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McKinsey & Boeing on India’s momentum & infrastructure

Friday 8 April, 2011

The Chicago Council on Global Affairs hosted this event India’s Economic Momentum and the Infrastructure Challenge featuring Jaidit Singh Brar of McKinsey-India,  Varun Bajpai of SBI Macquarie Infrastructure Management, & Rik Geiersbach, VP-Corporate Strategy @ Boeing.

Jaidit opened by noting that India’s infrastructure is behind on all parameters & needs massive investment of $1.5-2TR to catch up with their quality of life.  Because a water shortfall of 50% is expected, river basins are centers of economic activity.  The rural population is moving to the cities which will result in urbanization of 50-60% by 2030.  Unfortunately India has a poor track record of building infrastructure, which could derail growth, but that’s unlikely.  Consumer markets are attractive because they are relatively unregulated.  All infrastructure opportunities are open to the private sector & foreign investment, although few participated until 2005.  During Y2K-2010, infrastructure firms provided 4 out of the 5 best returns.  Power projects provide 30% returns annually.  Capital & skills availability make it 30-40% cheaper to build infrastructure in India.

80% of the capital raised for Varun’s State Bank of India-backed firm came from mature markets.  By 2025, 70% of India’s population will be of working age.  India’s economy is very inward-looking, but domestic consumption is high.  The conservative banking system has been relatively untouched by the financial crisis & Indians have the highest savings rates in the world.  Rising GDP leads to increased consumption, which leads to the need for infrastructure.  India is already @ the bursting point.  12 megawatt power plants are being built.  Regulations were a problem 10 years ago, but are no longer a barrier to entry.  For example, the telecom industry used to be convoluted:  now they have the cheapest phone calls in the world.  Although India’s infrastructure deficit consists of made-up numbers, their spend must simply be faster & deeper.  India’s is a slow moving democracy, but it always moves forward.  Large pension funds are investing in large projects like privatising airports.  Corruption is a problem, but the investment climate is sophisticated.  They could do more MNC investment, but they’re doing it already via partners.  All large private equity funds have offices in Mumbai or Delhi, but their local exposures are small.

Geiersbach observed that Boeing can’t ignore India’s opportunity set, which will be  the largest aviation market in the world.  That market’s growth is 18% from 140M passengers/year to 420M, while cargo traffic grew 80% in 2010.  There are 5 major airports in India & air traffic management is another growth area.  Security & environment are issues there.  India falls between China & the Middle East in terms of regulations & liability.

panel Q&A

  • Political connections, presence, & good partners all lead to creating a successful business in India, along with a fully differentiated offering.
  • There are still regulatory challenges in defense industries, but they are hungry to refresh old Soviet equipment.
  • While it’s simple to have standard cooperative agreements, equity partners are another story.

open Q&A

  • Corruption is a huge systemic problem, but the economy still does well.  Flagbearers are needed on some issues.
  • India is a complex country in which states compete for investment.  Working there requires a local presence because something is always simmering below the surface.  1 state has cleaned up its act & maintains its own standards.
  • India has the inspiring goal of putting a man on the moon by 2020.  108 of 126 defense planes will be produced in India by Boeing.  Although there is some debate on how much technology should be shared with Indian counterparts, Boeing is not holding back.

McKinsey left this document with the attendees India’s urban awakening which seems to contain a trove of information on India’s infrastructure.

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