Finance Minister Arun Jaitley said recently that India’s infrastructure gap is so huge that it will take at least two decades to bridge. At the same time this major bottleneck to development provided an opportunity for massive investment. Prime Minister Narendra Modi Government has therefore focused rightly on infrastructure development from day one it came to power in May 2014.
The push to infrastructure development has been evident and it is worth taking stock of the progress to put this major development in perspective during the last three years. Be it Railways, Roads, Ports, Shipping, Civil Aviation, Inland Waterways, Energy, including renewable, have made tremendous progress to aid connectivity, which had not made significant headway commensurate with the requirement during the 70 years after independence. To build physical infrastructure, India also needs necessary skilled labour and digitization. It goes to the credit of Modi that he launched skill India, Digital India and Swatchh India campaign along with Make in India initiative to ensure India became a global manufacturing hub by creating World class Infrastructure. In the 12 th five year plan that is ending 2017, the government had proposed to spend $ 1 trillion in infrastructure development, of which sizeable investment would come from private sector.
India’s infrastructure is creaking and was coming in the way of pushing the economy to high growth path. The first major and significant shift in Modi’s strategy on infrastructure has therefore been to make it demand-driven rather than supply driven as has been the case so far. The supply driven strategy has hit even India’s agriculture. This is because the demand to fix poor rural infrastructure like roads, cold storage and irrigation facilities were never met. Drawing lessons from the infra challenges faced during the last 15 years, Modi government has embarked upon modernization and the statistics speak for themselves.
A 1.25 billion population, two thirds of whom are below 35 yrs, no other development strategy could be better than big ticket infrastructure development. India is already on a sweet spot with economic growth rebounding at around 7.5 per cent this financial year. This is happening at a time when other economies including China are slowing down and the global demand none too encouraging. In that scenario, it is only appropriate that the government push infrastructure development, as any sound economist suggests, as this will create necessary platform to deliver when the demand picks up in the global economy. Also it makes sense to boost infrastructure development now when the global commodity prices are falling like oil, steel, cement, which are critical for infra sector. This will provide much needed advantage in cost.
Besides the pension funds in advanced economies and other global investors are waiting for an opportunity to invest. No other country in the present juncture has that kind of appetite for such massive and long-term investment. The global investors are waiting to cash-in on this golden opportunity. When emerging economies like China is faltering, India’s macro- economic parameters are strong making it conducive for an infra push. With inflation below five per cent, fiscal deficit at manageable level, interest rate falling farm sector bouncing back, the economic situation is ripe for jump-starting infra growth. The government has already made an ambitious plan to spend at least another $one trillion in the next 3-4 years.
In the first quarter of this year, the capital expenditure has already increased by 18 per cent and number of stalled projects is increasingly getting speeded up. There are already signs of foreign investors showing a lot of interest in longterm investments in infra, according to Power Minister Piyush Goyal. In July 2014, the government officially announced a push for foreign investment into the Indian Railways, part of a $128 billion upgrade of the country’s rail infrastructure that will include new tracks, 400 stations, a $15 bn bullet train service and a $12.5 bn dedicated freight corridor. More freight corridors have been announced in the last year’s rail budget improving rail and port connectivity in length and breadth of the country. Already the work in Mumbai-Delhi and Ludhiana-Kolkata freight corridors are going on at brisk pace.
Three more freight corridors, KolkataVijayawada, Delhi-Chennai and Kolkata-Mumbai have been taken up. A $6 billion National Infrastructure and Investment Fund set up by Modi Government will help in confidence building among foreign investors in the infrastructure sector. The NIIF is a Fund-ofFunds platform, in which the government holds a 49 per cent stake. Cash-rich public sector undertakings and foreign investors will hold the controlling stake, with each of the funds that the NIIF seeds run by external, professional investment managers. One of the major problems in the infrastructure funding has been that the government did away with development financial institutions in the 1990s post economic liberalization.
But it failed to create alternative sources of longterm funding like vibrant corporate bond market and infrastructure funds. This forced commercial banks to lend hugely into infrastructure sector. Commercial banks by nature get short- to –medium (page 2) PF- 102/2017 FEATURE term deposits and hence can lend only short-tomedium term. Typically infrastructure projects have long gestation period and slow rate of return, and hence it needs long term funds with lower interests. This is generally provided by pension and insurance funds, corporate bonds and infra funds. Since these were not there in the country, commercial banks were forced to lend resulting in asset- liability mismatch, laying the foundation for unmanageable Non performing assets. India, which is in the second wave of infrastructure development since Modi came to power in 2014, required Rs 43 lakh crore over the next five years, according to rating agency CRISIL.
This translates into roughly Rs 8.6 lakh crore annually. About 70 per cent of this Rs 43 lakh crore would be required in just three sectors, power, transport and urban infrastructure. With private capital that invested 10 to 15 years ago are looking to exit, there are now more opportunities foreign investors to step in. There is also interest in the renewable energy sector, as Modi begins implementing plans to increase the country’s green energy capacity from the current 30GW to 100GW by 2022 Common to all the infrastructure asset classes of renewable energy, highways and rail, is the fact they are primarily under the control of the central government, which is exhibiting a renewed focus on increasing transparency in government, Power Minister Goyal said recently adding the government has taken away the discretion in investment deals and is moving into a rules based government attracting more foreign and private investment.
There is also mounting evidence that Modi’s (page 3) PF- 102/2017 enthusiastic pursuit of government to government engagement with countries such as Japan, Korea, the US and Australia is paying off. Japanese companies are looking to invest about $ 5 billion into a dedicated freight rail corridor; Canada’s $ 268 billion pension group has already invested $ 2 billion, and the UAE’s Abu Dhabi Investment Authority is equally interested, according to Goyal. Modi, during the last three years, has stressed on the need to leverage co-operative & competitive federalism to achieve all round growth. For a long time, Big Brother relationship existed between the Centre and States. A ‘One Size Fits All’ approach had been used for years, not taking into account the heterogeneity of different states and their local requirements.
It is precisely for this reason NITI Aayog was formed to further empower and strengthen the states. Modi has also brought in game-changing reforms through the use of Jan Dhan, Aadhar and Mobile (JAM), a unique combination of three to implement direct transfer of benefits. This will prevent leakage in scarce government resources, which could be ploughed into infrastructure development. This is evident from increased allocation to public expenditure, the need of the hour to kick-start the economy particularly when domestic private capital is not forthcoming. Rollout of Goods and Services Tax from July one this year will further augment government revenue so as to step up expenditure into infrastructure.
Several studies indicate rollout of GST will push GDP growth by 1.5-2 per cent annually. This is bound to come largely from investments in infrastructure. If an economy grows at 8-9 per cent annually, logistics sector including railways will have FEATURE grow at least by more than two per cent. Rightly railways have stepped capital expenditure to a record level of over Rs one lakh crore annually. Capital expenditure in the Railways have gone up steadily from a mere Rs 40,000 crore three years back. Nitin Gadkari, Minister of Road Transport and Highways, and Shipping, has announced the government’s target of Rs 25 trillion ($ 376.53 billion) investment in infrastructure over a period of three years, which will include Rs 8 trillion ($ 120.49 billion) for developing 27 industrial clusters and an additional Rs 5 trillion ($ 75.30 billion) for road, railway and port connectivity projects. In 2016, India jumped 19 places in World Bank’s Logistics Performance Index (LPI) 2016, to rank 35th amongst 160 countries.
The Indian power sector itself has an investment potential of $ 250 billion in the next 4-5 years, providing immense opportunities in power generation, distribution, transmission and equipment The Indian construction equipment industry is reviving after a gap of four years and is expected to grow to US$ 5 billion by 2019-20 from current size of US$ 2.8 billion. Several countries like Japan, Britain, France, United State and China have evinced interest in government’s smart city projects and have committed to billions of dollar investment in this area. In the Union Budget 2017-18, the Government has taken several new initiatives to give further fillip to infrastructure development in the country. Infrastructure outlay and defence capital expenditure have been increased by 10 per cent and 20.6 per cent to Rs 3,96,135 crore ($ 59.18 billion) and Rs 86,488 crore ($ 13.1 billion) respectively, over revised estimate of 2016-17. This infrastructure development at break-neck speed during the last three years has put the economy on a take-off stage to get back to high growth trajectory in the coming years.