Rationale Behind Slow Growth in Infra Sector
The growth of the infrastructure sector can vary from region to region and over time, but from a broader picture we can sense that the growth rate in the Infra sector has been slow and steady as compared to other sectors. Above statement suggests both views, in positive way due to less variance in growth trajectory, risk is less in the sector, whereas in negative way, when all other sector’s growth rate has surged in last few decades, infra sector did not get that momentum. In this article we will discuss few most probable reasons (Inference) behind the observation:
- Project Characteristics:
Capital Intensive: Infrastructure projects typically require significant upfront capital investment. This includes funding for land acquisition, construction, machinery, and materials. The availability of such funds can be a limiting factor, especially in developing economies or during economic downturns when capital may be scarce.
Long Gestation Period: Infrastructure projects often have long gestation periods, which means that it can take several years before they start generating revenue or providing returns on investment. This makes them less attractive to investors seeking quick returns.
- Economics:
Economic Conditions at Individual level: As the rent/housing loan has the major share of the individual income, elasticity of the individual’s demand is pretty high. So, marginal increase in price of the above service/product leads to significant (comparing to other sectors) decrease in demand.
Economic Conditions at Institution Level: Economic factors, such as recessions or economic downturns, can impact the demand for infrastructure. During tough economic times, governments may cut back on infrastructure spending to allocate resources to more pressing needs.
- Politics and bureaucracy:
Political/Policy Instability and Regulation challenges: Changes in government policies and political instability can disrupt infrastructure projects. Infrastructure projects are subject to a wide range of regulations and approvals. Delays in obtaining permits or navigating bureaucratic hurdles can slow down project implementation and increase costs.
Geopolitical Factors: Geopolitical tensions or conflicts in a region can disrupt infrastructure development. Investors may be hesitant to commit to projects in areas with uncertain political stability and unavailability of support from local community.
- Technology:
Technological Advancements: Rapid technological advancements can make existing infrastructure obsolete or less competitive. Upgrading or replacing infrastructure to incorporate new technologies can be expensive and time-consuming.
Despite these challenges, the infrastructure sector remains crucial for economic development. Governments often play a significant role in funding and promoting infrastructure projects because of their long-term benefits in terms of job creation, economic growth, and improved living standards.
Areas which need special attention apart from project efficiency:
- Finding innovative ways to arrange fund and finance the ongoing/upcoming projects
- Adoption of technology in smooth manner, i.e., without having significant impact on the employment and commodity market in the short run.
- Policies with a long-term vision along with efficient regulation procedures
- Security to the developers against geopolitical uncertainties
- May be there is a scope for the fin-tech companies to work on improving/creating insurance products for the sector.