India is a unique country with an immense economic opportunity. The country's combination of strong economic growth and poor infrastructure means that the country will need to pour in billions of dollars to complete economy-supporting infrastructure projects. However, economic concerns have been a drag on the country's equity markets since November.
Since mid-2010, a series of infrastructure-related corruption scandals--including a high-profile USD39 billion scam over the sale of second generation telecommunications licenses--have eroded investors' confidence in the sector.
Corruption will remain one of the most potent risks for India-related investments for some time. But the Indian government has brought prominent politicians to justice for their role in these scandals, indicating that policymakers are serious about cleaning up graft and corruption in the system.
Furthermore, the country's political establishment recognizes that economic growth is the key to votes; developing infrastructure provides one path to political victory.
India's economy is expected to expand by 8 to 9 percent this year and this growth has attracted significant amounts of foreign direct investment and investment flows into the Indian market, particularly from institutional investors. Any short-term slowdown resulting from higher interest rates, inflation or even corruption, should be viewed as a buying opportunity for long-term investors.
That being said, we've witnessed a slowdown of projects under development and new projects over the past six months. As the graph below indicates, the value of new announced projects has fallen from INR6.2 trillion (USD130 billion) in the first quarter of the 2011 fiscal year to INR2.5 trillion (USD55 billion) in the fourth quarter.
The graph ostensibly justifies investors' concerns about the Indian infrastructure sector; the currently slowdown is dangerously close what we saw during the collapse of Lehman Brothers. Nevertheless no one with any knowledge of India will deny that better infrastructure is critical to the country's economic future. The country has no choice but to build new infrastructure projects if it is to maintain its economic dynamism.
It's a common theme that runs across all emerging markets. Without improvements in infrastructure, the ambitious goals to boost domestic demand in emerging economies will be unachievable. Without upgrading their infrastructure, these countries will not be able to achieve the savings from reduced costs and a faster production cycle. This is particularly important for Asia because the region is leading the charge on global economic growth. I write about this in more detail and include several picks profiting from this trend in my article, China to Power Global, US Growth .
The most current statistics indicate that by 2025, 21 of the world's largest 25 cities will be in developing countries. Today there are 16 cities in emerging markets with a population of over 10 million. And althoughChina leads the world in the pace of urbanization, India is right behind it.
Highways are a major focus of India's infrastructure development efforts. As you can see in the graph below, the National Highway Authority of India (NHAI) awarded more than 5,000 kilometers of highway projects last year. This figure is projected to rise to more than 7,000 kilometers in 2011.
There are also plans to upgrade about 24,000 kilometers of rural roads over the next five years as well as an initiative to build up the smaller roads that connect major arteries to small villages. By connecting these areas to the nation's growing highway system, this program has the potential to unlock the economic potential of these numerous villages.
The process of building out these roads may slow because of the recent slate of political scandals. But infrastructure projects are not only necessary for the country's economic future, they are also critical to political survival in the country's rough-and-tumble democratic system.
Political stability and programs aimed at economic reform and growth are key to collecting votes in India. Consider India's state of West Bengal, where the Communist party was recently voted out after three decades of rule. In last month's regional elections, voters in West Bengal ousted the Communist Party of India (Marxist) in favor of the Trinamool Congress Party, which ran on an anti-corruption and pro-growth platform.
The same will hold true for the Congress Party, the leading party in the central government coalition. Without total commitment on reforms and economic progress, the Congress Party will face an uphill battle in the general elections to be held three years from now.
Exchange-traded funds ( ETF ) are an excellent vehicle for tapping into broad trends in global infrastructure growth, a multiyear investment theme that my co-editor Benjamin Shepherd and I track in our Global ETF Profits advisory.
One ETF that could help you benefit from the push to build out India's infrastructure is Emerging Global Shares INDXX India Infrastructure Index Fund ( INXX ), which offers exposure to a variety of infrastructure-related industries. A little more than 50 percent of the ETF's holdings are in companies involved in the production and distribution of electricity, construction and materials, industrial metals and mining, and industrial engineering. You can find out more about why this ETF is a top pick of mine in my InvestingDaily.com article, An ETF for India's Infrastructure Boom .