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Infrastructure: Raising the bar!

Apr 7, 2006

World-class infrastructure plays an important role in creating a strong and sustainable growth path for an economy, more so for a developing one. In this regard, while India has been lagging its developing peers in terms of quality infrastructure, the realisation has finally set in. Over the past two years, the government has laid great emphasis on infrastructure development and it has been duly supported by private investments, which are though still miniscule relative to the requirements. In this write-up, we take a brief look at the factors that are laying the ground for infrastructure investments to pick up in a bigger way in the country. As far as the opportunities in the sector are concerned, we shall soon take up those in a separate article. Key Drivers underlying growth

Growth of the infrastructure sector is being driven by a host of factors, which include:

Political will: The Government of India has initiated an ambitious reform programme, involving a shift from a controlled to an open market economy. Building futher on the initiatives taken by the previous Government, the incumbent Government is undertaking several measures to enhance the quantum of investments in the infrastructure segment. One of such measures is the Rs 100 bn special purpose vehicle that the government had announced in the Union Budget for 2005-06 to fund infrastructure development projects in t he country. The National Urban Renewal Programme, the accelerated road development programme for the Northeast region and higher budgetary support for the National Highway Development Programme are other examples of the government's initiatives towards developing quality infrastructure in the country.

Funding from multi–lateral agencies: Multilateral agencies such as the World Bank and the Asian Development Bank are funding various infrastructure projects on a large scale in India. Other agencies include the Japan International Bank for Cooperation, which funded the Delhi Metro Project. Various state governments are mobilizing funds from these agencies to support rural roads and sanitation projects.

Increased private participation: In order to encourage private sector participation in the sector, the government has announced several tax and non-tax incentives for the sector. For instance, in case of BOT based projects, the government carries out all preparatory work including land acquisition and utility removal. The government also provides capital grant up to 40% of project cost to enhance viability on a case-to-case basis. Companies are also allowed 100% tax exemption for 10 years, and duty free imports of specified modern high capacity equipment are also allowed.

Apart from these incentives, the government is also enacting laws to improve the finances of utilities and make their management more transparent, so as to improve returns on these facilities.

Innovative modes of funding: The government is tapping alternative sources of funds for infrastructure development. One of these is the cess on petrol and diesel , which is being used to fund road projects such as the Golden Quadrilateral and the North-South East- West corridor. Special taxes on air travel (for airport modernization purposes) are also mulled.

All these factors (though the list is not all inclusive) combine to provide the much-needed impetus to infrastructure development in the country. A solid and sound physical infrastructure, ably supported by India's relatively strong institutional infrastructure (like a strong financial and regulatory system), will go a long way in moving the economy towards higher and more sustainable levels of growth and development.

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