INFRASTRUCTURE How serious is our government?

By- Richa Saxena and Rashmi Gupta

One of the greatest challenges facing India today is the creation of much needed infrastructure in order to sustain economic growth of over 8%, as well as to enhance the standards of living of the masses. To develop world class infrastructure, India requires large investments both domestic and foreign, complemented by well designed Public Private Partnership (PPP) initiatives. To achieve this, the Indian Government says that it has accorded highest priority to development of infrastructure. Infrastructure is actually a broad term including electricity generating assets, roads and bridges, telecommunication infrastructure, railway infrastructure, irrigation facilities, water supply and sanitation infrastructure, air and sea ports. It is obvious that substantial funds need to flow in to create the much needed infrastructure and the quantum of funds required over the next four to five years is being pegged at close to $500 billion, even at a very conservative level. Analysts strongly argue that if such levels of investment do not materialise, it can have a negative impact on the country’s GDP growth rates by as much as 2% to 3%. There is a clear, substantial infrastructure gap in the country!
What is the quantum of investment required in infrastructure? The eleventh plan, prepared by the Planning Commission covering the period 2007-2012, recognizes that infrastructure inadequacies might constitute a significant constraint in realizing the country’s development potential. In order to bridge this gap, an ambitious program of infrastructure investment, involving both public and private sectors, has been developed for the eleventh plan. The program ensures strengthening and consolidation of

the National Maritime Development Program and the Jawaharlal Nehru National Urban Renewal Mission(JNNURM). Investors need to have the assurance that concession will be transparently awarded.001 76. Crore 2010-2011 prices Tenth plan Sector s Electricity Roads and Bridges Telecommunicat ions Eleventh plan Rs.recent infrastructure related initiatives – such as Bharat Nirman for building rural infrastructure –as well as other sectoral initiatives.05 65. roads and bridges.816 267.850 71. How will the investment in infrastructure be financed? In his speech at London Business School in 2007. Finding a financing mechanism for these infrastructure projects is important. The overall investment required in infrastructure can be broken down into sectors. The planning commission has provided statistics pertaining to sector wise investment anticipated in the Tenth plan (20022007) and the projected investments in the same for the eleventh plan.37 70% 144.10 16% 14% 311. such as National Highway Development Program (NHDP).526 150. Further.34 30. irrigation(including watershed). the government recognizes that it may not be in a position to pool in the entire requirement in funds and therefore increased private participation has now become a necessity to mobilize the resources needed to achieve expansion and up gradation of infrastructure facilities. the finance minister identified the key issue in infrastructure development as a legal and regulatory framework that is conducive for private investment and a viable financing mechanism.892 123. the Airport Financing Plan.12 35% 30% . Crore US$ Sectorsl( Crore billion %) billion %) 291. water supply and sanitation. US$ Sectorsl( Rs. This has already started happening and both public and private sectors are learning from each project that is being implemented. How does India hope to obtain this level of investment? Sector wise Investment Anticipated in the Tenth Plan and Projected for Eleventh Plan Rs.18 33% 616. railways(including MRTS).411 35. This is very critical as it imparts the kind of credibility to the state that would encourage the private sector to invest in infrastructure. storage and gas. ports and airports. The successful promotion of private participation in infrastructure requires a well-designed framework of policies that will make investors comfortable about certain key issues. telecommunications. as detailed below: The Indian Government has claimed that it is committed to enhancing investments in infrastructure and serious efforts are being focused on improving physical infrastructure in the country. Challenges in achieving this have also been rightly recognized by the Government. the key sectors being Electricity(including conventional energy). given its other priorities.

IDFC and IIFCL.819 8.658 111.16 9 62.771 4.81 1.65 1.713 880.18 27.20 15.48 5.43 29% 25% 23% 8% 4% 3% 2% 100% Broadly speaking. the Asian development Bank has provided funds to the transport sector worth almost US$ 1. private investment and public private partnership.93 54.57 18. .76 billion from the same institution. Bilateral support is also forthcoming. a large part of the resources is expected to be found through the budget of the central and state governments. Gross Capital Formation in Infrastructure (GCFI) in 2006-2007 was estimated at 4.096 6. the government intends to find the resources through public investment.131 199. the government seems to be committed towards upgrading infrastructure to levels required.18 2.027.00 494. Recently.127 73. the World Bank has committed US$ 1.941 34. over a five year period. Saving and investment.46 5. US$2 billion will be available for equity investment and US$3 billion in the form of long term debt to fund infrastructure projects in India.748 22.500 2. The government has taken measures to broaden and deepen the debt market. Large amounts of money are parked in insurance and pension funds.42 48. have been on the rise over the last five years. Over the five years.001 223. Tax revenue are buoyant and this makes it possible to make larger allocations.00 1. as proportions of GDP.Railways Irrigation Water supply and sanitation Ports Airports Storage Gas Total 119. There is help from other sources too.516 29.803 4.5 billion to the energy sector. to jointly launch a US$ 5 billion India Infrastructure Initiative. and these could be used for infrastructure financing of long tenor.03 8.503 64. Given an economy of the size of US$1 trillion – and which is growing at 8 per cent – GCFI at such level will lead a minimum of US$80 billion a year and.6 per cent of GDP.38 to the urban water sector and US$ 0. The Delhi-Mumbai and Delhi-Kolkata dedicated freight corridors that will be built by the Indian Railways have received strong technological and financial support from the Government of Japan. Between 1986 and 2006. Governments can also borrow within the limits imposed by fiscal responsibility laws. Within India. Citigroup and Blackstone have joined hands with two Indian companies. Multilateral institutions continue to support the Indian government’s efforts in bridging the infrastructure gap. it would be possible to mobilize a minimum of US$400 billion for the infrastructure sector.378 20.13 214. Hence on review of the Eleventh Five Year Plan. this will result in greater diversification of risk and would ensure that the quantum of finances increases substantially.76 14% 13% 7% 0% 1% 1% 1% 100% 258. The government plans to put in concrete efforts to raise that proportion to at least 8 per cent.

000 crore for the enhancement of infrastructure in railways. does the budget 2011-2012 encourage or facilitate more investments in infrastructure? Given the magnitude of investments that is required to flow into the infrastructure sector. In addition. while full exemption of income of the fund from tax has been proposed. housing. Proposals in Budget 2011: However. FIIs would now be permitted to invest in unlisted bonds with a minimum lock-in period of three years.000 has been extended by a further one year. Pranab Mukherjee has planned an allocation of Rs 2. Tax sops in infrastructure investment up to Rs 20. The take-out financing scheme announced in the Budget 2009-10 has been implemented and seven projects have been sanctioned with a debt of Rs 1. To attract foreign funds for infrastructure financing. He also proposed infrastructure status for cold storage chains. Mukherjee also revealed that the take-out financing scheme announced in the last budget has been implemented and seven projects had been sanctioned with a debt of Rs 1. is being raised by an additional limit of USD 20 billion taking the limit to USD 25 billion.However.500 crore.000 crore has been planned for the scheme.14 lakh crore towards developing the country’s infrastructure in the next fiscal. As expected higher fund allocation across infrastructure development scheme Bharat Nirman has been proposed. ports. Allocation to the tune of Rs 58. the FM has proposed to create special vehicles in the form of notified infrastructure debt funds.000 crore by March 31. with residual maturity of over five years issued by companies in infrastructure sector. Interest payments on the borrowings of these funds will have a reduced withholding tax rate of 5% instead of the current rate of 20%. Mukherjee also proposed tax free bonds of Rs 30. Another Rs 5. Full exemption from basic customs duty has been extended to bio-asphalt. the FII limit for investment in corporate bonds. and highways. Tunnel-boring machines required for the construction of highways are also being included in this exemption. Also. which should specify the eventual and actual source of funds for such projects. The loopholes have been- . Another Rs 5. He further stressed on the endeavour to develop the public private partnership. The finance minister also proposed to raise the corpus of rural infrastructure development fund from Rs 16. and specified machinery for its application in the construction of national highways.000 crore will be sanctioned during 2011-12. capital investments in the fertiliser sector have been proposed to be given infrastructure status.000 crore.000 crore from the current year. India Infrastructure Finance Company Limited or IIFCL is expected to achieve a disbursement target of Rs 20. 2011 and Rs 25. Perhaps a more pertinent question is whether the Union Budget 2011-2012 reflects this spirit? To be more specific.000 crore by March 31. especially as per the planning commission roadmaps and estimates discussed above. Since most companies in the sector are organised in the form of SPVs. To enhance the flow of funds to the infrastructure sector. one would expect large allocations to be made in Union Budget. 2012. an emerging green technology for the surfacing of roads. raising the total limit available to FIIs for investment in corporate bonds to USD 40 billion. which is expected to make both domestic and global retail chains happy. an increase of Rs 10.000 crore has been proposed to be sanctioned during 2011-12.500 crore.000 crore to Rs 18.

Foreign investors often complain about the slow progress in shoring up infrastructure and have called for less bureaucracy 2. But for last two years the allocation for infrastructure sector put the rail well on the track which make confident of achieving the target. Just reduction of excise on products that are used to build highways will not help. 4. the total investment in infrastructure sector was only $ 217 billion. the investment in infrastructure was targeted and projected at $ 524 billion. 3. Infrastructure development has gone up from 4.5%of GDP in 2004-2005 to 6% in 20072008. But it is still low compared to eleventh plan target to raise it to 9% of GDP by 2012. INFRASTRUCTURAL INVESTMENT IN 11TH PLAN During the Tenth Plan(2002-2007). Pranab Mukherjee seems to have left untouched the constant issues of lack of clarity on policies and long term taxation that are plaguing the sectors since several decades. At the beginning of the 11th plan. Proper allocation and utilization is something that the Govt needs to sort out. In Infrastructure sector. Infrastructuring Investment (Projected investment in $ billion) . The initial scenario of infrastructure investment was felt far behind the target of $ 514 billion and the actual investment was estimated not to exceed $ 300-350 billion. 5.1. The need of the hour for the Govt is to provide a clear roadmap to fill the investment gaps without delays in projects and cost overruns. India’s development however has failed to meet its fast economic growth. Most of the proposals indicate that thinking for a more transparent and liberalized economy is on track but implementation remains a question. telecommunications especially Rs 10000 crore for rural telephony is noteworthy but power and roads and bridges are not even close to targets.

it would be critical for the companies to have a seamless strategy in “human resources” that would allow them recruit and retain talent.The infrastructure investment covers 10 infrastructure sectors. storage and gas. the companies active in the construction and infrastructure sectors could scale their operations in order to contribute to India’s Infrastructure development. we may hope that infrastructure companies will be able to repeat this success story in the coming decade and effectively contribute to bridge the Infrastructure gap! . Is this achievable? The answer is simple. able to scale up operations to global standards and also develop a sound and competent talent base. irrigation. Sectoral Fund Allocation Under the Eleventh Five Year Plan Given the above facts. electricity. including telecom. can India Increase rise to the occasion and facilitate infrastructure creation? The corporate sector. the shortfall in infrastructure investment if any. to operate at such scales. this investment would be double the $ 217 billion invested in infrastructure in 10th plan. As per official source of Planning Commission. roads. It is satisfactory stage because even at $ 450 billion. railways. However. water supply ports. airports. during the 11th plan would not be more than 10 per cent and the actual investment is expected to remain between $ 450 billion and $ 500 billion. All that we can perhaps say at this stage is that when the IT and ITES companies were. and in particular. and nature same through state of the art training. during the late nineties.