Aug 8th, 2006

Infrastructure : Infrastructure Sector to Drive Economic Growth

Infrastructure is an integral part of economic development and the availability of quality

infrastructure services is the key to sustained growth of any economy. There are tremendous
opportunities in the areas of Power generation, Port development, Telecom, construction of
roads and Airport development in the years to come due to the increased thrust of
government in bettering the basic infrastructure of the country. According to the latest
Economic survey, the estimation of the investment requirements in the infrastructure
development of the country by FY 2012 is as below.

Sector Investment (Rs. Cr.)

National Highway 172,000
Airways 40,000
Ports 50,000
Power sector 800,000

Infrastructure sector will see a quantum jump in the investments in the years to come. The
prospects as well as the government policy initiatives pertaining to the major sectors are
given below:

Power Generation
The Government aims to add 100,000 megawatts of generation capacity by 2012, 23,000
megawatts of which would be in the private sector. This would provide access to the 45% of
households still without power and would require an investment of approximately US$100
billion. The Government has also stated an intention to increase hydroelectric capacity by
50,000 megawatts with 162 projects to be developed during 2007-2017. The sector also has
many opportunities for new projects to meet these demands. In addition, the Electricity Act,
2003, is intended to introduce market-based competitive reforms through measures that
include the de-licensing of power generation and measures that encourage captive power
generation and open and non-discriminatory access in transmission. This has created
opportunities for infrastructure development in several areas in the sector, most particularly
in the development of captive power plants. The demand for natural gas is projected to
increase due to its cost competitiveness with other fuels and environmental friendliness.
Additionally, the completion of the National Gas Grid is expected to require an investment of
Rs. 180 billion over five years, a portion of which is expected to be provided by the private
sector. Development of independent gas grids is also expected. There are also city gas
distribution projects in several major metropolitan areas, including Ahmedabad, Baroda,
Pune, Kanpur and Hyderabad.

Road Development
The National Highways Development Project (Phases II, III and IV) is likely to require

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investment of Rs. 1,720 billion over the next seven years based on recent reports. Phase III
will involve the upgrading of 10,000 kilometers of existing national highways to four lanes.
Phase IV will involve upgrading 21,000 kilometers of existing single lane road to two lane
roads with paved shoulders and strengthening and adding paved shoulders to an existing
17,000 kilometers of existing two lane highways. Additionally, securitizations of tolls and
maintenance through public-private partnerships are being planned for completed sections of
the national highways.

Ports
The development of ports in India to continue to grow due to the increase in shipping and
trade as a result of India’s growing economy. The Government of India’s National Maritime
Development Project to develop ports, inland waterways and coastal shipping aims to have a
port every 150 kilometers of India’s approximately 6,000 kilometers of natural coastline. This
project which is still in the planning stages, is expected to involve investment of over Rs.
1,000 billion, 85% of which is to be private investment. Additionally, in the near term, there
are 23 port projects with an annual capacity addition of 89.3 million metric tons at various
stages of evaluation and implementation.

Airport Development
Growth in this sector has been driven by the Government’s recently adopted legal framework
for private investment in airports. The Airports Authority of India Act, 1994, as amended in
2003, allows for up to 100% private equity investment in airport projects. Additionally, the
Government has allowed for a maximum of 74% of foreign investment without Government
approval. As a result of this liberalization, a significant amount of investment is expected in
the development and construction of new international airports at Bangalore and Hyderabad
and the privatization of the major airports in the four key metropolitan areas of Mumbai,
Delhi, Kolkata and Chennai. Of these, the government has initiated bidding for the airports at
Mumbai and Delhi. Investment opportunities in the aviation sector include the privatization
and development of urban airports as well as investment opportunities in existing and new
private airlines. India is one of the fastest growing aviation markets in the world, with
domestic and international air traffic up 26.5% and 18%, respectively, from April through
November 2004 over the same period in the prior year. The need for high quality airports
with better infrastructure is expected to increase significantly with the high rate of economic
growth in India and increasing air travel to and within India. Currently, there are severe
infrastructure bottlenecks in the 62 Indian airports that currently handle scheduled airlines
and substantial investment in infrastructure is required. The Government has announced
plans to modernize 25 non-metro airports.

Others
The rapid growth and development of information technology and information technology
enabled services and business process outsourcing operations have given rise to demand for
quality commercial real estate and industrial parks, especially in metropolitan areas. There
will be opportunities in the telecommunication sector as penetration rates in India continue
to increase. As an example, in 2004 India’s mobile penetration was 5% compared with 21%
in China and 54% in the United States. Several private projects for the collection,
transportation and disposal of solid waste will be developed and will require funding from
various sources.

Outlook
According to CII (Confederation of Indian Industry), the countr

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from the private sector. The current rate of infrastructure investment in India at 5 % of GDP
is well below the target rate of 8.0% proposed by the Expert Group on Commercialization of
Infrastructure Projects. However there has been close to 21.7% increase in investments on
these sectors in FY06, on the back of a 8% growth recorded in the previous two financial
years. In FY06, telecom, roads and airport sectors have seen the highest quantum of
infrastructure investments, while power sector accounts for highest amount of funds. Despite
the recent uptake in core sector investments, India still lags way behind most emerging and
developed economies. In absolute terms, China spends seven to eight times more on
infrastructure than India, with China's infrastructure investment to GDP ratio standing at
about 11% of GDP. Better infrastructure is yet another area which has propelled the Chinese
economy ahead of India's. Sectors like Power, telecom, Road development, Ports, Airport
development etc are expected to see a major thrust which in turn will create need for
financing these long term projects. This indicates significant opportunities for further
infrastructure development and financing in India, particularly as regulatory, legal and
market frameworks evolve and become more supportive of private investment. Public-private
partnership (PPP) can contribute vastly to the growth of infrastructure and hence the
government has correctly identified public-private partnership (PPP) as a corner stone of its
policy on infrastructure development. However, obstacles still remain regarding the
successful rollout of PPP projects across all states and across all sectors. All said and done,
inspite of this huge amount of investment outlay, the pace needs to be accelerated in order
to achieve higher economic growth.

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