Challenges of Infrastructure

The Prime Minister, Dr. Manmohan Singh declared recently that India should aim to grow by at least 10% annually during the 12th Five Year Plan which begins in 2012-13. To achieve this ambitious target what is crucial is infrastructure development. The Economy faces serious infrastructure bottleneck and if this is not handled swiftly, moving on to higher growth path will remain only a dream.

One may argue growth is very important and infrastructure will grow by itself as we push growth. It does not work that way and if infrastructure growth does not keep pace with overall economic growth, there is every possibility that the economy gets overheated, which can have negative effect.

Overheating of the economy means for example an industrial cluster is set up without adequate electricity in the area for round the clock operation. In such a scenario production will dip leading to inadequate supply of the product to meet the demand. This will overheat the economy resulting in spiralling inflation.

To avoid such a scenario, Infrastructure development is critical to ensure that there is no deficit in the area as growth momentum picks up.

It is in this context, the Prime Minister has rightly emphasised the need to meet the challenges of infrastructure and said the 12th plan should target $1 trillion investment in the sector — that is over Rs 40 lakh crore. This meant doubling expenditure on infrastructure from about $ 500 billion in the current 11th five year plan, which ends in 2011-12.

Planning Commission Deputy Chairman, Shri Montek Singh Ahluwalia, at a recent conference on infrastructure said that a preliminary assessment suggests that investment in infrastructure during the 12th plan (2012-17) would need to be of the order of about Rs 40,99,240 crore ($ 1025 billion) to achieve a share of 9.95% as a proportion of GDP.

“This would have to be a key priority area in the 12th plan in order to sustain and support the targeted growth in manufacturing, agriculture and services. Provision of world-class infrastructure would not only be necessary for improving the competitiveness of the Indian economy but also for promoting inclusive growth and improving the quality of life of the common man,” Shri Ahluwalia said.

The Planning Commission, which recently carried out mid-term appraisal of the 11th Five Year Plan (2007-12) assessed the investment in infrastructure in the first two years of the plan and revised the projections of the investment for the entire plan.

Compared to the investment of Rs 9,06,074 crore (about $ 250 billion) during the previous 10th plan, the revised projection of investment in the 11th plan is Rs 20,54,205 crore, which is almost equal to the initial target. Only difference in some sectors like power and ports, the expenditure has been lowered while in some others like telecom, airports and oil and gas pipeline, investment has been stepped.

Despite economic downturn in the last from 2008 onwards, the Government has been able to meet almost the initial target of plan expenditure in infrastructure because of the larger than anticipated investments in the telecom and in oil and gas pipelines.

While the revised projections in irrigation and airport sectors are close to the initial targets, there are significant shortfalls in roads, railways, ports, water supply and sanitation.

During the 10th Plan 25 per cent of the total investment on infrastructure came from the private sector. This is expected to rise to about 36%, during the 11th Plan. While there may be a shortfall of about 8.7% (Rs 1,25,266) crore in public investment as compared to the initial targets for the 11th Plan, this is likely to be made good by the increase of about 20 per cent (Rs 1,23,321 crore) in private investment.

The investment in infrastructure in the 11th Plan was then doubled that of the 10th Plan, which could not been realised without large participation by the private sector. This is because the Government would have to devote a large portion of its own resources to critical livelihood support programmes and to providing access to health and education services which are crucial to ensuring inclusiveness.

As the Prime Minister himself said at a recent conference on infrastructure organised by the Planning Commission that the strategy for infrastructure development therefore involved combination of public investment supplemented by private investments where feasible. The mix was expected to vary from sector to sector, and also from region to region.

“Our experience shows that private participation in infrastructure development is indeed feasible and can help expand infrastructure much faster than it would have relying on public resources alone. The telecom sector is the most compelling example of this proposition. The 11th Plan target for tele-density was realised ahead of schedule, in the third year of the plan. The addition of 1 crore subscribers every month with user charges among the lowest in the world, has really taken the communication revolution to the doorstep of the ‘aam aadmi’.” Dr. Manmohan Singh has rightly pointed out.

There are successful Public-Private-Partnership (PPP) projects in roads, ports, airports and power, but they needed to be pushed. Now the Government has developed fairly robust framework for PPP projects.

One of the reasons, as the Prime Minister himself says, why it is difficult to attract private investment in infrastructure is that projects may not be able to generate adequate revenue streams. The projects may have high economic rates of returns but not be financially viable.

To deal with this problem, the Central Government offers capital subsidy. Since capital subsidy is only a proportion of the total capital cost, the Government resources effectively leverage a larger volume of private resources. The viability gap funding as it is called is also accessed by State Governments as well for infrastructure projects.

One area that the Government needed to move is the power sector which is crucial for fuelling 10% economic growth. The Prime Minister himself admits that “we have made less progress in this area than we should have. Power shortages remain a problem in many parts of the country. The distribution segment, which is entirely in the States sector, continues to be fragile.

Presently coal accounts for more than half of the power consumption, followed by oil, of which 70% is imported. There is need to push up nuclear power generation and the Government has ambitious plans to step nuclear power generation to 20,000 mw by 2020 and 63,000 mw by 2032.

Two major problems in infrastructure development are the large amount of funding and large areas of land required.

As Planning Commission says financing of Rs 20.54 lakh crore in 11th Plan is a stupendous task. Of which, Plan relies only to the extent Rs 6.44 lakh crore or about 31% on budgetary support. The remaining Rs 14.10 lakh crore has to come from private sector or public sector internal resources.

The large volume of investment required for projects in power, telecom, railways, highways, ports and airports, therefore would have to be funded either from internal generation and extra budgetary resources of public sector or from pure private investment and PPP projects.

The ability to attract these investments depended critically on a regime where there are reasonable and predictable user charges and risk allocation clearly defined.

In other words, as a Planning Commission document says, infrastructure services would have to be provided on commercial principles, with particular attention to the power sector. This is necessary to ensure viability of both and public and private sector targets.

The task ahead on infrastructure is huge for realising over 9% economic growth. What has been achieved in telecom needs to be replicated in other infrastructure sectors especially power. Though it is difficult, it is not impossible and the nation is moving in the right direction. (PIB Features)

Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB

RTS/VN

SS-72/SF-72/08.04.2010