World-class infrastructure is not only the key to a globally competitive economy but is also critical for improving productivity across all sectors. Inadequate and poor infrastructure is the foremost constraint in India?s economic growth.
The global financial crisis is already having a serious impact on the Indian economy which may get accentuated in the next one to two years. According to government and industry reports, numerous infrastructure projects across the country are getting delayed on account of various factors, including lack of financial resources which the global financial crisis has further aggravated.
Therefore, a massive infusion of financial resources into the infrastructure sector is not only important for establishing India as a globally competitive economy but also the need of the day to enhance aggregate demand by pump-priming the economy which is showing all signs of slowing down. The drying up of foreign flow of funds and the high cost of domestic finance is making this difficult.
The current level of annual gross capital formation in the infrastructure sector is estimated to be about 5% of GDP and it needs to be ramped up to at least 9% during the course of the 11th Five Year Plan if the targeted rate of economic growth of 9% is to be achieved. It is well established that in growing economies, the rate of growth in the demand for infrastructure outstrips the rate of growth of GDP. This would require a very significant scaling up of investment from public as well as the private sector.
According to estimates, the infrastructure sector in India needs infusion of $500 billion over the 11th Plan. The government cannot fund this level of investment required through budgetary or public resources. The investment requirement for meeting the infrastructure deficit in India is such that it can not be met by relying on the public sector alone. It is projected that the share of the Central Government, State Governments and the private sector in this will be 37%, 33% and 30% respectively.
But availability of funds is not the only issue. Concerted efforts are required by the government on several fronts to implement an action plan which provides a dynamic thrust to the infrastructure sector, including infusion of large financial resources, both private and public, so that there is a multiplier effect on the economy and the ripple effects of the global financial crisis are minimised.
Though the government has taken several measures, it should work towards rapidly creating an appropriate institutional mechanism, modernisation of the policy framework, efficient regulatory framework for implementation of infrastructure projects, standardisation and streamlining of contract and other documents, processes and procedures, model concession agreements, etc.
At the same time, public expenditure on infrastructure development has to be substantially increased, including through viability gap funding and long term debt. A new focus must also be given to making existing investment in public infrastructure more productive, improving the quality of governance and thereby, making public services more effective and efficient.
Land acquisition and consolidation takes a very long time. Since infrastructure projects require land which may necessitate displacement of people, it is essential that the interests of all stakeholders are factored in the policies on land acquisition and resettlement & rehabilitation (R&R). The land auctioned by government authorities should have inbuilt clearances and approvals so that the developer can start the project immediately. The high cost of land, especially in urban areas, adds tremendously to the project cost and ultimately to the final price paid by the users.
While sustainable development is the only way forward, the long time taken in obtaining multiple environmental clearances for infrastructural projects negatively impacts the developmental process. Impractical procedures, and abnormal delays caused in the entire process, lead to additional cost and impinge greatly on the viability of the projects. There is need for putting in place a new single window system for all, including environmental, clearances which relaxes the procedures for developers and tremendously reduce the transaction cost.
For encouraging greater private investment in the infrastructure sector, there is an urgent need for standardisation and streamlining of contract documents and model concession agreements in line with best international practices, and with inclusion of an institutional arbitration clause. The entire process of allotment should be made more transparent, with laid down specified timelines for DPRs (detailed project reports) and financial closures and milestones to be achieved by the developers.
The RBI should further ease lending norms for infrastructure projects to provide access to long term credit. The banking sector should be motivated to provide easy and soft loans to the infrastructure sector for capital expenditure. Financial closure of infrastructure projects in pipeline should be expedited and apart from expediting the flow of finance to infrastructure projects through traditional channels, new innovative sources of finance should be put in place.
It is now well recognised that to put in place the kind of infrastructure that is required, the private sector will have to contribute significantly. It is, therefore, necessary to explore the scope for building infrastructure through PPP. Private investment in infrastructure needs to be encouraged through incentivisation and putting in place a conducive policy environment.
India desperately needs infrastructure that is world class, commercially sustainable and efficient, but also which is cost-effective, so that it allows industry to stay competitive and does not constrain rapid economic growth.
?The writer is additional secretary, PHD Chamber. These are his personal views