China spends 11% of GDP on infrastructure, India 6%

Written by Geethanjali Nataraj | Updated: Mar 5 2010, 04:42am hrs
Physical infrastructure has a direct impact on the growth and overall development of an economy. But the fast growth of the Indian economy in recent years has placed increasing stress on physical infrastructure such as electricity, railways, roads, ports, airports, irrigation, and urban and rural water supply and sanitation, all of which already suffer from a substantial deficit. The goals of inclusive growth and 9% GDP growth can be achieved only if this infrastructure deficit is overcome. Infrastructure development would help in creating a better investment climate in

India. So, the government must revisit the issues of budgetary allocation, tariff policy, fiscal incentives, private sector participation and public-private partnerships with intense resolve.

Today, the gap between electricity production and consumption is affecting both manufacturing and overall growth. Though road transport is the backbone of Indian transport infrastructure, its inadequate in terms of quality, quantity and connectivity. Civil aviation and ports are crying out for modernisation. In this context, the suggestion for independent regulatory bodies in core infrastructure sectors such as the transport sectorcomprising highways, railways, ports and airportsis a welcome suggestion for future reforms.

Against this backdrop, Budget 2010-11 underscores infrastructure development but is low on impact. It has proposed $37 billion for infrastructure upgradation in both rural and urban areas. This amounts to over 46% of the total plan allocation for infrastructure development in the country. But more is needed to boost Indias long-term potential rate of growth.

The finance minister also announced an increase in the allocation towards road transport by over 13% from Rs 17,520 crore to Rs 19,894 crore. The railways have been allocated Rs 16,752 crore for modernisation and network expansion. This is about Rs 950 crore higher than last years allocation, which also reflected a substantial increase in the budgetary support to railways.

As per the Budget, disbursements by the India Infrastructure Finance Company Ltd (IIFCL), established by the government to extend long-term financial assistance to infrastructure projects, are expected to touch Rs 9,000 crore by the end-March 2010 and Rs 20,000 crore by March 2011. IIFCL has also been authorised to refinance bank lending to infrastructure projects and is projected to more than double the current year level of refinance at Rs 3,000 crore in 2010-11. The last Budget had provided for a take-out financing scheme, which is expected to initially provide finance for about Rs 25,000 crore in the next 3 years.

A total budgetary support of Rs 12,000 crore has been made for development of roads in rural areas. Included in this is a provision of Rs 1,114 crore towards North-Eastern region and Sikkim. The provision which has been made under the Department of Rural Development for Pradhan Mantri Gram Sadak Yojana, which is expected to cover 1.67 lakh habitations and involve the construction of 3,65,279 km of roads for new connectivity and 3,68,000 km to be upgraded at an estimated cost of Rs 1,32,000 crore at 2004-05 prices. To achieve Bharat Nirman targets, 1,46,185 km of road length has been proposed to be constructed by 2012 to cover 54,648 unconnected eligible habitations in the country.

Infrastructure development had also been accorded key priority in the 11th Five-Year Plan for the years 2007-2012 and the 12th plan period of 2012-2017, with projected investment requirement of $500 billion and $1.5 trillion, respectively, by the Prime Ministers Committee on Infrastructure.

These initiatives pale when compared to China that spends about 11% of its GDP on infrastructure development, indicative of the scope and extent of scaling up needed in infrastructure development in India to match global standards. According to the Planning Commission, as compared to 4.5% in 2003-04, investment in infrastructure as a proportion of GDP rose to 6% in 2007-08.

According to the recently released Economic Survey (2010-11), the collapse of markets worldwide and the dampening of equity markets acted as decelerators on the mobilisation of resources by infrastructure sectors during the previous year. But there are signs of a steady revival of flows of investible resources to infrastructure sectors during 2009-10. However, the Survey says that reaching the target of infrastructure investment of 9% of GDP would be a challenging task. Efforts are required to channalise long-term contractual savings to infrastructure sectors on a much larger scale.

Moreover, quick implementation of infrastructure projects in India is a rarity. There are several obstacles to speedy rollouts of infrastructure projects. For instance, there is hardly any progress on the Delhi-Mumbai industrial corridor project. Progress has been slow because of delays in decision-making and problems with land acquisition, while environmental clearances have added layers of complexity for investors trying to navigate Indias bureaucratic bylanes. NGOs add to the delay by holding up projects by filing writ petitions.

To improve Indias poor roads, narrow bridges, and dilapidated airports that choke the flow of goods and people, a large injection of capital into the system is required. A lot depends on the Central and state governments, which must remove policy, regulatory and institutional bottlenecks for speedy implementation of projects.

The author is fellow, National Council of Applied Economic Research, New Delhi