Urban Infrastructure in India

Where India stands and where it should head

Infrastructure is the basic structure, services and facilities required for the
proper functioning of an economy. It refers to the structures required to support
the society such as transportation, agriculture, water management,
telecommunications, industrial and commercial development, power, petroleum
and natural gas, housing and other segments such as mining, disaster
management services, and technology related infrastructure. Urban
Infrastructure refers to the physical structure present in cities and towns.
Infrastructure development has a key role to play in both economic growth and
poverty reduction.
In the 1950s the general perception of the policy makers was that India is pre-
dominantly an agriculture-based economy. Over development in urban areas
was considered skeptically as they held the notion that it will lead to the draining
out of the resources from the country-side to the cities. The problems regarding
the urban areas were considered just as welfare problems rather than problems
of national importance. The investment in this sector was of residual nature.

Present Scenario

The importance of urban infrastructure has seen a dramatic change from the
1950s till now. Its importance can easily be estimated by the fact that the
percentage of urban population increased from 17.28 percent in 1951 to 23.33
percent in 1981, 25.71 percent in 1991 and which further increased to 28
percent in 2001. The contribution of the urban population to the GDP has been
calculated to be around 30% of the total, in 2001.

YEAR POPULATION Decadal Urban % of Urban Number

(in millions) Growth Rate Population Population to of towns
% (in millions) total
Population
1951 361.1 13.31 62.4 17.28 2843
1961 439.2 21.64 78.9 17.96 2365
1971 548.2 24.80 109.1 19.90 2590
1981 683.3 24.66 159.4 23.33 3378
1991 846.3 23.86 217.6 25.71 3768
2001 1027 21.34 287.6 28 4368

Contrary to popularly held conception of India being predominantly a rural

economy, an increasing percentage of the population resides in urban areas
today. Most of the commercial activity perhaps other than agriculture and village
merchandise takes place in urban areas. Therefore, to a large extent, urban
India is the engine of productivity and growth in the country. The Indian
government has recognized this fact and has been working towards the
development of this propeller of growth.

The massive increase in the percentage share of urban population in class I

cities from 26.0 in 1901 to 68.7 in 2001 has often been attributed to faster
growth of large cities, without taking into consideration the increase in the
number of these cities. There were only 24 class I cities in 1901 that have gone
up to 393 in 2001. The pattern of growth has remained similar over time
although there is a general deceleration in urban growth in all size categories in
the past two decades. Class I cities in the country experiencing higher
population growth as compared to other categories (except VI) is due to both
aerial expansion as well as in-migration. A large number of satellite towns have
emerged in the vicinity of these cities.

The Constitution (74th) Amendment Act 1992 has unleashed a new era of
dynamism and reform in Urban India. Given the risks involved in large projects,
the government has identified the main problem as the availability of funds. The
public sector cannot fund these large projects all by itself. The government thus
has proposed a flexible budgetary scheme with allocation to Public-Private-
Partnership (PPP) for infrastructure projects. A special purpose vehicle (SPV),
called the Indian Infrastructure Finance Company (IIFC) has been proposed to
fund such projects. The IIFC will fund projects in urban infrastructure such as
roads, ports, railways, airports and tourism.

There is no denying the fact that power is one the major drivers of the growth
machine of any economy. In recent years, there’s been an uninterrupted policy
focus resulting in forward looking India Electricity Act 2003, de-licensing of
thermal power generation, restructuring of SEBs, proper market for power,
setting up of power exchanges amongst other initiatives. As such, significant
project opportunities are expected in the power generation sector and the
interest in the sector is at an all-time high. Efforts have been made to make the
tariff policy of power transparent. The Electricity Act lays down the method of
calculating the tariff considering all the factors involved. The generation capacity
has leaped from a mere 1713 MW just after independence to 147402.81 MW of
installed capacity in 2009.
The transporting sector has seen mixed activities. While some areas have seen
developments some has not. Clearly better the connectivity better is it for the
economy.
The road network of India is the second largest in the world. The National
Highways Authority of India is responsible for the strengthening and widening of
the National Highways in a multiphase manner. Indian Railways, which a few
years ago was operating at a loss, has, in recent years, been generating positive
cash flows and been meeting its dividend obligations to the government, with
operating profits going up substantially. The ports and airways sectors also have
seen major developments in the recent past.
A major contributor to the urban development in recent times is the improvement
in the telecom sector. A major upgradation in the voice services has lead to a
steep decrease in the call rates and the involvement of many new players in this
sector.
A major key for this project is the Foreign Direct Investment. FDIs have become
one of the major sources of capital for emerging market economies (EMEs). To
encourage foreign funds flow into the Infrastructure in India, the Indian Finance
Ministry has allowed Foreign Institutional Investors (FIIs) also to invest in
unlisted companies. FIIs now can invest 100 % of their funds in the
Infrastructure in India. In order to make the core sector more attractive for FDI,
the Cabinet Committee on Foreign Investment (CCFI) has modified the 49
percent cap on foreign equity in the infrastructure sector to make fund
mobilization easier.

Constitution (Seventy-Fourth Amendment) Act 1992 is a revolutionary piece of

legislation by which Constitution of India was amended to incorporate a separate
Chapter on urban local bodies, which seeks to redefine their role, power,
function and finances. It has made the urban local bodies into vibrant self
governing institutions. This has ushered in a new era of urban governance and
urban management in India. The future is full of possibilities and excitement for
investors, planners, administrators, economists and above all 300 million urban
dwellers of India.
Problems Faced

Although the urban infrastructure has seen major developments in the recent
past, it still faces some problems which are quite eminent. One the major causes
of worry is the paucity of funds. This is augmented by the fact that there is a limit
on external commercial borrowings for such projects. It is a well known fact that
most of the funds made available under governmental programs for provision of
basic services during the first three decades of planning, has gone to a few large
cities and benefited mostly the high and middle income colonies.

The gestation period of any infrastructural project is very long. The heavy import
duty levied on the imported construction materials aggravates the problem
further. Also, although city transport, systems and airports have found place in
the development processes, some of the essential elements such as drinking
water, sewerage management, drainage and primary health have not been
given their due importance.

Another major problem in this sector is the availability of land. The Urban Land
Ceiling Act (ULCA), that was proposed to ensure equity in access to land within
a framework of planned urban development, unfortunately failed in achieving the
objective. It is now considered as one of the key hindrances in development of
cities.

The disparities in the developments that took place in the large cities and the
one taking place in small towns are quite obvious. It’s only a handful of cities
which command strong economic base that attracts investment from private and
foreign investors. The deficiency of basic amenities in small towns has been a
serious hurdle in attracting private investment from within or outside the country,
which is reflected in the low demographic growth in these parts.
The Future

It is now an established fact that development in the urban sector will have
significant positive results on the economy of this country. It is predicted that by
2030, the urban sector will contribute about 70% to the national GDP. This
easily establishes the amount of importance we can attribute to the urban
infrastructure.
The public sector alone can’t carry out the amount of effort this sector demands.
Thus the PPP model must be encouraged as far as possible. The government
must provide import duty exemptions for PPP projects. Mechanisms must be
undertaken to ensure planned and expeditious implementation of infrastructure
projects. The projects must be properly phased in order to optimize the resource
utilization.
The business proposition for infrastructure projects should be made more
lucrative so that foreign investors are attracted towards this sector. Tax regime
for FIIs should be made more lenient and agreements like Double Taxation
Avoidance Agreements (DTAAs) be encouraged. More and more SEZs should
be developed to attract investments by private sectors.
Special capital support must be provided to less developed states that are not
able to allocate enough resources for their urban centers. The National
Commission of Urbanization in 1988 proposed to increase the resources
allocated for urban centers. Policies must be so designed that most of these
funds go to the small cities and towns where it is most required. Reform in land
acquisition policies is the need of the day.
I finally conclude by stating that the future of the urban infrastructure surely
looks bright and it will be a major player in the nation’s economy in near future.
Appropriate steps must be taken to ascertain this sector keep growing and
contributing to the economy.