Roads

Source: Flickr user Mark Chapman.

Despite being an industrial juggernaut, India has seen better days. GDP growth is the worst it has been in a decade, internal politics remain divisive, and government actions continue to make investors wary. But bright spots remain and are now seeing much-anticipated growth thanks to some significant consolidation in the subcontinent.

The name of the game is roadwork: Rural India and urban India, once separated by a vast gulf of technology and connections, are now drawing closer together thanks to the new infrastructure work around the country. For the past several years, the government has been dumping funds into replacing doubtful dirt paths with real, truck-ready asphalt roads, and now the results are starting to show.

This has been an ongoing process, of course -- "ongoing process" describes the emerging markets in a nutshell. But India's historically volatile major stock market, as represented by the iShares S&P India Nifty (NASDAQ:INDY) ETF, is on its way up once again after a steep drop last fall. It may not be at the early-2013 levels of $26, but the Nifty is approaching a stable $23, and the last several months have shown a newfound stability in the Index. It may not be coincidence that such stability coincides with an increase in the reliability of Indian roads. Roads, after all, function as the blood veins of an economy, and in a vast nation like India, new roads often mean new opportunities for both internal workers and external investors.

Have roads, will travel
So what specific benefits do these new roads -- an estimated 373,000 miles of them -- provide India these days? There's plenty of supply chain potential, but let's talk about three broad-stroke effects for now.

  • Consumer power: More roads mean more money. Farmers have seen their income skyrocket thanks to new roads that provide access to additional markets, faster services, and cheaper transportation. The number of rural Indians living below the Indian poverty has steadily fallen as roads have been constructed, and rural wages have been on a steady rise. The result is more consumer purchasing power -- welcomes news to companies like Tata Motors(NYSE:TTM), which is currently depending on its international Jaguar sales for income. While the Indian auto company saw its third-quarter income nearly triple, and net sales increased 39%, sales at home have taken a tumble: Passenger vehicles and trucks saw sales losses of 37% and 25%, respectively, in the nine months through December. Something needs to boost domestic demand for vehicles, and the continued growth of dependable roads, combined with greater rural wealth, could be the boon Tata needs. It could also benefit domestic oil and gas companies like Indian Oil.
  • Voting: Rural voters have a lot at stake when it comes to these new, dependable roads. The more positive benefits show up, the more interest rural voters will take in voting -- specifically for candidates that promise more rural expansion. Eventually, this could shift party priorities. Where priorities go, government funds and contracts follow. In other words, infrastructure investment has its own inertia, and chances are good that inertia will build in the coming years.
  • Indian crop prices: Thanks to new government mandates, guaranteed prices for wheat and rice have doubled. On one hand, this is a classic example of Indian government tactics, consisting primarily of pouring octane into the fuel tank without regard for engine mechanics. On the other hand, it certainly gives farmers and rural laborers a mix of confidence and new jobs.

Challenges ahead
New roads represent a good start and will certainly act as a catalyst for rural growth, but India has several issues to tackle if it wants to capitalize on the new infrastructure. Along with getting its GDP back up, the government needs to work on creating stable rural jobs so that farmers can start supporting themselves without huge subsidies. Also, given a consumer price inflation rate of about 10% and a slowing growth curve, the country needs to shore up its supply issues with further infrastructure projects and production controls. Increased income will not affect the market if inflation beats it down.

Also, it is worthwhile to point out the continued divide between rural interests and urban interests. Urban areas are interested in tech, manufacturing, and finance. Rural areas are interested in local jobs, transportation, and the preservation of their traditional cash cows. Among other benefits, the new road infrastructure has the ability to unite the two disparate sides of India at last.

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