INFRASTRUCTURE

How serious is our government?

By- Richa Saxena and Rashmi Gupta

One of the greatest challenges facing India today

is the creation of much needed infrastructure in order to
sustain economic growth of over 8%, as well as to
enhance the standards of living of the masses. To
develop world class infrastructure, India requires large
investments both domestic and foreign, complemented
by well designed Public Private Partnership (PPP)
initiatives. To achieve this, the Indian Government says
that it has accorded highest priority to development of
infrastructure.

Infrastructure is actually a broad term including

electricity generating assets, roads and bridges,
telecommunication infrastructure, railway
infrastructure, irrigation facilities, water supply and
sanitation infrastructure, air and sea ports. It is obvious
that substantial funds need to flow in to create the
much needed infrastructure and the quantum of funds
required over the next four to five years is being
pegged at close to $500 billion, even at a very
conservative level. Analysts strongly argue that if such
levels of investment do not materialise, it can have a
negative impact on the country’s GDP growth rates by
as much as 2% to 3%. There is a clear, substantial
infrastructure gap in the country!
What is the quantum of investment required in infrastructure?

The eleventh plan, prepared by the Planning Commission covering the period 2007-2012,
recognizes that infrastructure inadequacies might constitute a significant constraint in
realizing the country’s development potential. In order to bridge this gap, an ambitious
program of infrastructure investment, involving both public and private sectors, has been
developed for the eleventh plan. The program ensures strengthening and consolidation of
recent infrastructure related initiatives – such as Bharat Nirman for building rural
infrastructure –as well as other sectoral initiatives, such as National Highway Development
Program (NHDP), the Airport Financing Plan, the National Maritime Development Program
and the Jawaharlal Nehru National Urban Renewal Mission(JNNURM).

The overall investment required in infrastructure can be broken down into sectors; the key
sectors being Electricity(including conventional energy), roads and bridges,
telecommunications, railways(including MRTS), irrigation(including watershed), water
supply and sanitation, ports and airports, storage and gas. The planning commission has
provided statistics pertaining to sector wise investment anticipated in the Tenth plan (2002-
2007) and the projected investments in the same for the eleventh plan, as detailed below:

The Indian Government has claimed that it is committed to enhancing investments in

infrastructure and serious efforts are being focused on improving physical infrastructure in
the country. Further, given its other priorities, the government recognizes that it may not be
in a position to pool in the entire requirement in funds and therefore increased private
participation has now become a necessity to mobilize the resources needed to achieve
expansion and up gradation of infrastructure facilities. Challenges in achieving this have also
been rightly recognized by the Government. The successful promotion of private
participation in infrastructure requires a well-designed framework of policies that will make
investors comfortable about certain key issues. This has already started happening and both
public and private sectors are learning from each project that is being implemented. Investors
need to have the assurance that concession will be transparently awarded. This is very critical
as it imparts the kind of credibility to the state that would encourage the private sector to
invest in infrastructure.

How will the investment in infrastructure be financed?

In his speech at London Business School in 2007, the finance minister identified the key
issue in infrastructure development as a legal and regulatory framework that is conducive for
private investment and a viable financing mechanism. Finding a financing mechanism for
these infrastructure projects is important. How does India hope to obtain this level of
investment?

Sector wise Investment Anticipated in the Tenth Plan and Projected for Eleventh
Plan

Rs. Crore 2010-2011 prices

Tenth plan Eleventh plan

Sector s Rs. US$ Sectorsl( Rs. Crore US$ Sectorsl(

Crore billion %) billion %)
Electricity 291,850 71.18 33% 616,526 150.37 70%

Roads and 144,892 35.34 16% 311,816 76.05 35%

Bridges
Telecommunicat 123,411 30.10 14% 267,001 65.12 30%
ions
Railways 119,658 29.18 14% 258,001 62.93 29%

Irrigation 111,503 27.20 13% 223,131 54.42 25%

Water supply 64,803 15.81 7% 199,127 48.57 23%

and sanitation
Ports 4,096 1.00 0% 73,941 18.03 8%

Airports 6,771 1.65 1% 34,748 8.48 4%

Storage 4,819 1.18 1% 22,378 5.46 3%

Gas 8,713 2.13 1% 20,500 5.00 2%

Total 880,516 214.76 100% 2,027,16 494.43 100%

9

Broadly speaking, the government intends to find the resources through public investment,
private investment and public private partnership. Saving and investment, as proportions of
GDP, have been on the rise over the last five years. Gross Capital Formation in Infrastructure
(GCFI) in 2006-2007 was estimated at 4.6 per cent of GDP. The government plans to put in
concrete efforts to raise that proportion to at least 8 per cent. Given an economy of the size of
US$1 trillion – and which is growing at 8 per cent – GCFI at such level will lead a minimum
of US$80 billion a year and, over a five year period, it would be possible to mobilize a
minimum of US$400 billion for the infrastructure sector. Within India, a large part of the
resources is expected to be found through the budget of the central and state governments.
Tax revenue are buoyant and this makes it possible to make larger allocations. Governments
can also borrow within the limits imposed by fiscal responsibility laws. The government has
taken measures to broaden and deepen the debt market; this will result in greater
diversification of risk and would ensure that the quantum of finances increases substantially.
Large amounts of money are parked in insurance and pension funds, and these could be used
for infrastructure financing of long tenor.

There is help from other sources too. Multilateral institutions continue to support the Indian
government’s efforts in bridging the infrastructure gap. Between 1986 and 2006, the Asian
development Bank has provided funds to the transport sector worth almost US$ 1.76 billion
from the same institution. Over the five years, the World Bank has committed US$ 1.38 to
the urban water sector and US$ 0.5 billion to the energy sector. Recently, Citigroup and
Blackstone have joined hands with two Indian companies, IDFC and IIFCL, to jointly launch
a US$ 5 billion India Infrastructure Initiative. US$2 billion will be available for equity
investment and US$3 billion in the form of long term debt to fund infrastructure projects in
India. Bilateral support is also forthcoming. The Delhi-Mumbai and Delhi-Kolkata dedicated
freight corridors that will be built by the Indian Railways have received strong technological
and financial support from the Government of Japan.

Hence on review of the Eleventh Five Year Plan, the government seems to be committed
towards upgrading infrastructure to levels required.
However, Perhaps a more pertinent question is whether the Union Budget 2011-2012 reflects
this spirit? To be more specific, does the budget 2011-2012 encourage or facilitate more
investments in infrastructure?

Given the magnitude of investments that is required to flow into the infrastructure sector,
especially as per the planning commission roadmaps and estimates discussed above, one
would expect large allocations to be made in Union Budget, which should specify the
eventual and actual source of funds for such projects.

Proposals in Budget 2011:

However, Pranab Mukherjee has planned an allocation of Rs 2.14 lakh crore towards
developing the country’s infrastructure in the next fiscal.
To enhance the flow of funds to the infrastructure sector, the FII limit for investment in
corporate bonds, with residual maturity of over five years issued by companies in
infrastructure sector, is being raised by an additional limit of USD 20 billion taking the
limit to USD 25 billion, raising the total limit available to FIIs for investment in
corporate bonds to USD 40 billion. Since most companies in the sector are organised in
the form of SPVs, FIIs would now be permitted to invest in unlisted bonds with a
minimum lock-in period of three years.
To attract foreign funds for infrastructure financing, the FM has proposed to create
special vehicles in the form of notified infrastructure debt funds. Interest payments on
the borrowings of these funds will have a reduced withholding tax rate of 5% instead of
the current rate of 20%, while full exemption of income of the fund from tax has been
proposed.
In addition, Mukherjee also proposed tax free bonds of Rs 30,000 crore for the
enhancement of infrastructure in railways, ports, housing, and highways.
India Infrastructure Finance Company Limited or IIFCL is expected to achieve a
disbursement target of Rs 20,000 crore by March 31, 2011 and Rs 25,000 crore by
March 31, 2012. The take-out financing scheme announced in the Budget 2009-10 has
been implemented and seven projects have been sanctioned with a debt of Rs 1,500
crore. Another Rs 5,000 crore will be sanctioned during 2011-12.
As expected higher fund allocation across infrastructure development scheme Bharat
Nirman has been proposed. Allocation to the tune of Rs 58,000 crore has been planned
for the scheme, an increase of Rs 10,000 crore from the current year.
Mukherjee also revealed that the take-out financing scheme announced in the last
budget has been implemented and seven projects had been sanctioned with a debt of Rs
1,500 crore. Another Rs 5,000 crore has been proposed to be sanctioned during 2011-12.
He also proposed infrastructure status for cold storage chains, which is expected to make
both domestic and global retail chains happy. Also, capital investments in the fertiliser
sector have been proposed to be given infrastructure status. He further stressed on the
endeavour to develop the public private partnership.
Full exemption from basic customs duty has been extended to bio-asphalt, an emerging
green technology for the surfacing of roads, and specified machinery for its application
in the construction of national highways. Tunnel-boring machines required for the
construction of highways are also being included in this exemption.
The finance minister also proposed to raise the corpus of rural infrastructure
development fund from Rs 16,000 crore to Rs 18,000 crore.
Tax sops in infrastructure investment up to Rs 20,000 has been extended by a further
one year.
The loopholes have been-
1. India’s development however has failed to meet its fast economic growth. Foreign
investors often complain about the slow progress in shoring up infrastructure and have
called for less bureaucracy

2. In Infrastructure sector, telecommunications especially Rs 10000 crore for rural telephony

is noteworthy but power and roads and bridges are not even close to targets. Just reduction of
excise on products that are used to build highways will not help. The need of the hour for the
Govt is to provide a clear roadmap to fill the investment gaps without delays in projects and
cost overruns.

3. Infrastructure development has gone up from 4.5%of GDP in 2004-2005 to 6% in 2007-

2008. But it is still low compared to eleventh plan target to raise it to 9% of GDP by 2012.

4. Proper allocation and utilization is something that the Govt needs to sort out. Most of the
proposals indicate that thinking for a more transparent and liberalized economy is on track
but implementation remains a question.

5. Pranab Mukherjee seems to have left untouched the constant issues of lack of clarity on
policies and long term taxation that are plaguing the sectors since several decades.

INFRASTRUCTURAL INVESTMENT IN 11TH PLAN

During the Tenth Plan(2002-2007), the total investment in infrastructure sector was only $
217 billion. At the beginning of the 11th plan, the investment in infrastructure was targeted
and projected at $ 524 billion. The initial scenario of infrastructure investment was felt far
behind the target of $ 514 billion and the actual investment was estimated not to exceed $
300-350 billion. But for last two years the allocation for infrastructure sector put the rail well
on the track which make confident of achieving the target.

Infrastructuring Investment
(Projected investment in $ billion)
The infrastructure investment covers 10 infrastructure sectors, including telecom, railways,
irrigation, water supply ports, electricity, airports, roads, storage and gas.

As per official source of Planning Commission, the shortfall in infrastructure investment if

any, during the 11th plan would not be more than 10 per cent and the actual investment is
expected to remain between $ 450 billion and $ 500 billion.

It is satisfactory stage because even at $ 450 billion, this investment would be double the $
217 billion invested in infrastructure in 10th plan.

Sectoral Fund Allocation Under the Eleventh Five Year Plan

Given the above facts, can India Increase rise to the occasion and facilitate
infrastructure creation?
The corporate sector, and in particular, the companies active in the construction
and infrastructure sectors could scale their operations in order to contribute to India’s
Infrastructure development. However, to operate at such scales, it would be critical for
the companies to have a seamless strategy in “human resources” that would allow
them recruit and retain talent, and nature same through state of the art training. Is this
achievable? The answer is simple. All that we can perhaps say at this stage is that
when the IT and ITES companies were, during the late nineties, able to scale up
operations to global standards and also develop a sound and competent talent base, we
may hope that infrastructure companies will be able to repeat this success story in the
coming decade and effectively contribute to bridge the Infrastructure gap!