Despite the West Asia conflict and global uncertainties, India’s infrastructure growth story continues to move resolutely towards the Viksit Bharat vision, with tailwinds in multiple sectors.

From the core of clean energy diversification (renewables) and logistical debottlenecking (roads), the story is now fanning out to a unique blend of digitalisation (data centres and smart meters) and decarbonisation (green hydrogen and battery). This milieu of expanding infrastructure investments will continue to support real estate growth, resulting in healthy absorption of commercial office spaces and steady residential demand.

While this growth will have its share of challenges—delayed offtake and lagging transmission capacity in renewables, slowdown in road project awarding, elevated capital values in residential real estate and slowing demand for commercial spaces by the Information Technology (IT) sector—continued government policy support and strong balance sheets will keep the infrastructure players well-positioned to sustain the growth trajectory seen in recent years.

Says Krishnan Sitaraman, Chief Ratings Officer, Crisil Ratings, “The key infrastructure sectors—renewables, roads, real estate and the new-age ones—account for around half of India's total infrastructure investments and provide strong support to India’s GDP growth trajectory. While largely insulated from the direct impact of the West Asia conflict, they do face indirect inflationary pressure if the conflict prolongs. Nevertheless, investment growth is likely to remain strong at 45-50% over the current and next fiscals—akin to the growth seen in the preceding two fiscals. Consequently, investments in these sectors should rise to ~Rs 23-24 lakh crore, benefiting from strong government policy support and domestic demand.”

Renewable energy capacities—the first pillar in the infrastructure growth story—are tracking their clean energy targets for 2030 and may see addition of 50-55 giga-watt (GW) annually over the current and next fiscals, surpassing the previous high of 50 GW logged last fiscal. This will be on the back of a robust project pipeline and policy push for round-the-clock solutions (with battery storage capacity targeted to scale up to 208 giga-watt hour by 2030¹). Fuelling this further is rising adoption of rooftop solar under PM Surya Ghar Yojana and favourable open access policies for commercial and industrial projects.

This massive growth in power capacities finds a strong anchor in India’s tryst with data and decarbonisation. Data centre capacity² is seen increasing 35-40% annually through fiscal 2028, fuelled by increasing artificial intelligence (AI) and cloud adoption. Also, need for decarbonisation across industrial sectors and the ongoing geopolitical tensions impacting the natural gas markets can potentially catalyse the policy environment around green hydrogen.

A gradual revival is expected in project awarding in the road sector—the second critical pillar—post slowdown of the last few years. This will be led by healthy budgetary allocation as well as efforts taken by the government to debottleneck the approval processes. Interestingly, asset monetisation is expected to gain further momentum, with Rs 70,000-80,000 crore worth of assets estimated to be monetised by the National Highways Authority of India to fund the growth.

The real estate sector—the third critical pillar—is experiencing a divergent trend across segments. Residential demand growth is expected to remain flattish for the current and next fiscal amid elevated capital values, though on a high base established by above average growth of past few years. The commercial office segment is bucking this trend, driven by continued healthy leasing demand (6-7% growth in the current and next fiscal), fuelled by flexible workspaces, Banking, financial services, and insurance (BFSI) sector and global capability centres (GCCs), leading to declining vacancy levels.

While these sectors are expected to see significant investment, there may be some challenges for the developers too.

In the renewable energy sector, transmission capacities are yet to match the pace of renewables rollout, while offtake arrangements for nearly half of previously awarded projects remain untied.

Similarly, in the roads sector, a prolonged slowdown in awarding activity may affect the order books and growth momentum of developers. This could drive them to take new risks as they diversify into other sectors.

The real estate sector may also experience challenges, with residential inventories on the rise over the current and next fiscals. Similarly, the commercial real estate office segment may be impacted by AI related disruptions and the global economic slowdown, which could dampen leasing activities, particularly by the IT sector.

Among new-age sectors, the growth of data centres is exposed to pricing risks due to a rise in competitive intensity. Smart meters may face execution delays due to right-of-way issues and lower-than-anticipated consumer acceptance. Battery manufacturing and green hydrogen sectors remain exposed to competition from imports or alternative solutions.

Says Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings, “Despite challenges, most of the players in the established sectors are well-positioned to overcome them, given their strong track records and execution capabilities. Their healthy credit profiles, on the back of stable cash flows, strong operating performance and prudent leveraging, provide support. Around 15-20% of investments in these sectors will be funded through equity. New-age sectors with mature business models will benefit from easier access to capital, while nascent ones may require higher upfront equity investments.”

And to top, their credit profile will remain resilient. For the renewable energy sector, though the debt levels are likely to increase due to substantial capacity additions, a commensurate increase in operating cash flows will keep credit metrics comfortable. Meanwhile, road and residential real estate developers are likely to exhibit healthy credit metrics, driven by past deleveraging efforts and steady operating performance. Commercial real estate office players will also demonstrate stable credit profiles, characterised by healthy operating performance and prudent leveraging by the players.

Among new-age sectors, data centres and smart meters exhibit greater bankability due to their relatively more mature business models and higher track records, while battery manufacturing and green hydrogen will require policy support given the relatively early stage of their evolution.

All said, timely project execution will be crucial amid geopolitical uncertainties, and continued prudent leveraging by the players will bear watching.
 

¹ As per the National Electricity Plan (2023) published by the Central Electricity Authority (CEA): https://www.pib.gov.in/PressReleasePage.aspx?PRID=2246898®=3&lang=2
² These are for third-party capacities (excluding captive capacities by hyperscalers)