India represents much opportunity. However, until it gets its infrastructure in order, that potential will be muted. The Indian government has finally gotten serious about upgrading the roads, electrical grid and waterways, and in that spending, investors can profit. However, India is likely to narrowly miss its target of investing US$ 500 bn in infrastructure under the five year plan ending in 2012. Provisional estimates have indicated that India would have spent around US$ 480 bn in the 11th five year plan which will be more than a doubling of investment compared to the previous plan.
The planning commission of India has set an ambitious target of spending US$ 1 trillion in the 12th five year plan. However there are many problems which need to be addressed before this target can be achieved. India ranks 51st overall in the World Economic Forum competitiveness index, but for infrastructure it fell to 86th this year. Inadequate supply of infrastructure was ranked as the most problematic factor for doing business in the country. India's infrastructure deficit acts as a brake that knocks an estimated 2% points off growth.
In order to hasten the process of infrastructure building the government needs to adopt a holistic approach to infrastructure for sustained development of the economy. Infrastructure related to health, information, water, housing, education, energy and logistics require equal focus to sustain the 8% plus growth in the long run.
Most of the infrastructure projects are held back or delayed due to land acquisition issues, lack of funding and execution delays. The Indian government has stepped up infrastructure spending in recent years, but the slow pace of reforms and a lack of long-term funding options constrain the sector's growth. The government in order to boost funding has also allowed setting up of infrastructure debt funds which are aimed at mobilizing the long term capital needed to improve the country's outdated infrastructure. The Reserve Bank of India (RBI) has also allowed foreign investors to invest in these funds provided they stay invested in them for minimum 3 years. This move by RBI will help raise funds for building infrastructure.
The 12th five-year plan focuses on removing some of these roadblocks and creating a sustainable framework for private-sector participation. Nevertheless, the fate of the infrastructure sector over the next few years will depend on the ability of India's leaders to execute these plans.