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Infrastructure: Bottlenecks galore! - Views on News from Equitymaster
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  • Jul 21, 2006

    Infrastructure: Bottlenecks galore!

    In his visit to India earlier this year, the president of Asian Development Bank noted, "The accumulated economic and social costs of power shortages, bad roads, inadequate capacity in ports, poor sanitation facilities and unreliable communication systems in India are huge. By adding significantly to the cost of doing business, infrastructure bottlenecks also deter foreign and private investors, and further constrain the process of growth."

    There is now a broad consensus that the current growth momentum of the economy cannot be sustained unless the bottlenecks created by the infrastructure deficiencies are swiftly and adequately addressed. Further, a view is gaining ground that deficiencies in infrastructure are hurting the economic variables the most. Nevertheless, an appraisal of the infrastructure developments so far brings to light several issues that are far from being addressed.

    The dramatic growth of the Indian telecom sector is best manifested in the improvement in coverage. The cellular subscriber base, for example, grew by 72% YoY in FY06 and reached a figure of 90 m at the end of this fiscal. Also, the tele-density in India has risen from 2.8 in FY00 to 12.7 in FY06 (Source: IDFC Annual Report). In fact, the performance of the Indian telecom sector is better than China (which launched its commercial mobile services 7 years ahead of India). The dramatic rise in tele-density has been possible mainly because of decline in tariff, which in turn has resulted from rising competition. It must, however, be noted that despite a rapid growth in subscriber base, the tele-density in India continues to be low by international standards, even in comparison to some developing nations. In financing such growth in tele-density, Foreign Direct Investment (FDI) would have to play a much larger role than in the past. With the exception of the lone example of Vodafone acquiring a 10% stake in Bharti, one cannot cite any other major FDI in telecom being routed into the country. Structural bottlenecks with respect to regulatory issues, penetration and revenue sharing still exist and act as impediments for such investments.

    (m tonnes) FY06 FY07E
    Coal requirement 338 365
    Availability 317 334
    Shortfall from indigeneous sources 21 31
    The turnaround that was seen during FY04, following the enactment of the Electricity Act 2003, has been shaky. During FY05, power generation grew by barely 4.7% YoY. Capacity addition during the year 2005 (5,177 MW) was also below targets. It is almost evident that even the revised (lower) Tenth Plan (2002-2007) capacity addition target of 36,956 MW would not be achieved. In addition to the traditional factors afflicting the sector, non-availability of the desired level of coal has emerged as a matter of concern (see table). To give a major boost to power generation, the government has taken the initiative of development of large sized Ultra Mega Power Projects (4,000 MW each) at coal pitheads and coastal locations to reap economies of scale. While this will take several years to fructify, in the interim, commercial establishments will have to endure power shortages.

    During 2005, domestic and international passenger traffic grew by 24% YoY and 18% YoY respectively. This growth, among the highest in the world, has been possible partly because of the policy initiatives facilitating the entry of low-cost carriers (LCCs). LCCs have stimulated passenger traffic demand to such an extent that they have begun to impose discipline and induce efficiency in other modes of transport such as the Railways. Furthermore, to ease the peak period shortage of seats, an 'open sky' policy was adopted for a limited period (December 1, 2005 to January 31, 2006), under which designated foreign airlines were allowed unlimited number of services to the available points of call. However, inadequate air transit facilities (example, runways) and poor quality of airport infrastructure, limit the growth prospects of the aviation sector.

    Commercial infrastructure
    The Government recently approved the much-awaited new SEZs law. The new law is intended to provide a uniform SEZ policy regime and covers all aspects of establishment and operation in a comprehensive manner under a single legislation. The new law offers not only expanded fiscal benefits, but also a single window clearance relating to FDI, procurement of goods and services from domestic tariff area. While these provisions have elicited strong investor response (involving a total investment of about Rs 1,000 bn), red-tapism with respect to the allotment of land for the SEZs may once again dissuade the prospective investors.

    PPP showing promise...
    While traditionally the public sector has been the dominant provider of infrastructure services, the focus in recent years has been shifting to private concerns and the Government has been progressively taking the role of a facilitator. Public Private Partnerships (PPP) are moving to the center-stage with the government exchequers falling short of the requisite funds. Nevertheless, one can only hope that better availability of capital will strengthen the Government's resolve to address the infrastructure bottlenecks and create a wider socio-economic consensus in its favour.



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