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Infrastructure spending needed to support Indian urbanisation

Hong Kong, 02 Mar 2016

India must overhaul its cities to cope with a rapid wave of urbanisation as up to 100 million people migrate from rural to urban areas over the next decade.

This process has already begun say Macquarie analysts, with India’s government embarking on a city building program to try to address chronic housing shortages and deliver infrastructure to urban residents.

“The driver for everything is urbanisation,” says Macquarie India strategist Rakesh Arora.

“India is seeing an urban wave and the government is making plans to cope with that. Having recognised the problem, I think we are half way there.”

The government announced in January 2016 the first 20 of 100 cities that will be overhauled to become so-called “smart cities” connected to water, sanitation, transport and internet communications.

Included on the list is Bhubaneswar in the Indian state of Odisha, as well as Rajasthan capital Jaipur.

“Some of those cities are important from a tourism perspective,” Arora explains.

“The idea of new smart cities is to decongest existing cities and create sustainable and inclusive development by working on infrastructure such as transport, water, sanitation and IT connectivity.”

Key to this is to deliver affordable housing and reduce the number of urban slum areas.

Arora says the government has estimated the country is already faced with a shortage of 20 million houses.

He says almost 65 million people live in slums and the number of slum households in India has increased by 4 million in the past decade.

That problem will only grow if cities are not built to cope with an increase of workers from rural areas.

“These 100 million people who are going to migrate to urban centres, one third are just workers with very low salaries,” Arora says.

He adds that India’s housing woes largely come down to housing congestion, with poor workers cramming into slum areas because that is the only roof they can afford to put over their heads.

“Only 20 per cent of it is because people are actually homeless,” he says.

Almost 65 million people live in slums and the number of slum households in India has increased by 4 million in the past decade.

As well as upgrading existing cities, the government is in the early stages of planning new industrial centres along major transport corridors.

Arora says two major freight corridors are being built to connect the north to the south of India and the east to the west.

Along those railway lines, he says, there are plans to develop industrial centres.

“Work has only started on two to three such centres, mostly where the state government has been proactive in providing land.”

The question remains whether India’s government is developing cities at a rapid enough pace for its booming population and young workforce.

Macquarie’s analysts say “aggressive” infrastructure spending is required and suggest the government will have to double its infrastructure budget if it is to manage the transition from what was once a largely agrarian economy.

“The population is increasing very quickly, but on the ground things are progressing very gradually,” says Macquarie Securities India economist Tanvee Jain.

“The government needs to focus on the pace of execution, otherwise there could be a number of problems over the next decade.”

Macquarie’s research suggests the government needs to significantly increase its spending on infrastructure from 5-5.5 per cent of GDP to 8-10 per cent.

But they note some promising signs from the government, among them a move to increase the construction of roads to better connect rural areas with cities.

“They built 1100 kilometres of road in 2013-14. From 2016 they have planned 6000 kilometres,” Jain says.

By 2025, India’s urban population is expected to have increased from 418 million to 509 million.

With the country already running a fiscal deficit, Jain says public/private partnerships present an opportunity.

“They have to focus on more private/public partnerships to ensure the incentives are there for private companies to participate,” she says.

The country provides an interesting contrast to China, which has already embarked upon massive investment in infrastructure over the past two decades.

Rapid industrialisation and urbanisation have turned the country into the world’s largest consumer of commodities.

China’s working age citizens are living away from country areas, at least part time, to pursue work opportunities in Chinese cities.

Macquarie Securities Head of China Strategy Erwin Sanft says China’s success in expanding its manufacturing sector is “actually very hard for other countries to replicate”.

Sanft says China’s urban policy in coming decades won’t have to be focused so much on city building but social reforms, specifically “Hukou reform” – or household registration – to ensure former rural residents are reclassified as urban residents.

And as India and other parts of Asia try to follow China’s lead, the effects of urbanisation – coupled with higher adoption of technology – could be felt right throughout their economies.

Macquarie’s analysts say that if urbanisation is managed with the right structural reforms in places like India then the trend toward city living, and higher disposable incomes, will benefit many sectors: from healthcare to consumer goods to insurance and internet companies.

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