PM needs to focus on infrastructure for growth

While India is one of the fastest growing economies in the world today, a major obstacle for sustaining its real GDP growth has been the lack of adequate infrastructure, which can support the growth process. Low levels of public investment have made India’s physical infrastructure incompatible and without improving the rate of infrastructure investment, the overall growth rate would remain modest. Therefore, there has been a growing emphasis by the Government of India to mobilise infrastructure investments to the tune of$1 trillion during the 12th plan (2012-17) across sectors such as roads, railways, seaports, airports, power, telecom, water and irrigation of which 50% is expected to come from the private sector in the form of both debt and equity. However, there is a realisation that expecting private sector to contribute nearly 50 per cent to the total infrastructure deficit is a stiff ask given that there are lack of bankable projects and mistrust between the private and government sector.

The 11th FYP had projected investment requirements in infrastructure to be about $514 billion. This target was doubled in the 12th FYP to nearly $ 1 trillion highlighting that GDP growth averaging 9% per year can be achieved only if this infrastructure deficit can be overcome. It was opined that domestic savings can contribute significantly to boosting infrastructure investment. However these savings have to be intermediated into infrastructure to achieve these targets.

The government plans to draw an even mix of public and private sector investments in the 12th FYP through public private partnerships (PPP) and other initiatives. “Make in India” is a nice slogan and will remain one unless, inter alia infrastructure genuinely improves and most of these will come through the public private partnership which means that there is a need to institute measures to fast track these and make them more attractive. The gross capital formation (GCF), as an indicator of investment in infrastructure, grew to 6.5% of GDP in FY12. The overall share of investment in infrastructure (as a percentage of GDP) is expected to be 8.37% in the base year of the 12th FYP. However, the infrastructure requirements for a 9% growth in GDP will require a further step up in the pace of infrastructure development during the 12TH plan. If GDP in the 12th period grows at an average rate of 9%per annum, it should be possible to increase the share of investment in infrastructure to about 10.70% of GDP in the terminal year of the 12th plan.

In a World Bank study on ease of doing business 2013, India ranks 184th among 185 countries in terms of enforcement of contracts. Given the past record, typically seven out of ten infrastructure projects in India actually get implemented. So even if 70% of $1 trillion investment target has to materialize over the 12th plan period, it would require a mammoth effort.

For any nation, development of infrastructure is essential to ensure growth. India has lagged on this front for some time now and the Modi government plans to give a major push to infrastructure. The government is in the process of preparing an ambitious infrastructure development programme to be implemented in the next 10 years. A fast track investment friendly and predictable public private partnership mechanism is expected to be in place. Modernization and revamping of railways is on top of the infrastructure agenda. Moreover in order to promote investments in infrastructure, the government had introduced long term infrastructure investing options by providing an avenue of participating in long term bonds. Recently, the government has relaxed rules for FDI in the construction sector by reducing minimum built up area as well as capital requirement and liberalized exit norms.

The Government has undertaken various steps to improve infrastructure financing in the country. The cabinet has also approved the proposal to amend the FDI policy. India and the US have signed a MOU in order to establish infrastructure collaboration platform which would facilitate US industry participation in Indian infrastructure projects to improve the bilateral commercial relationship and benefit both the participating economies. India also has signed an agreement to become the founding member of the China backed Asian Infrastructure Investment Bank (AIIB) which aims to aid the infrastructure development in the Asian region and reduce the dependence on World Bank and IMF. Moreover India will be the second largest shareholder of the bank after China. India and Japan also upgraded their partnership by expanding the bilateral cooperation between the two nations and also elevating the already established strategic partnership to the “special strategic global partnership”. Japan also committed to double its direct investment in India from $2 billion in 2013 to 3.5 trillion yen in the next five years from 2014. India is also in the process of importing Shinkansen technology from Japan as part of Modi’s Diamond Quadrilateral project for introducing high speed rail in India. At the same time China is also expected to commit investment of over $30 billion billion in India’s infrastructure projects including high speed trains.

Singapore has also offered assistance to fulfill PM Narendra Modi’s dream of building smart cities in India. A MOU was signed between international enterprise Singapore and the infrastructure cooperation of the Andhra Pradesh government which stated that Singapore will help design and develop a world class city area in southern India and at the same time conduct capacity training programmes for Andhra Pradesh officials to enhance their capacity in urban governance.

In tandem, to promote investments in infrastructure, the government had introduced long term infrastructure investing options by providing an avenue of participating in long term bonds. Re- introduction of infrastructure bonds and providing tax exemption up to rupees 50,000 would be a welcome change and help the country and government to achieve its objective of “SABKA SAATH SABKA VIKAS (development with everyone and for everyone)”. Infrastructure financing continues to be a key area of concern on the infrastructure front. With the PPP mode not taking off in the manner expected, the pressure to develop Infrastructure has remained with the Government. However, it is hoped the forthcoming Union Budget will place a special focus on infrastructure sector and announce several measures to restore the faith of the private sector to take up infrastructure projects and also simplify procedures to ensure speedy implementation of projects.

Given the development agenda and reform measures taken up by the Modi government, 2015-2016 is expected to be a year revival of growth for the Indian economy. There is a positive hope from the upcoming union budget of 2015.

(The writer is a Research Intern at Observer Research Foundation, Delhi)

(Courtesy: ORF)

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