External Audit

Demographic environment
India is a large, diverse, and populous country with a varied topography, ethnicity, income classes etc,
making it an extremely challenging country but at the same time, a land of opportunities for the
infrastructure sector.
Population
Indias is the second most populous country in the world after China. According to the data by United
Nations, Department of Economic and Social Affairs
1
, India had a population of 1.22 billion in 2010,
behind China, which had a population of 1.34 billion in 2010. The population of India is forecasted to
overtake that of China by 2020, when India will become the most populous country in the world.
Figure 1 Population of India and China

Furthermore, Indias population consists of a large proportion of young population 48% of the
population in 2010 was below the age of 30 years, a feat, which is quite unique to a country as large as
India.
Topography
India is endowed with almost all the important topographical features, such as high mountains, extensive
plateaus, and wide plains traversed by mighty rivers. With a geographical area of 3,287,263 sq. km, India
is the seventh largest country in the world
2
. The level of urbanization in India was 27.78 per cent in 2001,
which was much lower than the average level of urbanization in the developing countries (40 per cent in
2001). According to census 2001, there are 35 million plus cities consisting of 107.9 million urban

1
United Nations, Department of Economic and Social Affairs, Population Division (2011). World Population
Prospects: The 2010 Revision, CD-ROM Edition.
2
http://www.nih.ernet.in/rbis/india_information/topographic.htm
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populations and constitute nearly 39 per cent urban population in the country
3
. Clearly, the level of
infrastructure in the urban areas is much better than the infrastructure in the rural areas. In fact, most of
the infrastructure development work currently going on can be attributed in the urban areas.
Income
Even as India has made tremendous economic progress over the last five decades, India has a very wide
disparity in income, second only to South Africa among developing countries. According to a report by
the Institute of Applied Manpower Research (IAMR) and as quoted by the India Today Group
4
,
"In India, the distribution of assets is extremely unequal, with the top 5 per cent of the households
possessing 38 per cent of the total assets and the bottom 60 per cent of households owning a mere 13 per
cent
India's Gini coefficient, the official measure of income inequality, has gone from 0.32 to 0.38, (0 being
the ideal score). In the early 1990s, income inequality in India was close to that of developed countries;
however, its performance on inequality has diverged greatly since then, bringing it closer to China on
inequality than the developed world. There is evidence of growing concentration of wealth among the
elite. The consumption of the top 20% of households grew at almost 3% per year in the 2000s as
compared to 2% in the 1990s, while the growth in consumption of the bottom 20% of households
remained unchanged at 1% per year
5
.
Economic environment
Growth drivers
India has a very large domestic market, and rising domestic demand is a major driver of economic
growth. A vast supply of inexpensive but skilled labor has turned India into the back office of the world.
India's emerging middle class will continue to drive demand for new goods and services. A wealthier
society, combined with tax reforms, would serve to boost revenue receipts, relieving fiscal pressure. The
government has implemented some tax reforms. A uniform goods and services tax to be implemented in
the near future should help boost compliance, thereby raising government revenue. With Chinese labour
costs rising aggressively, India may well enjoy a manufacturing boom in the coming years as
multinational look to take advantage of a young, competitive workforce and major transport network
improvements.
6


3
R. B. Bhagat, Dynamics of Urban Population Growth by Size Class of Towns and Cities in India, Demography
India, Vol. 33, No.1 (2004), pp. 47-60
4
Income gap between rich and poor has widened, says Planning Commission, India Today, Oct 23, 2011,
http://indiatoday.intoday.in/story/rich-and-poor-division-penury-hdr-planning-commission/1/157212.html
5
India's income inequality has doubled in 20 years, Dec 2011, The Times of India,
http://timesofindia.indiatimes.com/india/Indias-income-inequality-has-doubled-in-20-
years/articleshow/11012855.cms
6
Growth Upturn, But Mind The Twin Deficits India Business Forecast Report, Q2 2013 Business Monitor
International, 18 January 2013
Growth resisters
Despite rapid economic growth, India remains a very poor country. According to estimates by Business
Monitor International, India's GDP per capita was roughly US$1, 400 in 2011, a third of the size of
China's. Agriculture remains inefficient, and poor monsoon rains can slash rural incomes and
consumption. Two-thirds of the population depends on farming for their livelihood. India runs chronic
trade and fiscal deficits, both of which are near historic highs. The government spends a significant part
of its revenue on interest payments, subsidies, salaries and pensions. This limits the amount of money
available for infrastructural improvements. India's dependency on oil imports is problematic. This
undermines the trade balance and makes India vulnerable to energy price-driven inflation. India is at risk
of severe environmental problems. Many of its cities' air and rivers are heavily polluted, raising questions
about the sustainability of the economy's rapid growth
7
.
GDP growth
Indias GDP growth has slowed down considerably in the last 3-4 years and the fiscal year 2012 is likely
to end at a sluggish growth of 5.5%. However, the GDP is likely to gain some steam in the next two years
and is forecasted to grow by 6.1% and 6.7% in 2013 and 2014 based on the key drivers mentioned in the
previous section.
Indias national investment rate is around 33-34 per cent, and is expected to increase to 36 per cent by the
end of 12th Five Year Plan (2012-17). India has been adjourned the fifth best country in the world for
dynamic growing businesses, as per the Grant Thornton Global Dynamism Index. The index gives a
reflection of how suitable an environment the country offers for dynamic businesses. Indian tax climate
was also considered to be reasonably favourable and India continued to be an attractive investment
destination, according to a survey conducted by Deloitte Touche Tohmatsu Ltd (Deloitte). Furthermore,
India was ranked fourth on Ernst & Young's (E&Y) renewable attractiveness index, second on the solar
index, and third on the wind index, as per the latest study by E&Y and UBM India Pvt Ltd
8
.
Figure 2 India's Real GDP Growth Rate (%)

Source: Business Monitor International

7
Growth Upturn, But Mind The Twin Deficits India Business Forecast Report, Q2 2013 Business Monitor
International, 18 January 2013
8
Indian Economy Overview, Indian Brand Equity Foundation, February 2013, http://www.ibef.org/india-at-a-
glance/India-diverse-democratic-dynamic/indian-economy-overview.aspx
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Political environment
India is the world's largest democracy. A secular constitution, framed in 1950, officially guarantees
justice, liberty and equality while aiming to promote fraternity among the citizenry. More than 1,000
political parties registered for the April-May 2009 general elections, competing for the preference of
India's 714mn eligible voters. Despite its multitude of problems, India has generally managed to avoid
hard authoritarian rule or military coups, which have happened in many other developing countries,
including India's neighbors Bangladesh, Myanmar and Pakistan. India has in recent years edged closer to
the US in foreign policy. Both the US and India are democracies and face threats from militant Islamists;
this, combined with the presence of a 2 million-strong affluent Indian diaspora in the US, is bringing the
two countries closer together. Thawing relations with Pakistan has made it easier for the parties to defuse
potentially explosive situations, such as the Mumbai attacks in November 2008, which Islamabad
acknowledges were planned and launched from its territory
9
.
However, large coalition governments complicate policymaking at the centre as coalition partners and
outside parties pursue their own agendas. The competence of state government varies enormously across
India's 35 states and union territories. India's tense relationship with Pakistan still weighs on regional
stability. The two countries have gone to war three times since they were 'partitioned' on independence
from British rule in 1947. Issues such as the ineffectiveness of the executive and judiciary in controlling
underhand practices, the apparent arbitrary allocation of government licenses, and the uneasy influence of
special interest groups remain key investor concerns. India's growing regional rivalry with China, if
unchecked, could lead to a more hostile regional climate. India has experienced a series of serious
terrorist attacks over the past few years, perpetrated by radical Islamist and rural Maoist groups. The
surge in Naxalite attacks has also raised the presence of further violence
10
.
Regulatory and legal environment of Indian infrastructure sector
The Indian Government is making consistent efforts to accelerate the growth of Indian infrastructure with
its array of infrastructure reforms. The aim of these reforms is to achieve planned and consistent
economic development.
The infrastructure sector is governed by specific statutes governing the specific sectors it encompasses.
These statutes provide the modes and means of private participation. Generally private participation is
allowed through grant of licenses to the private developer or through contractual relationship. The scope
and extent of private participation is determined by the state government concerned and can be of varying
degrees, such as on a build, own and operate (BOO) or build, operate and transfer (BOT) or build, lease
and transfer (BLT) basis.
In brief, the legal framework within which the infrastructure sectors operate is described below
11
. The
reforms backed by a large statistics of projects go on to confirm that infrastructure sector is presently

9
Growth Upturn, But Mind The Twin Deficits India Business Forecast Report, Q2 2013 Business Monitor
International, 18 January 2013
10
Growth Upturn, But Mind The Twin Deficits India Business Forecast Report, Q2 2013 Business Monitor
International, 18 January 2013
11
Infrastructure Laws in India by Rajkumar Dubey sourced from www.mondaq.com. Direct Link
http://www.mondaq.com/india/x/27497/real+estate/Infrastructure+Laws+in+India
booming in India. A phenomenal growth has been projected making it an opportune time to invest in this
sector.
Power
Laws in place: The new law Electricity Act 2003 replaced Indian Electricity Act 1910, the Electricity
(Supply) Act 1948 and the Electricity Regulatory Commission Act 1998.
Advantages of the new law
This law promotes competition; decreases the amount of regulatory approvals necessary, introduces
uniform licensing for electricity distribution, transmission and trading; rationalizes electricity tariffs;
provides transparent policies regarding subsidies; and provides statutory basis for the restructuring of
state electricity boards.
Provision of the Electricity Act 2003
Private participation in generating companies and captive generating plants is allowed without a
license.
Activities pertaining to transmission, distribution and trading of electrical energy is subject to
the possession of a license from the appropriate electricity regulatory commission (ERC). The
license can be procured subject to fulfillment of certain terms and conditions and is valid for 25
years.
The regulatory functions have been delegated to the Central ERC, State ERC, the Joint
Commission and Appellate Tribunal constituted under the act.
Monitoring agencies and agencies for governing operational aspects of the electricity system are
also formulated under the act.
Total foreign direct investment (FDI) is permitted for hydroelectric power plants, coal/lignite-
based thermal power plants and oil and gas-based thermal power plants projects.
Fiscal incentives like a 100% tax holiday for new power projects in any block of 10 years within
the first 15 years of operations
Tax exemption for interest/dividend, long-term capital gains
Concession rates of import duties and deemed export benefits.
Airports
Laws in place: Policy on Airport Infrastructure 1997, Airports Authority of India Act 1994, the Aircraft
Act 1934 and the Aircraft Rules 193
Provision of Policy on Airport Infrastructure 1997
The policy recognises the importance of private participation for a sustained development of airport
infrastructure. It seeks to achieve this by
Corporatising airports with the aim of divesting the government holding in the future. The
airports can be owned by the central or state governments, public sector units, urban local
bodies, private companies and individuals or through joint ventures. The management of
airports or parts of airports can be on BOT, BLT, BOO, joint venture, management contract or on
a wraparound addition basis.
Preparation of detailed masterplans for the development and upgrading of all selected airports
in line with the standards and recommended practices of the International Civil Aviation
Organisation.
Greenfield airports projects may be permitted in the public or private sector or as a joint
venture without the approval of the government. However, for other categories of airports run
by private operators, the approval of the director general of civil aviation is required.
Permitting FDI, in joint ventures relating to airport infrastructure, up to 74% under the
automatic route and up to 100% with prior approval
Fiscal incentives like 100% deduction in profits for the first five years followed by 30% deduction
for next five years, full deduction to run for continuous ten out of twenty fiscal years of the
assessees choice, and deduction of 40% of the profit to financial institutions from long-term
financing of infrastructure projects
Provision of Airports Authority of India Act 1994, the Aircraft Act 1934 and the Aircraft Rules 193
Private participation is allowed through issuance of license for an airport other than those
owned by the Central Government and formation of joint ventures with the Airports Authority
of India.
Establishment of private airports and leasing out of airports to private entities is now permitted
subject to approval of the central government
Full deduction to run for a continuous 10 out of 20 fiscal years of the assessors choice and
deduction of 40% of the profit to financial institutions from long-term financing of infrastructure
projects
Roads
Laws in place: National Highways Act 1956 and the National Highways Authority of India Act 1988.
The functions relating to development, maintenance and management of national highways are carried out
by the National Highways Authority of India.
Provisions of the law
FDI up to 100% (with total foreign equity up to 1500 crore) is permitted in construction and
maintenance of roads, highways, toll roads, vehicular tunnels, rail beds, non-vehicular bridges, non-
vehicular tunnels, pipelines, ropeways and runways.
Fiscal incentives include
o duty free imports
o 10 years of corporate tax holiday within 20 years of commissioning the project
o exemption on profits of financing institutions
o exemption on long-term capital gains of investors
o concession period up to 30 years
o toll rates indexed to the wholesale price index

Water
Laws in place: The National Water Policy 2002
Provision of Law: Encourages private sector participation in planning, development and management of
water resources projects for diverse uses, wherever feasible.
Railways
Provision of the law:
Railway transport is covered in the list of industries reserved for the public sector and is therefore
not exempt from industrial licensing requirements. However, several railway components have had
licences removed.
FDI in the railway sector has been allowed with sectoral caps.
o FDI up to 51% is permitted for the manufacture of railway containers used in container
traffic.
o FDI up to 74% is permitted in construction and maintenance of railbeds, bridges and
tunnels under automatic route.
Ports
Laws in place: Major Ports Trusts Act 1963 and amendments thereof
Provision of the law
FDI up to100% is allowed.
A tax holiday is provided for the first five years followed by a 30% rebate on the earnings in the next
five, which may be used within 12 years of the commissioning of the project.
Oil and natural gas
Provision of the law
In exploration and production, Indian oil and gas fields are open to the private sector and for foreign
participation up to the prescribed limit under production sharing contracts.
In the refining sector, 100% FDI is allowed under the automatic route in the private sector. However,
FDI up to 26% is permitted where the joint venture is with public sector undertaking.
FDI up to 51% is permitted for petroleum products and the pipeline sector.
Fiscal incentives like corporate tax deductions and allowances, seven-year tax holidays and
deduction of expenses are allowed.
Divestment of government holding in the oil sector has further enhanced the scope in the sector.