Youthful Asia’s infrastructure opportunities: Malaysia has the best supply and India has largest demand gap by 2040

This is the second of a series of reports on?Youthful Asian economies and their investment opportunities.

A third of the world population’s increase from 2020 to 2040 will come from Youthful Asian economies, adding 405 million people versus Aging Asian’s decline of 5 million people. The increase in population is the largest in India (213 million), followed by Pakistan (81 million) and Indonesia (45 million) people, respectively.?Youthful Asia will also increase its urban population by 52% as 462 million people will be moving to cities from a staggering 895 million urbanites already in existence. Both population growth and rapid urbanization, require investment in infrastructure. Beyond sanitation and other health-related and social reasons, more and better infrastructure is needed to improve labor productivity.

To understand the infrastructure opportunities in Asia, we create a?Natixis Asian Infrastructure Metric (NAIM)?for existing supply as well as the?Natixis Infrastructure Gap Index (NIGI). We focus on the availability transport infrastructure (roads, railway, air, and electricity) as well as communication infrastructure (broadband) since they are essential for attracting manufacturing FDI and, more generally, for development.?

For this analysis, we select the same countries in emerging Asia that may be appealing to investors given their size and prospects for population growth and calculate their supply of transport and communication infrastructure. The ranking is shown in our NAIM. We add the demographic transition to 2040 as a proxy for the additional infrastructure needs stemming from urbanization up to 2040. The difference between the infrastructure supply and such needs is the basis for our second ranking, NIGI. Our results show not just relative performance within Youthful Asia but also relative to other benchmarks, such as China, and the US, Japan, and South Korea.

Looking into the supply of infrastructure (NAIM) Malaysia ranks best in overall infrastructure among Youthful Asian economies, even better than China. That said, Malaysia still ranks below our developed market benchmark, particularly for expressways, rail lines and fixed broadband subscriptions. Indonesia and India clearly lag in the stock of infrastructure, indicating that a large amount of investment is needed, even before accounting for the expected increase in population in the next 20 years.

When accounting for urbanization in 20 years, our?NIGI?shows the gap in infrastructure between future expected demand and current supply. India has the widest gap, followed by Pakistan, and the Philippines. If we zoom into specific infrastructure needs (transport or communications) India comes out first due to its large population increase and low supply of existing infrastructure. If we add the findings of our previous paper on Asian countries’ potential to attract manufacturing investors, India and the Philippines have a competitive labor market for manufacturing, but their woeful infrastructure supply requires more investment, and especially even more so in the future, to improve their attractiveness and productivity.

The good news is that governments across the region are prioritizing infrastructure investment. For example, the Indian government has USD1.3trillion plan called “PM Gati Shakti Master Plan” to boost domestic infrastructure in the next 25 years. Beyond government support, the yawning gap of infrastructure in Youthful Asia - coupled with their worsening fiscal situation after the Covid-19 fiscal packages - implies that private financing is needed. For those countries with structurally low domestic savings, foreign investors will be crucial in bridging the gap.?Countries that want to enhance their competitiveness in attracting offshore manufacturing investors should be working hard to close the gap to realize its demographic dividend. This is particularly the case for India.

Full report is available for Natixis clients. ?