India poised to become Asia's fastest economy but lack of infrastructure investments a major drag: Moody's

It needs improvement on PPP model.

India's economy is set to grow at the fastest pace among major economies in 2016 and 2017, although GDP growth remains constrained by various factors, including inadequate infrastructure investments, says Moody's Investors Service.

The rating agency said that enhancement of India's public-private partnership (PPP) model could help attract more private sector investments towards infrastructure projects, and thus help address the country's very large infrastructure needs.

"Historical underinvestment and rapid economic growth are straining India's existing infrastructure," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst.

The analyst noted that while the country's PPP model has seen reasonable success in some sectors over the last 20 years, PPP activity has been low in the last four fiscal years due to challenges with the PPP model.

As such, he suggested that India's PPP framework will benefit if it is developed further to address key issues regarding (1) improved risk allocation; (2) the ability to renegotiate unpredictable factors in the bid documents; and (3) a move away from project awards based on one metric, such as estimated revenues.

According to Moody, there has been a large decline in private investment in PPP projects in recent years for a number of reasons, including delays in project approvals and land purchases by the government, complicated dispute resolution mechanisms in the concession agreements, and lower than expected revenues due to aggressive assumptions.

Delays in project completion have resulted in cost overruns and revenue losses to private concession owners.

These factors have impacted the financial viability of some projects and their ability to service debt.

"The poor performance of some infrastructure projects, including PPP, has been a source of stress for both developers and the Indian banking system," said Moody's in a report.

The June 2016 Financial Stability Report (FSR) of the Reserve Bank of India stated that infrastructure, which accounted for 14.2% of total advances of the banking sector, accounted for 34.4% of restructured standard advances and 13.9% of gross non-performing assets of commercial banks in India.

In that regard, Moody's points out that more developed PPP markets, such as in the UK, Canada and Australia, use both availability-payment and demand risk PPP models, and relatively standardized bid documents --features that could address some of the bottlenecks in India's PPP framework.

In particular, Moody's says these more developed PPP markets typically feature (1) well-developed regulatory frameworks; (2) largely standardized project contracts; (3) a large and sophisticated investor base; and (4) predictable project pipelines.

Adjustments to the PPP framework in India to align it more with those of more mature PPP markets could help attract new private investment, said Moody's.