Infrastructure: The roots of growth for emerging markets

“When you don’t invest in infrastructure, you are going to pay sooner or later“

–      Mike Parker

Infrastructure, in general, defined as the set of interconnected structural elements that provide framework supporting an entire structure of development.

A well-knit and coordinated system of transport plays an important role in the sustained economic growth of a country.  It also helps a nation develop a stature in today’s world where globalization is the buzzword. Evidence also suggests that creation of infrastructure, through its direct and indirect effects, has a significant impact on poverty reduction.

Now when the need of infrastructure is defined, its working is a mandate to be discussed. To accelerate the pace of infrastructure development Government has taken the initiative and has started a host of projects and schemes with the sole motive to upgrade physical infrastructure in all crucial sectors.

In the Indian context, though there has been some improvement in infrastructure development in transport, communication and energy sectors in recent years, there are still significant gaps that need to be bridged. The current economic slowdown provides an opportunity for countries like India that have a substantial degree of unmet infrastructure requirements. This is reinforced by the understanding that spending on infrastructure has large multiplier effects.

Indian Economy

Post Independence Era (1947-1975):

Indian Economy was known to be an agrarian economy wherein the major part of the revenue, to an extent of 70%, was generated from the agriculture sector. The main objective of planning in India at this stage was to initiate a process of development which will raise living for a richer, more varied life. The sole problem of development of an under developed economy is one of utilizing the potential resources available to the community effectively. An underdeveloped economy is characterized by the co-existence of unutilized or underutilized manpower on the one hand and of unexploited natural resources on the other.

Indian economy, post independence, was somewhat more focused towards increasing the investment the reason being accounted to the fact that being a fresh, new economy freed from the British Raj it was necessary for the government to stabilize itself so as to control its economy in future. A somewhat low rate of capital formation might have been adequate for countries like the U.K. and the U.S.A., wherein the modern industrialization took root early. On the other side the under developed countries which make a late start have to aim at comparable development within a briefer period.

The First Five Year Plan involves an outlay on development by public authorities of around ` 2069 Crores over the period of 1951—56. The main considerations that have been taken into account are:

1. Need for initiating a process of development that will form the basis of the much larger effort needed in the future
2. Total resources likely to be available to the country for the purpose of development

3. The close relationship between the rates of development and the requirements of resources in the public and in the private sectors
4. The necessity of completing the schemes of development initiated by the Central and State Governments prior to the commencement of the Plan ; and
5. The need to correct the mal adjustments in the economy caused by the war and the partition.

Following the budgetary plan formulated by the Planning Commission, since its inception in the year 1950, for the year 1951-1956 which is the First Five Year Plan of and for the Indian Economy. It is seen from the chart that a major portion of the plan was focused on areas like agriculture and irrigation.

Table 1: Sector wise Plan for 1^st Five Year Plan

Chart 1: Sector wise Plan for 1^st Five year Plan (Percentage wise)

Thus we can see that Indian economy was not focused into infrastructure development rather the development of the economy so as to ensure utmost utilization of the resources.

During the period of 1947-1965, the rate of growth of the Indian economy in the first three decades after independence was derisively referred to as the Hindu rate of growth by economists, because of the unfavorable growth rate. Since 1965, after the number of revolution in  the agricultural sector like the Green Revolution, Yellow Revolution or the White Revolution which enhanced the use of high-yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the improved condition of agriculture by increasing crop productivity, crop patterns and strengthening forward and backward linkages between agriculture and industry.

Liberalization of Economy (1991)

Liberalization Period- Is it liberalized or Paralyzed?

The major breakthrough in the economy came during the year 1991, when Dr. Manmohan Singh served as the Finance Minister and incorporated the Policy of Liberalization, Privatization and Globalization. In 1991, after India faced a balance of payments crisis, it had to pledge 67 tons of gold to Union Bank of Switzerland and Bank of England as part of a bailout deal with the International Monetary Fund (IMF). In addition to the bailout, IMF required Indian government to undertake a series of structural economic reforms. As a result of which, the government of P. V. Narasimha Rao and finance minister Manmohan Singh started breakthrough reforms.

The new neo-liberal policies included

• Opening for international trade and investment,
• Deregulation,
• Initiation of privatization,
• Tax reforms, and
• Inflation-controlling measures

The main objective of the government was to transform the economic system from socialism to capitalism so that a high economic growth is achieved and industrialization can be seen in the nation which was, at the end of the day, intended for the well-being of Indian citizens. Today India is mainly characterized as a market economy.

Figure 1 Timeline of Development of Indian Economy

Following is the chart of trend of gross domestic product:

 Table 2: India’s GDP

The figures itself shows how the GDP of the economy in 2000 grew by more than 24 times than that of the GDP in the year 1975. Thus the trio policy of LPG came out to be a boon for the nation where in the infrastructure was also taken care of in the second generation reforms. The Indian economy which generated around 70% of its revenue from the agriculture sector has now turned the scenario with the services sector taking the lead with 57%.

Table 3: Sector wise contribution to GDP

Chart 3: Sector wise contribution to GDP (Percentage)

Table 4: Sector wise workforce distribution

Chart 4: Sector wise workforce distribution

In the past, development of infrastructure was completely in the hands of the public sector which was characterized by:

• Slow Progress,
• Poor Quality, and
• Inefficiency

Infrastructure deals with the availability of power, construction, transportation, telecommunication or real estate etc.; it was seen that India’s low spending on these categories at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates. With changing policy and reforms, certain minimal infrastructure was required in order to sustain the pace of development. This has prompted the government to partially open up infrastructure to the private sector allowing foreign investment, and most public infrastructure, barring railways, is today constructed and maintained by private contractors, in exchange for tax and other concessions from the government.

• Electricity – As of 2006-07 the electricity generation capacity was at 652.2 kWh, against an installed capacity of 128400 MW. In 2007, electricity demand exceeded supply by 15%. Major notable lacks of infrastructure in electricity dimension can be
  • Some 600 million Indians have no electricity at all
  • 80% of Indian villages have at least an electricity line, wherein just 44% of rural households have access to electricity
  • The stolen electricity amounts to 1.5% of GDP.

The reforms brought about by the Electricity Act of 2003 caused the separation of generation, transmission and distribution aspects of electricity, abolishing licensing requirements in generation and opening up the sector to private players, thereby paving the way for creating a competitive market-based electricity sector.

• Water Supply – Notable improvements in water supply infrastructure, both in urban and rural areas, have taken place over the past decade. The proportion of the population having access to safe drinking water has risen considerably as shown below:

Table 5: Change in Water Supply

However, quality and availability of water supply remains a major problem even in urban India, with most cities getting water for only a few hours during the day.

• Transport – India has the world’s third largest road network, covering about 3.3 million kilometres and carrying 65% of freight and 80% of passenger traffic. In terms of road length, India has one of the largest road networks in the world. The national highways account for less than 2% of the total road network but carry 40% of the movement of goods and passengers.

• Telecommunication – India has a national teledensity rate of 67.67% with 806.1 million telephone subscribers, two-thirds of them in urban areas, but Internet use is rare—there were only 10.29 million broadband lines in India in September 2010.

Thus we can see that India after getting liberalised has developed to a great extent in terms of infrastructure wherein the country which didn’t had metalled roads is now having one of the largest and dense transport system including all the roadways, railways, airways and yes not to forget the waterways.

Approach to 12th Year Plan

The Indian economy which is now on the verge of releasing the Twelfth Five Year Plan for the period of 2012-2017, which can be characterized by strong macro i.e., the overall fundamentals and is also characterized by a successful and good performance over the ongoing Eleventh Plan period. At the same time looking at the other side of the coin the economy can be seen clouded by some slowdown in growth in the current year which can be accounted to the fact of continuously growing concern about inflation and a sudden increase in uncertainty about the global economy.

Plan of Action

The twelfth year plan commencing April 1, 2012 projects a total investment of Rs 41 trillion (at 2006-07 prices) in infrastructure. This would account to approximately 10% of India’s GDP during the period and is twice the targeted levels during the eleventh five year plan. Following is the brief intended plan of financing of Infrastructure projects during the plan. The Sources of Financing is categorically divided into the Equity and Debt Financing.

  All Figures in Crores

Table 6: Source of Equity finance

Chart 6: Source of Equity finance (Percentage)

The equity financing includes IPO’s, private equities, Foreign Direct Investment or the QIP (Qualified Institutional Placement). The equity finance, as per the Planning Commission projection, is expected to raise around 29% of the total amount chart projected for financing inclusive of both debt and equity.

        All Figures in Crores

Table 7: Source of Debt finance

Chart 7: Source of Debt finance (Percentage)

Key Challenges

There are several other external challenges arising from the fact that the current stature of the global economic environment is less favorable than it was at the start of the Eleventh Plan. The global slowdown and the European Crisis along with the fear of the double dip recession have added fuel to the fire. Apart from this, the downgrading of US economy from it’s ever since AAA to AA+ by the Standard & Poor’s have done the remaining icing. These global challenges call for renewed efforts on multiple fronts.

Performance and Key areas

As far as the Indian economy performance is considered it has performed well on the growth front which is 8.2 percent as seen in the first four years where as the growth in the final year of the Eleventh Plan saw a growth of 8.5 percent in contrast to the projected 9 percent.

This slight underperformance can be owed to the strong rebound from the crisis thus the actual growth in 2011-12 is likely to be around 8.0 percent which would lead to achieve an average GDP growth of around 8.2 percent over the Eleventh Plan period, lower than the targeted 9.0 percent, but better than the 7.8 percent growth as seen in the Tenth Plan.

This increase accounted for an increase of nearly 35 percent in per capita GDP. The slowdown in 2011-12 is a matter of concern, but can be reversed if the investment climate is turned around and if fiscal policy is strengthen alongside.

One of the major shortcomings of 11^th Plan was inadequate infrastructure which resulted as a major constraint on rapid growth of the economy. The Plan had, therefore, emphasized the need for a massive expansion in investment in infrastructure based on a combination of public and private investment, the latter through various forms of public?private?partnerships. The total investment in infrastructure which includes roads, railways, ports, airports, electricity, telecommunications, oil gas pipelines and irrigation is estimated to have increased from 5.7 percent of GDP in the base year of the Eleventh Plan to around 8.0 percent in the last year of the Plan. A large number of PPP projects have taken off, and many of them are currently operational in both the Center and the States.

As far as Urbanization is concerned as compared to other developing countries, India has been slow to urbanize, but the pace of urbanization is expected to accelerate over the next two decades. According to the 2011 Census an increase was seen in the urban population from 27.8 percent in 2001 to 31.2

percent in 2011, and is likely to exceed 40 percent by 2030. This would generate a heavy demand for better quality infrastructure in urban areas, especially water, sewerage, public transport and low cost housing. Since it takes time to create urban infrastructure, we must introduce a sufficiently long term focus on urban planning in the Twelfth Plan.

Public Private Partnerships (PPP) in Infrastructure

With the government spending or investment becoming a constraint, the Public Private Partnerships (PPPs) are increasingly becoming the preferred mode for construction of infrastructure projects, both in developed and developing countries. The adoption of standardized documents such as model concession agreements and bidding documents for award of PPP projects have streamlined and accelerated decision?making by agencies in a manner that is fair, transparent and competitive.

How PPP has affected India

India currently has 1,017 PPP projects accounting for an investment of Rs. 486,603 Crore. According to the Private Participation in Infrastructure (PPI) database of the World Bank, India is second only to China in terms of number of PPP projects and in terms of investments, it is second to Brazil.

Few PPP Projects

Major PPP projects undertaken thus far are: Delhi, Mumbai, Hyderabad and Bangalore airports; 4 ultra-mega power projects at Sasan (Madhya Pradesh), Mundra (Gujarat), Krishnapatnam (Andhra Pradesh) and Tilaiya (Jharkhand); container terminals at Mumbai, Chennai and Tuticorin ports; 15 concessions for operation of container trains; Jhajjar power transmission project in Haryana and 298 national and state highway projects.

There have been 758 PPP projects in main sectors of focus where a contract has been awarded and projects are underway – in the sense that they are either operational, have reached construction stage, or at least construction/implementation is imminent. The total project cost is estimated to be about Rs. 383,332.06 Crore.

Source: Planning Commission

Conclusion

Thus we can see that there is a drastic change in the Indian Economy since Independence and a lot has been done towards the development of the Nations’ Infrastructure but still a lot more needs to be done. According to the report published by the standards and poor’s, it is said that lack of infrastructure on the face of Transport and lack of funding is a hindrance to the growth of Indian Economy. The report says that the inadequate infrastructure is a major roadblock for the country’s economic development and if the same condition prevails the forecasted economic growth for the coming twelfth five-year plan would be impossible to achieve.

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