Over the years, India has made significant progress in physical infrastructure segments like electricity, railways, roads, ports, airports, irrigation, urban-rural water supply and sanitation. Still, India ranks only 84th in basic infrastructure as per the Global Competitiveness Index 2012-13 of the World Economic Forum. India faces significant challenges of inadequate investments and the absence of a promising environment for better private participation in the infrastructure space. This has also resulted in the slowdown in India?s GDP growth rate. Yet, India?s growing economy holds huge potential for critical infrastructure development consisting of transportation, power and telecommunication. There remains a need to stimulate investments through policy and structural reforms.
Major highlights of the infrastructure sector
Growth in the core infrastructure industries decelerated to 4.4% in FY12 after growing at a rate of 6.6% in FY10 and FY11.
Sectoral deployment of bank credit to the infrastructure sector during FY13 (Apr-Oct 12) stood at R202.6 bn. On a year-on-year basis, this represents a growth of around 15%.
Envisaged total fixed investment by large firms in new projects which were sanctioned financial assistance during FY12 dropped by 46% to about R2.1 tn from R3.9 tn a year ago.
The development of the infrastructure sector has been a top priority of the Indian government for the past couple of years. The government has been investing heavily in this sector and devising conducive policies to encourage private participation. However, it is evident that the current level of investment is not sufficient to meet the demand. The projected investment in infrastructure has been increased from R19,481 bn in the Eleventh Five-Year Plan to R40,152 bn in the Twelfth Five-Year Plan in order to bridge the demand-supply gap.
The government is seeking to increase its investment in infrastructure through a combination of public investment and public private partnerships. Several measures have been announced recently in this context. The government, in the middle of the current financial year, promised to boost the country?s infrastructure and pledged quick action in awarding airports, highways and port projects. Other significant steps announced in 2012 include easing of external commercial borrowing norms for infrastructure companies, encouraging foreign institutional investors, qualified foreign investors and other foreign investment in infrastructure bonds and other securities. These measures could provide the necessary impetus to the sector. The government had also set up an infrastructure debt fund through public-private partnership to address the long-term funding problems of the sector.
Further, the government has recently got a bill allowing 51% FDI in multi-brand retail passed in Parliament, thus, paved the way for international multi-brand retailers to come in. Opening up the retail sector has been under consideration for more than a decade. This regulation includes a clause for the multi-brand FDI retailers to invest 50% of their total investment to develop India?s back-end infrastructure such as cold storage, warehouses, etc. This is expected to develop India?s overall food supply chain where private investment is minimal.
Power
Investment in the power sector has been affected by the rising losses of public sector utilities. Though power tariffs have been raised by many state electricity boards (SEBs) along with several other steps initiated to improve the financial health of the SEBs over the last two years, the rising fuel cost and operating expenses have pressured their financial performance during FY12 and the first half of FY13. Though the government has approved a a debt restructuring plan for the SEBs, its implementation is being delayed. The reform is expected to mitigate the financial losses of SEBs and enhance the power distribution system.
The exposure of banks to the power sector is about R3.3 trillion as per sector-wise deployment of credit obtained from 47 scheduled commercial banks that account for 95% of total non-food credit. However, with the government planning to invest around R15,000 billion during the 12th Plan as compared to R8,021 bn during the Eleventh Plan and with more private participation, the power sector is expected to achieve a double-digit growth in the next five years.
Railways
The growth target for the overall infrastructure development in the Indian Railways has not been matched with demand, as many projects have been running behind schedule, leading to time and cost overruns of more than 100%. Only around 1,800 km of new lines were added from 2006 to 2011; compare this with China, which added around 14,500 km. Some of the issues affecting the sector include lack of funds, mismatch in investment priorities, lack of timely reforms in organisations and inability to attract private investments. Moreover, the loss-making Indian Railways lack adequate funds to support its investments.
However, the ministry of railways has proposed to increase the freight rates and passenger fares to revamp its revenue inflows. Moreover six high speed rail corridors have been proposed, wi-fi in trains, converting the remaining meter gauge to broad gauge railway tracks, modernisation of nearly 19,000 km track through renewal, strengthening of 11,250 bridges to run heavier freight trains of 25 tonne axle load and to achieve passenger train speed of 160 kmph have been proposed by the government during the next five years with an investment of R632 bn.
Ports
India has around 13 major ports which handled around 560.15 mn tonnes of cargo during FY12 as compared to 423.56 mn tonnes during FY06. Moreover, these ports along with more than 55 operational non-major ports handled more than 90% of India?s external trade by volume. However, there are many issues faced by ports, including the long custom procedures, unavailability of proper infrastructure to handle large cargo, receiving proper clearance on time, insufficient connectivity, etc. Looking at these irregularities, the ministry of shipping had undertaken 25 major projects under the public-private partnership route to be allocated during FY13.
The government also proposed to invest around R1,200 bn in more than 400 projects in major ports and R1,600 bn in non-major ports of which more than three fourth is to be allotted to the private sector by the end of 2020.
Roads
Importance of the road infrastructure in economic growth needs no reiteration, since more than three-fourths of passenger traffic and more than half of the freight moves by roads in India. The total road network constitutes around 3.34m km of which the National Highways constitute a mere 2%, state highways around 3.9% and the rest is with major districts roads, rural roads as well as urban roads. Yet only 24% of the country?s national highways are four-lane and meet the required standards. Traffic on roads is growing by 7-10% every year, while the vehicle population is growing at 12%. The government had undertaken and implemented many projects under various schemes to develop India?s road infrastructure, including Jawaharlal Nehru National Urban Renewal Mission (JNNURM), National Highway Development Programme (NHDP), etc.
However, during FY12 there has been a shortfall of around 50% in the government?s target of completing 20 km of road construction per day. Reasons attributed for this shortfall include financial, regulatory, execution, project planning, proper policy implementation, etc. Some of these issues need to be resolved immediately, while the others require long-term action. The government has planned to cover a length of around 8,800 km under the NHDP project by the end of FY13 with an investment of around R255 bn. It had further planned to set up infrastructure targets for various sectors, putting in place an institutional mechanism to monitor the progress of each road based projects at the central and state levels.
The way forward
The recovery process of the Indian economy since the financial crisis of 2008, as reflected in the performance of FY11, is again taking a pause in FY12 owing to global uncertainties. However, given the huge demand for infrastructure development, accelerating savings and investment rates hold a key to revitalizing the economy and achieving the growth aspirations. Moreover, there is a huge investment target for the infrastructure sector to be met during the 12th Plan period. The government has been taking measures such as clearing some of the long standing infrastructure bills, including the land acquisition bill, bringing transparency in the tendering process for infrastructure projects, and enhancing the monitoring of projects with the use of technology, etc. so as to achieve the 12th Plan target. It further plans to enhance private investment in the infrastructure sector up to 50% by the end of the Plan period. This needs to be supported by taking conducive policy measures, enhancing the tendering process at every stage, and adopting pending reforms so as to create a favourable environment for private investment in the infrastructure space.
Going forward, India can regain its near to double-digit growth trajectory only if infrastructure development is taken as a priority, supported by an efficient system for clearing infrastructure projects of all sizes across sectors.
The author is leader?Economy Analysis Group, Dun & Bradstreet India