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Monday, December 06, 2004

India: Need for Infrastructure Spending of US$100 Bn by 2010 -Part 1

I was in a conversation with good friends from India yesterday night at Seoul, South Korea when these intelligent and well read friends said that India has arrived, India is roaring and is on its way to become a super power etc etc.. I had a difficult time to look credible, in saying that India is far from it - and unless important infrastructure related things are carried out now, India's raise to glory is a pipedream.I explained china's and other nation's progress today and how much India is behind.I also referred them to this article "Oh Indian Century" and said that the country shall slip from its existing position if urgent reforms do not take place.

This morning, I came across this Morgan Stanley Report written by Chetan Ahya and Mihir Sheth which says that India should be planning an infrastructure investment of US100Bn by 2010. Excerpts (with edits and my views added):

A Concerted National Plan on Infrastructure Spending Is Necessary :
The single most important macro constraint on the Indian economy, restraining its average growth at 6.0-6.5%, is the low spending on infrastructure. India is currently spending a miniscule amount compared to what it needs, on our estimates. Our analysis indicates that China is spending over eight times as much as India’s outlays on infrastructure (including real estate) in absolute terms. In 2002, total capital spending on electricity, construction, transportation, telecom and real estate was US$260 billion (20.3% of GDP) in China compared with US$31 billion in India (6.0% of GDP). Even if we exclude real estate investment, China’s investments would be about US$133 billion compared with US$20 billion in India. There is a need for a plan at the national level to increase infrastructure spending gradually to US$100 billion by 2010 from an estimated US$33 billion in 2003 to push India on a sustained growth path of 8-9%.

Infrastructure Is the Key for Creating Jobs

India’s strengths of a huge skilled and semi-skilled work force, entrepreneurial expertise and natural resources are currently not being adequately utilized because of a lack of infrastructure. Infrastructure is, in many ways, the key to unlocking underutilized resources. Efficient and low-cost infrastructure is the key facilitator of globalization and labor arbitrage. India has been able to achieve its potential in software services and business process outsourcing due to the availability of high-quality telecom facilities, the infrastructure backbone for IT and ITES, at a reasonable cost. However, the manufacturing sector is constrained by relatively inefficient and high-cost infrastructure – namely roads, airports, seaports and electricity.

Glaring Deficiencies in Infrastructure : Except for telecoms, the cost of most infrastructure services is about 50% to 100% higher in India than in China. Apart from the high cost, just the lack of basic infrastructure facilities is impeding the efficiency of production. Most of the large successful Indian companies tend to have captive infrastructure facilities, which are at times not necessarily of economic size. An inefficient distribution set-up and cross-subsidization to residential customers and farmers result in a large part of the burden being borne by industrial customers. The electricity sector in India needs a serious and immediate overhaul. Similarly, India’s road infrastructure has been significantly lacking. China’s highway network is seven times greater than India’s. India’s highway network covers about 200,000 km compared with 1.4 million km in China. China has been investing almost US$24 billion annually (2-2.5% of GDP) on improving its highways.The cost of cargo movements at Indian ports remains significantly higher than the global average. The higher costs at Indian ports reflect the low productivity at terminals, insufficient hinterland infrastructure facilities and delays at customs. The lead-time for India’s trade with the US is 6-12 weeks compared with China’s 2-3 weeks.

Waiting for the Private Sector May Not Be the Solution : Everywhere else in the world, infrastructure investment has largely come from government or government-owned utilities. According to World Bank estimates, in the 1990s, about 70% of infrastructure investment in developing countries came from governments or public utilities as against 22% from the private sector and 8% from official development assistance. For instance, in China, in the 1990s only about 9% of total highway spending was funded by the private sector. About 70% of investment was funded from road maintenance fees, vehicle purchase fees and other government revenue sources. Similarly in India, critical infrastructure investment, especially in roads, airports, and urban and rural basic infrastructure, will have to come from the government. Many of these infrastructure services are public services as it is not possible to attribute the benefits from these facilities easily to any specific entity in order to build a viable service charge mechanism for attracting private investments. A long payback period also makes it difficult to obtain private sector participation. Part II shall be published shortly.
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