market in and around the areas seeing increased electrification. The increased electrification trend allows the NBFC to now access a substantial component of existing customers for a new product line of consumer durables. Thereby, the NBFC can deliver value to its stakeholders by building on an existing distribution network and credit information repository.
Additionally, there is a business opportunity for the logistics sector as well. A new market in consumer durables creates the need for transportation, storage and distribution of products in new areas. The above is an example of how “basic” infrastructure creation creates positive multiplier effects throughout the economy. Most importantly, new industries are established, and existing industries can expand into new areas thereby creating jobs and facilitating investments.
For investors focused on India, both in the private and public markets, current trends such as increased electrification create investment opportunities. For example, more electrification begs an important question: Which segment of the supply chain does the investor want to invest in to generate investment returns?
Do investors want to invest in consumer durable companies that can tap into new markets? Do they want to invest in financial firms that can benefit through funding of the consumption? Or do they want to invest in the logistics needed to create the new supply chain? Regarding direct versus non-direct investments, investors have a choice of directly investing in logistics real estate versus investing in publicly-listed companies that have significant exposure to the new markets. The single biggest takeaway is that the creation of “basic” infrastructure creates investment opportunities for all types of investors across the spectrum.
It is also important to note that besides the creation of new infrastructure, significant value creation is possible through improving the quality and maintenance of existing “basic” infrastructure. While new projects tend to grab most of the headlines, gradual quality improvements and effective maintenance of infrastructure is value-additive as well.
In summary, the creation of “basic” infrastructure delivers value on many fronts. Crowding in private capital, job creation, a higher standard of living, access to basic amenities and expansion of business opportunities are some of the obvious advantages that come to mind. Going forward, both central and state governments would do well to build and improve the “backbone” infrastructure.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at [email protected] or @Taponeel on Twitter)