Meeting its infrastructure demands is crucial for India. On the one hand, the country cannot achieve its goal of 7-8% growth in GDP without substantial investment in physical infrastructure, including roads, railways, ports, communications links and power plants. On the other, the current state of these major infrastructure sectors countrywide is poor – the country will need about $150 billion of investment in infrastructure over the next 10 years.
"The deficiency in India is an infrastructure deficiency," says P. Chidambaram, India's finance minister. "We have heritage sites, we've no hotels near them; we've got airports which cannot take more than fifteen or twenty aircrafts at the same time. We need to deal with this infrastructure deficiency."
The country's 10th Five Year Plan estimates that over the next five years, developing urban infrastructure is top priority and will require about $41 billion. During the same period, roads and highways will cost about $19 billion. The development and expansion of the railway network will need about $13.5 billion. Modernizing existing power plants and building new ones will cost another $6.17 billion. Port development will account for $3.76 billion, while airports development will need another $2.9 billion.
Clearly, it is no mean task. In the next 5-7 years, about 65,000km of highways will be upgraded and developed. There is also a plan to connect all the major ports in the country with state capitals. This will require an additional investment. Dayanidhi Maran, Union minister for communications and information technology, concedes that infrastructure has been an area of concern and that the government wants to develop world-class facilities.
Today, airports are being upgraded at a cost of $0.6 billion in Hyderabad and Bangalore. Further, those in Delhi, Chennai and Mumbai are being fully revamped. For the telecom sector, the government estimates that a 20-25% growth by 2007 would mean a total of about 200-250 million phone lines. Such quantum growth will need about $35 billion of investment. The cost of achieving such mammoth build-up is not going to be easy.
Consider: the World Bank estimates that $1,900 is needed for every kilowatt of electricity generated. Similarly, $410,000 is needed for every kilometre of two-laned paved road. The cost of the railway network is estimated to be in the region of about $900,000 per km. Again, it is estimated that $400 per line is needed for a single telecom landline connection while $580 per subscriber is required for mobile connections.
Despite these staggering demands, India currently spends a mere 3.5% of its GDP on physical infrastructure. According to one World Bank estimate, between 2005 and 2010, South Asia will need to invest 3.06% of its GDP every year to build new roads, rail, power stations etc, while another 3.82% of its GDP is needed to keep its current infrastructure going. Clearly, there is a huge gap: a country like India will have to invest twice as much as it is doing now in infrastructure. That is the scale of the challenge.
But Chidambaram admits that the problem is also political. "We need to do much more in infrastructure, and we need to do much more in implementation. Where India fails is India's inability to implement its decisions; some of it is inbuilt difficulties."
"We can do more but we can do more only if we have good governors and good administrators," he adds. "States where there is good governance have done better, states which have very poor governance have done very badly; it ultimately comes down to governance."
Funding Gap
The other question is where the money will come from. Traditionally, more than 75% of investment in infrastructure has come from the government sector. But over the last few years, there has been a consistent fall in public investments in capital expenditure as a share of overall GDP.
The reason is that recent governments have slashed capital expenditure while maintaining politically sensitive issues like subsidies. In the process, it is areas like infrastructure that have suffered. But in recent years, the government is acutely aware of the need to cut its fiscal deficit. It is also fast getting integrated into the global economy.
Not surprisingly, then, today the government expects that the share of the private-sector investment in infrastructure will rise. The government is also pushing policies that will attract investment, particularly foreign investment in the sector. In the future, the government estimates that a large part of the money needed will come from the private sector, international financial institutions and capital markets and foreign investors. In recent years, the national banks have also started lending for infrastructure projects.
India's project finance business has become an almost exclusively local affair, with local commercial banks taking on the funding without the support of international lenders. For example, the financing for Bangalore International Airport Ltd (BIAL) was lead arranged and underwritten by ICICI bank alone.
Other projects are setting benchmarks for financing infrastructure. The Petronet project, India's first operational liquefied natural gas (LNG) importing terminal, is relying on Indian institutions for the long-term project loan.
Prosad Dasgupta, director of finance for Petronet, says that the project loan (with a tenor of 12 years), led by State Bank of India, included a total of 15 Indian banks and development finance institutions. All the state banks were represented in the deal, as well as the Infrastructure Development Finance Corporation (IDFC) and ICICI. The loan is denominated in local currency, as proposed by the financial adviser (ABN Amro), partly because of the strong local bank appetite.
But long-term infrastructure lending comes with concerns over financing for long periods, and taking huge exposures could create asset-liability mismatches. The government in recent times also issued infrastructure bonds as another means to attract capital in the sector.
In general, debt capital markets funding is still rare for Indian projects. The main investor base, according to one local banker, is the Indian banking sector itself. Therefore, in view of the sufficient liquidity within the system and the ability of banks to take and hold positions, it does not usually make sense to go through the process of getting a rating and issuing a bond.
Another way to attract funds into the segment would be to draw in foreign money, most of which comes from pension and provident funds and the insurance sector.
Says Gaurav Dalmia, director of the Dalmia group of industries, a company with substantial exposure to infrastructure projects, "The long-term viability of infrastructure projects is an area of concern. That is one issue that will have to be addressed."
There have also been moves recently, on suggestions from the country's Planning Commission, to use a part of the country's foreign exchange reserves to fund this. China has already announced similar plans. Under one proposal, the government could set up a special purpose vehicle for infrastructure, drawing on the reserves. But this plan has drawn flak from some of the economists within the country, who argue that many infrastructure projects are not particularly import-intensive.
To attract major and sustained investments from these segments, deeper financial sector reforms will also be required. But, in the longer term, what the country needs are also bankable and more profitable infrastructure projects. To make this happen, some of the regulatory and policy issues also need to be ironed out.
So, what more needs to be done? For a start, regulatory bodies in the various segments of the financial and infrastructure sectors need to be developed and strengthened. Says Chandrajit Banerjee, senior director, Confederation of Indian Industry, "The regulatory issues in the infrastructure sector is a concern. Second, Indian industry would also like to see a separate allocation to develop an infrastructure index. Once some of these issues are addressed, foreign and domestic investment into the sector will flow in."