India's Infrastructure: Much Work To Be Done

By Aaron Levitt | May 18, 2011 AAA

Perhaps no other economy in the BRICS has long-term promise like India. A stable democracy, well-educated workforce and population/income growth are all hallmarks of the emerging market nation. However, without the proper infrastructure, the nation's talents and potential will go unutilized. This vital economic "backbone" still needs developing. As India transitions into an economic powerhouse, the government has pledged to spend well above $1 trillion on various infrastructure projects over the next five to six years. For investors, this new building binge represents just as much opportunity as China did 10 years ago.

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The Work Continues
With practically no mass transit in Bangalore, Indian technology firm Infosys (Nasdaq:INFY) spends nearly $5 million a year on buses, minivans and taxis to transport its 18,000-plus employees to and from Electronics City, Bangalore's main technology hub. Modern highways and bridges, state-of-the-art seaports, dependable power and clean water continue to be in short supply throughout the nation. For about 60 years, India has under invested in its infrastructure, and the nation is behind its current needs by 10-12 years. The Indian government has recognized that, in order to efficiently move people, electricity and information from place to place within the populous nation, it needs an infrastructure revival. The government estimates public and private organizations will spend nearly $330 billion to $500 billion over the next five years for new infrastructure. The Asian Development Bank has recently announced plans to lend India $7.4 billion for a variety of infrastructure projects over the next two years.

India's government has set an aggressive target of building 20 km of new roads every day, up from the current 5 km. The $12 billion Golden Quadrilateral project, which spans more than 3,000 miles of six-lane highway that connects Mumbai, Delhi, Kolkata and Chennai is a perfect example of India's thirst for roads. Analysts calculate that a well-planned infrastructure program could help India cut its transportation congestion/waste by half, and fuel requirements by 15% to 20%.

On the electricity and power production front, the International Energy Agency estimates that China will only needs two electricity grids to achieve universal electrification - India will need 245. In addition, China is projected to reach full universal electrification by 2015. At its current pace, India won't be fully electrified until 2030. India's power demands are set to more than double by 2030. The government's current five-year plan calls for power generation targets of nearly 62,000 MW of electricity.

Upgrading India's Infrastructure and Your Portfolio
For India to reach its full potential, massive improvements to its infrastructure are needed. For investors, that presents a great long-term opportunity. Just as EGShares has a China-Focused Infrastructure Fund (NYSE:CHXX), it has an Indian ETF, as well - the EGShares India Infrastructure (NYSE:INXX), which follows 30 companies related to India's build out with nearly 40% of its holdings in construction and electricity producers. However, there are plenty of opportunities in the sector.

Building and boosting India's power production and electricity capabilities could be one of the best plays on India's infrastructure. General Electric (NYSE:GE) has doubled the amount of power equipment and generators it exports to India each year since 2005, and Spanish wind company Gamesa (OTCBB:GCTAF) recently won an $18 million loan to increase wind capacity in the nation. Stringing those wind turbines and power grids together will be the work of General Cable (NYSE:BGC).

Building-out infrastructure also requires huge quantity of raw materials. Steel, copper and concrete will all be needed in vast amounts. The Market Vectors Steel ETF (NYSE:SLX), iShares MSCI Emerging Markets Materials Sector Index ETF (Nasdaq:EMMT) and PowerShares DB Base Metals Double Long ETN (NYSE:BDD) allow investors to play the need for these materials.

The Bottom Line
India represents much opportunity. However, until it gets its infrastructure in order, that potential will be muted. The Indian government has finally gotten serious about upgrading its roads, electrical grid and waterways, and in that spending, investors can profit. Portfolios with long-term timelines may want to take gamble on this trend. Either through any of the previous stocks or via the PowerShares Emerging Markets Infrastructure Portfolio ETF (NYSE:PXR).

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