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Infrastructure: Lot is desired - Views on News from Equitymaster
 
 
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  • Sep 23, 2003

    Infrastructure: Lot is desired

    In the Indian context, one cannot stress enough the importance of adequate infrastructure to spur economic growth. Infrastructure, in itself, not only creates employment, it also opens up new opportunities and markets, which further adds to the momentum. By infrastructure, we mean areas like roads, highways, railways, housing, telecommunications, ports, airports, irrigation projects and power.

    While the government has initiated measures (highway projects) to provide a fillip to the infrastructure sector, there is still a lot of work to be done. Quite often, the reform process has been half hearted. Arranging finances for these projects has been one of the most difficult parts. Let us take the example of the power sector alone. The government opened up the power sector for the private sector participation for green field projects. However, capacity additions continue to languish. Just to put things in perspective, the 10% share that private players have currently in power generation has not improved much. While the government opened up the generation aspect, adequate measures were not taken on the distribution side, which consequently led to foreign players opting out of the Indian power sector.

    This is despite the fact that private participation in power projects has been allowed for some time now (since 1993-94). The main reason for the lackluster response of the private sector has been the inability of the state and central governments to initiate and implement power sector reforms that have led to the ill health of the state electricity boards. Just to put things in perspective, the return on investment of the state power sector declined to -33% in FY02 compared to -13% in FY92.

    Capital Expenditure: Declining trend
    % of GDP 1980s FY91-FY97 FY98-FY02
    Centre 6.3 4.0 2.9
    States 4.3 3.0 2.7
    Combined 8.2 4.8 4.0
    * includes defence capital expenditure

    Apart from private sector participation, the government and public utilities in the country (which have historically been the largest investors in infrastructure in the country) have failed to meet the investment demands of the sector. For one, the capital formation across various sectors (which finally determines the quantum of reinvestment that can be done in the sector) has been declining. This indicates that the public infrastructure entities have been unsuccessful in their role of spurring investments in their respective sector. To put things in perspective, the real capital formation by utility services like electricity, water supply and gas fell to 2.6% in the 1990s compared to the 2.9% in the previous decade. That apart, government investment in infrastructure itself has shown a decline of 1% between the first and second halves of the 1990s.

    Nevertheless, the government has initiated various measures to boost investment. For example, it has allowed 100% participation by private parties for the construction and maintenance of roads and bridges. The RBI, on its part, has also liberalized term loan financing by banks for infrastructure projects. The SEBI too has extended relaxations for public issues by infrastructure companies regarding size, pricing, mode and minimum subscription of issues. Banks have been further allowed to contribute to the equity capital in infrastructure projects and lend to special purpose vehicles for directly undertaking infrastructure projects.

    Though some developments, like the increased participation by private players in the national highway projects, are encouraging, a lot is desired. According to the RBI, nearly US$ 215 bn is required for infrastructure requirements between FY02 and FY06. Thus, it is imperative that the country is able to attract more private participation and capital in the infrastructure sector. However in order to do so, there have to be further reforms carried out in the area of user charges (which will address the issue of return on investment) and structured financing options. Bureaucratic delays, lack of clarity regarding policies and corruption are also issues that need to be addressed as priorities.

    While we have taken solid measures in the recent past, the issue is that of the pace. The need for the hour is to implement policies wholeheartedly and not half measures, which lead to further confusion and delay in the implementation of the reforms process. One thing is assured, if the economy is able to bridge the infrastructure gap between itself and other developed countries, the tenth plan target for GDP growth (8%) could be a reality for sure.

     

     

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