Infrastructure Investment - Port Sector Study
Chapter 2
Infrastructure Investment-Shift From Public Sector To Private Sector
As is generally agreed by economists that India lags behind East and South-East Asian economies in infrastructure spending vis-a-vis GDP. However, there has been a change in outlook and the draft approach paper of the 11th Plan has mooted increasing investment from the current 4.6 per cent of GDP to 7-8 per cent during the coming years, writes Dhurjati Mukherjee.
The Confederation of Indian Industry (CII) has projected that Rs 14,89,500 crore investments in the infrastructure/core sector would be needed over the next five years to sustain the 8 per cent growth rate during the Eleventh Plan period (2007-12). Out of this, the private sector would have a big share of investment.
While China spent 10.6 per cent of GDP, India’s capital spending was very low, below 4 per cent in 2003, though over the years this has remarkably increased. China spent $ 150 billion on infrastructure in 2003 against India’s total investment of a mere $ 21 billion, the CII study revealed. As is well known, infrastructure development can only boost up the economy and invigorate the backward areas of the country.
The country’s gross capital formation expenditure will thus need to grow at 8 per cent of GDP by the end of the Plan period. For this, it has suggested that the government spells out an investment strategy, so that public and private investments, including expected foreign investments could accelerate the pace of growth in these sectors.
Being a resource-crunch economy, infrastructure development till the beginning of the 1990s was very meagre. There was very little investment in roads and the rural areas had virtually no connectivity while the power position was also equally bad. The situation started changing since the early 90s, but even now a lot remains to be accomplished. If India is to emerge big and strong, it is necessary to consolidate the infrastructure sector and make it an engine of growth, as has been the case in China and many South East Asian economies. The country has immense potential and the Western world is too eager to invest here because of many advantages.
The Industrial Policy Resolution of 1956, which reserved infrastructure exclusively for the public sector, caused the setback to the development of infrastructure in the country. The government took on the responsibility for the development of infrastructure. It did not realize the heavy burden that it would have to bear to keep a sizable growth of the GDP. This large sector should have been opened to both the public and private participation to keep the growth momentum needed for a developing economy.
Over the years, infrastructural bottlenecks coupled with indirect taxes and multiplicity of procedures in starting operations has been holding up India’s attractiveness as an industrial power house and manufacturing base. To maintain or accelerate the growth rate, the following challenges have to be seriously considered: greater private sector investment in all the areas of physical infrastructure sector; part disinvestments of the public sector units (PSUs) for improvement of functional efficiency and more accountability; ,structural reforms in banking, finance and insurance sectors; more foreign direct investment in infrastructure development; all-round technological upgradation and suitable measures to make India an attractive destination for doing business.
The public-private partnership (PPP) in infrastructure development has been envisaged as the right strategy. Private sector investments of about Rs 60,000 crore every year would be required in infrastructure projects, assuming that 20 per cent of the investment should come from private parties, Moreover, PPPs would not only allow access to the management and operational skills of an incentive-driven private sector, but also facilitate additional funding for capital investment, the study said.
The PPPs in the Latin American context have been quite successful and achieved by privatization with the sovereign selling the assets or its controlling stake. In the Asian economies, the preferred route seems to be allowing ‘market access’ for private players into hitherto closed markets.
Thus, in a fast growing economy like India, PPP is a viable alternative to public spending and the Bharat Nirman programme is moving in this direction. Benefits derived by users of infrastructure created under PPP outstrip user charges paid by them. The BOI model has been refined to suit Indian conditions by the National Highways Authority India (NHAI) for awarding construction contracts. As part of its plan to uplift the road infrastructure, the government has outlined 50,000 km of road projects over the next 10 years at a cost exceeding Rs 180,000 crore. It is expected that anything around 15-20 per cent would come through private sector participation. In fact, by involving the private sector, the government could free funds upto Rs 30,000 crore for other works/social programmes.
One may mention the success achieved in the telecom sector primarily due to private participation in a big way. Moreover between 2001 and 2004, the total FDI in telecom has been around Rs 5763 crore. The number of phones shot up from 22.8 million four-five years ago to 106 million presently, improving tele-density to nearly 10 per cent.
But power development, which is possibly the most vital element in the infrastructure sector in the country, has been inadequate by all standards. Generally 1 per cent increase in GDP necessitates 1.5 per cent increase in power generation. In the last 15 years, the GDP has increased at the rate of over 6 per cent on an average while power generation has gone up by only 4.1 per cent a year. Realizing that power development was beyond its capacity, the government allowed, though belatedly, the private sector to get involved in this sector.
The Tenth Plan target was around 41,000 mW but the achievement has been only around 31,290 mW. Moreover out of the private sector target of 7121 mW, the achievement was a mere 3000 mW, which was no doubt unsatisfactory. It is necessary that investments in power generation, transmission and distribution should be made more attractive in the coming years for entry of private capital. This has to be understood keeping in view the fact that electrification of all villages has been targeted by 2010 and presently about 150,0011 are yet to be electrified.
While in the roads sector, a lot has been accomplished in big projects like Golden Quadrilateral (5846 km), the North-South Corridor (7300 km) and Port Corridor (1133 km) but the roads in semi-urban and rural areas are in a pitiable condition. It is necessary that the private sector, whether indigenous or foreign companies have to be motivated to undertake highway construction in a big way so that the government could concentrate on rural connectivity. Though under the Pradhan Mantri Gram Sadak Yojana there has been some progress in recent years, only 60-65 per cent of the work has been completed. The earlier deadline of 2007 has now been shifted to 2010 but it should be ensured that this time the target is achieved.
In areas like urban infrastructure, development of ports and civil aviation, government programmes are being supplemented by private sector projects. One may mention here that greenfield projects are in progress with private participation while contracts for modernisation of Delhi and Mumbai airports have been awarded to private players. Such airports are also being contemplated in some other cities as well.
Infrastructure development is the key to a nation’s progress and in a fast developing economy like India, it is imperalive that such development is accomplished at a faster pace in tune with the growth. Whether it is industrial, agro-industrial or agricultural growth, a strong physical infrastructure would go a long way in achieving the targets.
Foreign investment has to be attracted in some of these sectors to keep up the growth momentum and reenergize the rural economy. It is expected that by the middle of the Eleventh Plan period (or latest by the end of the Eleventh Plan) infrastructure development, which has for long been a bone of contention, would improve drastically in most parts of the country
