India estimates it needs to invest 8% of GDP in infrastructure, but is already running a fiscal deficit of over 7% of GDP. Should India increase its fiscal deficit and invest in infrastructure The answer is to improve the efficiency of existing infrastructure stock, Devarajan told Reuters on the sidelines of the annual India Business Forum in London. The problem is not that we need to pour billions into new infrastructure, the problem is to fix the existing infrastructure. For instance, the World Bank estimates that just by improving efficiency and pricing systems, India can narrow its power deficit by one percent of GDP, Devarajan noted. In water, half the deficit can be resolved by raising prices to more realistic levels.
A big problem is inadequate expenditure on operating and maintaining existing infrastructure stock, he said. India is aiming to grow at around 9% a year from 2007-2012 but for this it will need to invest $320 billion just to overcome infrastructure bottlenecks such as overcrowded ports, poor roads as well as chronic power and water shortages. Projects worth $350 billion are in the pipeline but red tape and ingrained mistrust of privatisation means progress is slow.
To illustrate the scale of the problem, Devarajan said that, not one Indian city offers inhabitants a 24-hour water supply, unlike several in Latin America, Asia and Africa. In the poorest Indian states 70-80% of households are not connected to roads. Studies show that in some Indian provinces, subsidies on power are much higher than primary health spending. Almost half the power generated is stolen before it reaches consumers. Devarajan said that most problems stem from explicit government policies to underprice water or offer free power as a sop to farmers, with the poorest people usually bearing the brunt of the chronic power and water supply shortages.