Physical infrastructure has a direct impact on the growth and overall development of an economy. As the Indian economy showed a significant growth of 6.7% amidst the global financial crisis, efficient infrastructure is essential to achieve the estimated growth rate of 9% for current financial year and future prosperity. The fast growth of the economy in recent years has placed increasing stress on physical infrastructure such as electricity, railways, roads, ports, airports, irrigation, urban and rural water supply and sanitation, all of which already suffer from a substantial deficit from the past in terms of capacities as well as efficient delivery of critical infrastructure services. The pattern of inclusive growth of the economy projected for the Eleventh Plan, with GDP growth averaging 9% per year, can be achieved only if this deficit can be overcome and adequate investment takes place to support higher growth and an improved quality of life for both urban and rural communities.

China is the only country that achieved an average growth rate of 10% for over a decade due to consistent improvement in physical infrastructure, particularly in eastern coastal areas and connecting transport links with the rest of the world. The supply and demand gap of physical infrastructure in India is increasing over the years and infrastructure bottleneck is one of the major problems for investors, increasing trade and transaction costs. As the figure shows India is lagging behind in providing quality physical infrastructure.

Today the gap between electricity production-consumption is at the peak affecting both manufacturing and overall growth impulses. Though road transport is the backbone of Indian transport infrastructure, we need much greater and better connectivity. Similarly, improvement and modernisation of sectors like civil aviation and port, to increase turnaround and to reduce berthing time, is long overdue. In this context, the suggestion for independent regulatory bodies in core infrastructures such as the transport sector comprising highways, railways, ports and airports is a welcome suggestion for future reforms. The need of the hour is to give highest priority to infrastructure development. This will help create better investment climate in India. Government must revisit the issues of budgetary allocation, tariff policy, fiscal incentives and private sector participation and public private partnership to improve infrastructure development in India.

Against this backdrop, the budget has laid major emphasis on infrastructure development. The budget says that 9% of the country’s GDP will be spent on infrastructure by 2014, from the current 5%. Estimates suggest that a third of this investment will come from private companies, paving the way for unprecedented investment opportunity under public private partnership (PPP) model. This reinforces the government’s commitment to augment the antiquated infrastructure of the country, vital to achieve a GDP growth of 9% per annum from the current 6.7%. The lack of adequate infrastructure is responsible for pushing back India’s GDP growth by about 2% annually, according to estimates. Further, infrastructure development had also been accorded key priority for the Eleventh Five-Year Plan for the years 2007-2012 and the 12th plan period 2012-2017, with projected investment requirement of $500 billion and $1.5 trillion respectively by the Prime Minister’s Committee on Infrastructure. These initiatives pale when compared to China, which spends about 11% of its GDP on infrastructure development. Infrastructure development in India has a long way to go if it has to match global standards.

However, infrastructure sector is the winner in budget 2009-10, as the government has accorded it top priority. Despite an ever-widening fiscal deficit, the government has massively upped the budget allocation for several infrastructure schemes and sectors based on the rationale that infrastructure development generates income, providing employment opportunities to a large section of people. With more than Rs 30,000 crore directed towards the sector and provisions for Rs 1 lakh crore of budgetary support in all, infrastructure development certainly appears to be at the heart of the Union Budget. The government has announced that India Infrastructure Finance Company Limited (IIFCL) will be recapitalised by Rs 1,00,000 crore. The IIFCL and banks would now be in a position to support projects involving a total investment of Rs 100 thousand crore in infrastructure. Combined with the efforts of the government to increase public investment in infrastructure, this is expected to give a big boost to such investment.

To stimulate public investment in infrastructure, the government had set up the IIFCL as a special purpose vehicle for providing long-term financial assistance to infrastructure projects. The IIFCL is being given greater flexibility to aggressively fulfil its mandate. To ensure that infrastructure projects do not face financing difficulties arising from the current downturn, the government has decided that the IIFCL will refinance 60% of commercial bank loans for PPP projects in critical sectors over the next 15 to 18 months. In order to fund the projects, the allocation of budget has been stepped up by 23 and 87% over the 2008-09 expenditures on highways and railways, and Jawaharlal Nehru National Urban Renewal Mission respectively. The budgetary allocation has been increased by 160% to Rs 20 billion for the Accelerated Power Development and Reforms Project, aimed at reducing the gap between power demand and supply. Moreover, the key focus for infrastructure includes encouragement to PPPs, strengthening regulatory framework, speeding up Golden Quadrilateral Project, and removing bottlenecks in speedy implementation of infra projects.

Investment in infrastructure for the growth of the economy is critical. To improve India’s poor roads, narrow bridges, and dilapidated airports, which choke the flow of goods and people, a large injection of capital into the system is required. Therefore, the infrastructure sector is being paid maximum policy attention to ensure that supply shortages do not trigger runaway inflation. At present, it offers significant opportunities to private investors, both domestic and foreign. All the policy measures initiated by the government are expected to reduce the infrastructure supply-demand gap in India in the coming years. A lot depends on the central and state governments’ efforts to spur investment and weave together the regulatory and institutional mechanisms necessary for speedy implementation of infrastructure projects under a policy that understands the need of the hour.

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