Infrastructure is a driving force in the Indian economy, contributing tremendously towards the overall growth and development. This sector includes power, roads and highways, airports and aviation, railways, ports and shipping and urban infrastructure and housing.
Historically, the public sector financed infrastructure spending almost entirely. However, the state centric approach of building, owning and managing projects followed by the government post independence led to years of unmet demand and growing financial constraints. This resulted in the government opening the sector to private investment as part of its economic liberalization in the early 1990s.
Today, India needs US$1 trillion for its infrastructure (12th five year plan), with half of that expected to come from private capital.
The top players in the market include Larsen, Adani Ports, BHEL, Siemens and ABB among others.
India has made a significant progress in attracting private investments in the infrastructure sector. Over a decade (2002-2012), private sector has invested approximately US$ 250 billion in various infrastructure projects. More importantly, investment in infrastructure as a percentage of GDP increased from 4.9 per cent in 2002-03 to about 7.2 per cent in 2011 – 12 and is expected to reach 10 per cent of GDP by 2016-17, according to CII.
Realizing the massive investment requirements and the need for a more competitive infrastructure industry, the Government of India has adopted a new approach with public–private partnership as the cornerstone of its policy framework. The current policy framework allows 100% FDI in most infrastructure sectors with no restriction on repatriation of profit. Moreover, the Government of India has launched a Viability Gap Funding Scheme to enhance the financial viability of competitively bid infrastructure projects.
Viability Gap Funding (VGF) refers to a one-time or deferred grant, provided to support infrastructure projects that are economically justified but fall short of financial viability. For instance, it would not be possible to charge user fee by way of a rural road connecting villages, due to the income factor of rural population. This creates a hindrance in getting private investment. In such cases, the government can pitch in and meet a portion of the cost, making the project viable. Despite all the progress, the Indian Infrastructure sector has faced years of underinvestment and chaos, which has resulted in slow growth. Growth slipped from 10.5 percent in 2010 to 4.8 percent in 2013, according to the World Bank.
India ranked 85th out of 148 countries for its infrastructure in the World Economic Forum’s 2013- 2014 Global Competitiveness Report.
As far as power is concerned there is massive electricity shortage. The gaps between relevant measures- such as privatization of the distribution sector, tariff reform, and anti-theft measures- and their implementation continue to exist.
The roads and highways and transport situation is no better with only half the country paved and national highways not meeting the required standards.
The ports and airports suffer from cumbersome customs and inefficiency, and new projects face a lengthy list of administrative and environmental clearances that could take years to get settled.
All in all, India needs to pull up its socks, given the seriousness of the situation and the vitality of the sector in question.
Thankfully, there’s good news. To everyone’s relief our infrastructure performance in 2014-15 was better than the previous fiscal, as production of inputs including power, steel, coal and cement moved up, says ET.
Other areas that showed improvement are fertilizer, refinery, goods traffic carried by railways, cargo handled at major sea ports, airports and net addition in telephone switching capacity (Ministry of Statistics & Programme Implementation).
Recent developments include, the government revealing plans to invest in the rail network; companies increasing investments in the construction business and real estate; and propositions to add on to the existing aircrafts and ports.
Going at this pace we will definitely be successful in achieving our growth rate target. Major infrastructure development requires a substantial influx of investment capital. The policies of the Government, therefore, must seek to encourage investments in domestic infrastructure from both local and foreign private capital.
Polices such as the recent ban, by the RBI, on bank purchases of new infrastructure bonds must be done away with. On the other hand agreements must be initiated with other countries, for the enhancement of our infrastructure; such as India’s partnership with the United States for the launch of the US$10 billion dedicated Infrastructure Debt Fund in 2010.
“The link between infrastructure and economic development is not a once and for all affair.
It is a continuous process; and progress in development has to be preceded, accompanied, and followed by progress in infrastructure, if we are to fulfill our declared objectives of generating a self-accelerating process of economic development.” – Dr. V. K. R. V. Rao
The writer is a student at SSCBS, DU. The views expressed are based upon the analysis and research that the writer did on the topic from various books, reports and web articles. The writer regularly writes for Corporate Monks as a research associate. The writer takes personal responsibility for the ownership of the content shared and incase some sources have not been given credit, you can directly mail the writer firstname.lastname@example.org