Infrastructure Development in India: Civil Services Mentor Magazine - January 2014

INFRASTRUCTURE DEVELOPMENT IN INDIA

Introduction

India is the fourth largest economy in the world. However, one factor which is a drag on its development is the lack of world class infrastructure. In fact, estimates suggest that the lack of proper infrastructure pulls down India’s GDP growth by 1-2 percent every year. 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, urban and rural water supply, and sanitation, all of which already suffer from a substantial deficit. The goals of inclusive growth and a 9 percent growth in GDP can be achieved only if this infrastructure deficit is overcome. Infrastructure development will help in creating a better investment climate in India. To develop infrastructure in the country, the government is expected to revisit issues of budgetary allocation, tariff policy, fiscal incentives, private sector participation, and publicprivate partnerships (PPPs) with resolve.

There are many issues that need to be addressed in different infrastructural fields. To begin with, the gap between electricity production and demand is affecting both manufacturing and overall growth. Then though road transport is the backbone of the Indian transport infrastructure, it is inadequate in terms of quality, quantity, and connectivity. Also in the overall transport sector, civil aviation and ports desperately need modernization. It is expected that the public sector will continue to play an important role in building transport infrastructure. However, the resources needed are much larger than what the public sector can provide.

12th Five Year Plan

Inadequate infrastructure was recognized in the Eleventh Plan as a major constraint for rapid growth. The Plan had, therefore, emphasized on the need for massive expansion on investment in infrastructure based on a combination of public and private investment, the latter through various forms of PPPs. Substantial progress has been made in this respect. The total investment in infrastructure, which includes roads, railways, ports, electricity and telecommunication, oil gas pipelines, and irrigation, is estimated to have increased from 5.7 per cent of GDP in the base year of the Eleventh Plan to around 8 per cent in the last year of the Plan. The pace of investment has been particularly buoyant in some sectors, notably telecommunication and oil and gas pipelines, while falling short of targets in electricity, railways, roads, and ports. Efforts to attract private investment in infrastructure through the PPP route have met with considerable success, not only at the level of the central government, but also at the level of individual states. A large number of PPPs have taken off, and many of them are currently operational at both the centre and in the states.

The Twelfth Plan intends to continue its thrust on accelerating the pace of investment in infrastructure as this is critical for sustaining and accelerating growth. The Planning Commission in its Twelfth Five Year Plan Document (2012-17) expects investments in infrastructure projects to be worth of US$ 1 Trillion over the five years of the plan. The total investment as a percentage of GDP is also expected to be in the range of 7-9% (see figure 1). Public investments in infrastructure have been the dominant form of infrastructure financing in India, but this is expected to change and the private sector will be expected to invest more in infrastructure in the
coming years. It would be necessary to review the factors which may be constraining private investment, and steps may be needed to rectify them. PPPs, with appropriate regulation and concern for equity, need to be
encouraged in social sectors, such as health and education. Several state governments are already taking steps in this direction.

However, public investment in infrastructure is still expected to bear a large part of the infrastructure needs in backward and remote areas for improving connectivity and expanding much-needed public services. Since resource constraints will continue to limit public investment in infrastructure in other areas, PPP-based development needs to be encouraged wherever feasible. The above chart shows the percentage component of public and private investment in infrastructure in the 11th Five-Year Plan. As per the 12th Plan Document, the Planning Commission targets to achieve 50% private and PPP funding in total infrastructure investments, compared to a little more than 30% in the 11th Plan. The chart 3 below gives us an idea of what portion of private investment is in the form of PPP investments. It is evident that there is a greater emphasis to initiate PPP projects in the 12th Plan. In terms of number of projects, roads and highways are emerging as favoured destinations for PPP, while telecom and electricity lead in terms of private investments. Currently there are 758 projects in the pipeline with more than 53% in the roads sector, followed by urban development with 20% of the projects.

See chart 4 The Indian power sector has attracted much private investment in the past years. With 56 projects for a total consideration of US$ 12.6 billion, the sector accounts for 18% of the total value of PPP projects across sectors, though only 7% of the total number of PPP projects. India’s total generating capacity is around 173,626.4 megawatts (MW), of which the private sector accounts for the lowest (21.2%). See figure 5 and 5A. India is expected to make great investments in the power sector due to rapid urbanization, rural electrification and industries across the country. Under the 12th Plan, the private sector is likely to account for a major share of the additional capacity (55.6%). PPP is likely to be the preferred route for such ventures.

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