Effective leadership envisions results in the long term, so even exceptional leadership qualities can at best limit the impacts of immediate issues such as economic slowdown, but not much more. Deep Narayan Mukherjee situates and analyses the role of economic leadership in India’s infrastructure growth story.It is easy to swing between euphoria and ensuing praise for overall leadership capability. However, at the turn of fortune such behaviour is replaced by collective disillusionment and blame the same leadership which everyone thought was praiseworthy even two years back. The victim of such collective moods swings is often objective reasoning. For evaluating the impact a person or group (that may be called the leaders) has on specific economic or business outcomes, it is necessary to differentiate the role of external factors (let’s call them “chance”) and internal factors (such as leadership capability, execution skills and the like). At the outset, the author would like to highlight that even exceptional quality of leadership may possibly limit the impact of economic slowdown and nothing more. In fact, in terms of economic aspects, leadership is often reflected by the efforts to address fundamental issues, the benefits of which would incur only after a decade or so. Otherwise, why would it take nearly 13 years after 1991 for India to enter into the 8 per cent GDP growth trajectory?To understand the current stress lines in the infrastructure industry, one needs to appreciate the reasons for the infrastructure boom preceding it. This boom-bust cycle of infrastructure is of course closely linked to India’s overall economic cycle and, indeed, shares some of the factors.Incredible but not unique: India’s growth pattern between 2004 and 2008 (average yearly GDP growth of 8.9 per cent), however incredible, was by no way unique, during this golden period of world growth, where the global GDP grew above 4.8 per cent during the 2004-2007 period. Indeed, around 40 other countries exhibited continuous record high growth rates during this period. With a benefit of hindsight, one may tend to appreciate that historically high levels of global liquidity and adjoining credit expansion turbocharged global demand: Indian exports grew at record rates despite appreciation of the rupee. Chase for yields by global investors with high risk appetite rushed into emerging market assets which benefited India as well.It is to the credit of India’s economic leadership that it facilitated to translate this once in a multi-decade opportunity into palpable growth. Thus, the world was presented with an investment destination in the form of world’s largest democracy, which was an antithesis to single party-driven growth stories such as China.Leadership exhibited: The constituents of economic leadership considered here are government, business owners, investors, media and regulators. During that key period of growth, the key constituents of economic leadership acted in sync and got a lot of things right, maximising growth.Weak structural aspects that remained largely unaddressed came to haunt India when the global liquidity subsided along with a surge of risk aversion after H2 2008. More importantly, the biggest drawback of this moderately reasonable, overall economic leadership was lack of appreciation of risk and accounting for the same either in terms of planning, budgeting or financing. The basic characteristics (both the positive as well as the not-so-positive aspects) are also applicable to India’s infrastructure story. The Great Infra StoryThe trigger of infra story started well before 2004. The intention of successive governments to develop infrastructure was always clear. What had been a roadblock was ability to fund such public utility assets. The high growth period of 2004 enabled the government to take these initiatives.The revenue receipts of government, not surprisingly, grew at an average rate of 15 per cent (Y-o-Y) between 2004 to 2009, as compared to an average rate of 13 per cent (Y-o-Y) for the 10 year period preceding that. In fact during the period 2004 -2008, tax receipt as a proportion of GDP was consistently above 15 per cent, a figure rarely seen before that period. Post 2009, the figure is estimated to fall below 15 per cent. One may conjecture that higher growth makes tax payers more compliant!The rise of India’s infrastructureThe initial success emboldened the early birds to see the opportunity and the promise. Groups and companies with limited direct experience in infrastructure business jumped on the bandwagon. Bank loan disbursement to infrastructure sector grew at an average rate of 46 per cent between 2004 and 2008.The initial success, which could have blinded the constituents of the infrastructure leadership, was tremendous. The sheer enormity of the targets with respect to infrastructure (both in 10th and 11th Five Year Plans) and what was achieved is commendable even when benchmarked with the best infra efforts undertaken globally.An example of the achievement during this period (non-withstanding the recent global crisis) is that over 18,000 km of roads were constructed or enhanced (from 4-lane to 6-lane). Around 13,700 km of roads are under construction and is expected to be completed by 2015-16 period. Investment in infrastructure was at the level of 5.5 per cent of GDP during the 10th Plan, is estimated to be at 7.55 per cent of GDP during the period of the 11th Plan (2007-2012) against a target of 7.6 per cent of GDP. Not what may be called a slippage!The success of private funding in those initial years can be evidenced by the fact that as against the expectation of 20 per cent private funding of infra projects in the 10th Plan the actual private funding was to the tune of 25 per cent.Risks wished awayThe fact that during the phase of 2000-2008 a lot of such risks did crop up on a large scale does not mean that they would never aggravate in the future. So there were issues with land acquisition, which was always contentious to start with. However, a lot of projects were able to navigate out of the challenge. This possibly made a lot of promoters and their bankers feel that going forward early the success to negotiate out of structural issues, will continue. Thus, a lot of road related projects had been disbursed loans with very low Debt Service Coverage Ratio. Thus, there was very limited cushion available to service the debt (direct bank lending typically constituted 75 to 80 per cent of the project value). The argument was that the cash flow would accrue in lot of these cases from a quasi-sovereign entity namely National Highways Authority of India (NHAI). However, the execution risks were clearly underestimated.On a similar note, for power sector along with land acquisition, uncertainty regarding availability of coal was always a well-known fact. Apart from pure commodity price risk, event risk with respect to regulatory intervention is always a feature in most countries. In significant number of project plans sufficient margin of safety in terms of cash flow projections may not have been build.No choice but to be optimistic: The inadequacy of the current banking system in making term funding available for long gestation projects has been well documented even before 2004. The most prominent being the Deepak Parekh Committee on Infrastructure Financing. While the huge loan growth between 2004 and 2008 started many projects, banks and promoters assumed that refinancing will be available at low interest rate. The expectation was market liquidity conditions would remain benign and interest rate (despite burgeoning inflation) would remain low. The stakeholders of infrastructure industries also expected foreign currency inflows to continue and stock prices to keep on moving up so that the promoters can raise further loans against their holdings in listed companies.And the risk strikes backThese execution risks would typically arise from delay in land acquisition or rise in cost of construction. Any delay or escalation would affect the debt service ability given the low Debt-Service Credit Ratio (DSCR). Additional risk oversight and policy lapses further aggravated the risks to lending banks. The promoter’s contribution in many cases was actually funded by raising promoter loan against the shares of the company he owns. There was hardly any true promoter equity in some cases. The fact that the construction work was sometimes handed out to other promoter company essentially ensured that at least a few of the promoters made very high returns by virtually no equity investments in such cases.Banks soon hit the exposure limit to infrastructure sector. As regulatory and land acquisition issue stalled cash flow generation ability of the projects, the debt had to be restructured. Some promoters had significant challenges in bringing in their addition contribution and with global risk aversion at all time high, there was no exceptional rush for investment in Indian infrastructure.Pause-time to rethink?While the banking assets linked to infrastructure sector are facing a stress and there is a brake on launch of fresh big ticket infrastructure project, a pause in its tracks is not necessarily a bad thing for infrastructure, other than for stock investors whose long term investment horizon is, say, three months! Most of the risks that could have, have played out. Other issues have been ingrained in the system. Some such as land acquisition may get at best partially resolved even (and as and when) when the Land Acquisition Bill is finally passed. Some issues such as fuel availability are something that one has to live with. These risks need to be rigorously accounted for in all such projects.One hopes when the infrastructure engine accelerates again (note that it has slowed down but not stopped), lenders would be more circumspect while political leadership and regulators would possibly focus ensure that the capital structure is not practically over leveraged, investors may show more maturity and patience. Lastly, all the stakeholders should behave responsibly and may build in the learnings in terms of things that can go wrong and include it in their projections as well as return expectations.Would Better leadership work?Given the regulatory challenges that exist in any emerging country (India is no exception), the economic leadership in India had significant achievements to showcase. However, one may argue that the achievements were under a benign economic scenario. Besides, the structural and known challenges of funding access, land acquisition, mining access did not crop up. Thus relatively lenient assumptions with respect to risk, return and regulation would have done.However, the real test of leadership is always a crisis. And while it would be too much to expect even the best leaders to pull an entire economy out of reason, the achievement should be measured in how the structural issues are handled (if at all they can be handled over a short to medium term) and during the period of this adjustment how the various stakeholders are managed so that even if the infra growth is moderated it does not come to a standstill.The author is Director – Structured Finance, Fitch Ratings India. Views are personal.