September 26, 2007

Over Optimism versus Reality

Are we an overly optimistic people? The Sensex is climbing new peaks like a sprightly mountain goat, gaining 1000 points in a week; the rupee trades at 39 to the dollar as we speak and in these merry times if you have a surname which is an anagram for 'infrastructure' you can raise a billion dollars no questions asked. Travel by the local trains (in the First Class ... the conversations in the Second Class are an assortment of desi rugby jokes) and you will hear the sophisticated executive types waxing eloquent on the Indian economy.

Not so says the Planning Commission. In an article which paints a grim picture by describing
the situation as 'pressing panic buttons' we are told that to keep the bubbly flowing we need lots of moolah, $40 bn to be exact, for the current 11th Five Year Plan. Various agencies have made estimates ranging from $350 bn to $500 bn for our infrastructure growth requirements. And with every passing year, prices going northwards, these estimates grow for every project that hasn't taken off yet.

Well there have been deals like this and almost every fund house worth its name has launched an infrastructure focused fund. Private Equity players across the world have also dedicated billions of dollars to the India story; but the action ends right there with the word 'dedicated'. Dedicated does not mean disbursal and disbursal does not happen because it is difficult to find good assets (read: projects) that will give returns which these money czars expect.

Projects that offer high returns like airport modernisation, supply chain logistics, telecoms, etc have been lapped up. What are left are the low return projects like power and roads and virgin territories like renewable fuels. There are a million projects waiting to be launched but investors are searching for the elusive asset that give returns in line with their expectations. Unfortunately, the money chasing these assets will cause valuations to sky-rocket and those who moved in first will make a quick buck. Those who followed and those who will follow may make money. Small investors, as is their wont, will rush in when the floodgates are about to open and will be blown away in the deluge. (Digression: The commies will then blame capitalism for the pains of the common man)

Does that mean the tragic end to our fairy tale economy. Definitely not. Infrastructure projects can be more attractive if they are not politicised. Power for example is more an election issue than an economy issue. Will politicians and bureaucrats ever realise? If they do then maybe the capital kings will loosen their purse strings. Maybe dedication will realise disbursement. Maybe this rant will be inconsequential.