Emerging Markets Weekly

Infrastructure development will continue to be a challenge for the emerging market economies and an opportunity for investors over the next two decades. Investors have voiced concerns that a lack of infrastructure development in India, particularly in power generation, will create natural speed limits to the economy over the long term—holding back growth and corporate profitability. A recent report by Goldman Sachs estimates that India will require US$1.7 trillion in infrastructure spending over the next decade to overcome these issues—a huge opportunity for investors to be sure but one that will be funded internally.

The good news is that Goldman figures that India can generate sufficient private savings to fund this development. It boils down to a favourable demographic picture whereby the median age of the population is currently 25 years, thereby leading to a rise in the savings rate over the next ten years and beyond as the population ages and as incomes rise, with the savings rate expected to rise to 40% of GDP by 2016. There is more to the story, however.

Corporations in India are operating with low leverage that will enable them to throw off sufficient cash as well to act as an additional source of funds to finance infrastructure development.

All told, infrastructure in India will continue to be a major opportunity for investors over the next decade, and banks will continue to be the intermediary for channelling savings into these projects suggesting that banks will also be an important part of this investment opportunity.