>INDIA ECONOMICS (Morgan Stanley)

Road Infrastructure Development – Taking Stock of Progress

Infrastructure spending – critical in the current economic environment: In the current domestic growth environment, while the private business capex is likely to suffer, we believe that the government’s effort to push infrastructure spending will be critical. Within the infrastructure segments, we believe the roads spending is the most important considering its strong multiplier
effect.

Tardy progress in development of roadways over the last few months: Of the total 33,097km planned, only 10,858km had been completed as of February 2009. About 50% of roads tenders have yet to be awarded. According to the monthly data released by NHAI, not a single project was awarded between August 2008 and January 2009 even though there was some pick up in the month of February 2009.

Three key reasons for this poor performance: (a) funding constraints for the private sector on account of deteriorating global and domestic credit markets as well equity markets; (b) change in regulations related to public-private partnership contracts, which has added some uncertainty for the private bidders; (c) typical execution hurdles including land acquisition, removal of
existing structures, and getting the environmental and forest clearances.

Bottom line: We believe that the progress on road development is likely to be tardy until the end of 2009. The new cabinet, which should be in place by June 2009, will need to spearhead this spending and, if need be, take the financial risk on its own balance sheet for such investments as the private sector could remain shy.

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