Indian infrastructure 2006
An urgent and moral imperative
By Jo Johnson
Published: April 24 2006
Poor infrastructure is India’s Achilles heel. But it is also the area that is receiving the most attention from policy-makers and one that offers significant opportunities to private investors, both domestic and foreign. Failure to get infrastructure right, whether it is new ports, rural roads, power plants or mass transit systems, will cost the Congress-led coalition almost any hope of fulfilling its other goals.
Any visitor to India familiar with Asia is immediately struck by how far the country’s infrastructure lags not just China but the entire region. Except for telecoms, most infrastructure services in India are between 50 and 100 per cent more expensive than in China. Electricity costs Indian manufacturers twice as much as their Chinese rivals and railway transport three times as much, according to Morgan Stanley research.
“Weak infrastructure is costing us about 3 or 4 percentage points of lost GDP growth a year,” says Sunil Bharti Mittal, chairman and managing director of Bharti Televentures, the country’s largest private mobile telecoms group. The startling implication is that India, without its glaring infrastructural deficit, India has the potential to expand at between 11 and 12 per cent a year, faster even than China.
Today, however, India’s principal advantage – a large, low-cost labour force – is eroded by high charges for substandard power and transport services. This is reflected in India’s small share of global goods exports, which stood at 1.2 per cent in 2005, compared with China’s 9.9 per cent, and its difficulties in creating manufacturing jobs for landless labourers migrating to gridlocked cities.
While large companies can rely on “workarounds”, such as back-up electricity generators, it is small- and medium-sized businesses, the ones that generate the bulk of new jobs in any economy, that suffer most from the lack of high quality public infrastructure. Unless this is resolved, India’s demographics – half the population is under the age of 25 – will prove a liability rather than an advantage.
Economists say that infrastructure jobs will provide a stepping stone – in the form of construction jobs – for unskilled rural workers making the transition from the land to the cities. Once an efficient and low-cost infrastructure is in place, the pace at which India integrates with the global economy will accelerate as manufacturers exploit the same labour cost arbitrage that has long been available to the IT industry.
“We believe that the single most important macro constraint on the Indian economy, holding back its growth, is the low spending on infrastructure,” says Chetan Ahya, an economist with Morgan Stanley. “India is spending a minuscule amount compared with its needs. Our analysis is that China is spending seven times as much as India on infrastructure (excluding real estate) in absolute terms.”
The government recognises that increased infrastructure spending is critical to efforts to lift the growth rate from the 7 to 8 per cent achieved in the last three years to double-digit levels. According to Montek Singh Ahluwalia, deputy chairman of the Planning Commission, India needs to lift its spending on infrastructure, including irrigation, by three percentage points of gross domestic product, from 6 per cent today to 9 per cent.
“The investment required to upgrade our infrastructure is massive and not all of it can come from the public sector,” says Mr Ahluwalia. “The strategy is to increase public investment towards infrastructure development as much as possible, but simultaneously to devise ways of attracting private investment in all the major infrastructure sectors – roads, ports, power, airports and even railways.”
A sign of intent is that Manmohan Singh, India’s prime minister, himself chairs the government’s committee on infrastructure. It estimates that India’s infrastructure can absorb $150bn of foreign direct investment over the next five years. Given that India attracted only about $7.5bn of FDI in 2005/2006, bringing in $30bn a year in infrastructure alone would be a radical step-change in the opening up of the economy.
But promises to invest more in infrastructure are nothing new. The trouble is their lack of credibility. A massive financing gap remains between the required outlays in the six main infrastructure sectors of ports, airports, roads, railways, power and telecoms and the government’s planned expenditure. It is no surprise that investment in infrastructure over the past decade has failed to live up to expectations.
According to the Tenth and the Eleventh Five Year Plans, covering the decade from 2001-02 to 2010-2011, government funding for the main six infrastructure sectors amounts to roughly Rs13,601bn ($302bn). Even if the government manages to allocate this amount of money in cash-strapped coffers, it will still face a massive shortfall relative to its own estimates of the required investment of Rs19,143bn.
“India would still face a staggering financing gap of more than Rs5,500bn for the decade ending 2010-11,” notes Priya Basu, lead economist for the World Bank in India. “By any canon, this is a huge difference between what the country needs and what the government can pay.” Funding this gap will depend on having regimes in place that encourage private investment and public private partnerships.
India has made considerable progress in the last 10 years in attracting private investment into infrastructure: first in telecommunications, then in ports and roads, and most recently in airports (Delhi and Mumbai) and container freight.
But progress is painfully slow and is unlikely ever to be a substitute for a substantial uplift in public investment in vital areas such as rural roads and irrigation.
Getting the private sector to fill financing gaps is much harder in some sectors than in others. It will be easier to mobilise Rs478bn of private investment for telecoms than Rs151bn for the country’s train network. The national addiction to subsidised user charges – in the form of dirt cheap passenger fares, power and water – pushes up costs to industrial consumers and creates big viability gaps in private sector business plans.
As the telecoms and aviation sectors show, where private capital and management disciplines have been introduced, the results have been remarkable.
In the early 1990s, a landline was a status symbol possessed by barely 2 per cent of the population and subject to bureaucratic rationing. Today, it is a ubiquitous feature of rural and urban India. In aviation, the arrival of low-cost carriers has caused fares to plummet.
No economist doubts that the biggest hurdle to lifting living standards for many of the 260m Indians surviving below the poverty line is poor infrastructure in rural areas. India’s per capita income is just Rs23,744 a year. In terms of purchasing power parity, this amounts to $2,880 per year, compared with $4990 per year for China, $8,940 per year for Malaysia, and $37,500 per year for the US.
No one denies that improving the infrastructure of a country that is a patchwork of 500,000 hamlets, each with a population of about 1,000 people, is a daunting task. Only 44 per cent of rural households today even have electricity. But, for a government elected with the votes of the rural poor, excluded from the prosperity of the great new middle class, it is also a political – and moral – imperative.
Copyright The Financial Times Limited 2007
http://www.ft.com/cms/s/6f1c935e-d1...uid=894d591e-d9c4-11da-b7de-0000779e2340.html
