INFRASTRUCTURE: THE KEY TO RAPID GROWTH

Like most of the developing countries, Indian economy is also a diversified and
resilient in nature. Similarly, like most of the developing countries, huge sums of
funds are being spent on the development of infrastructure, both in the private as
well as in the public sectors. But, it is felt that the infrastructure spending is
shorter than what is ideally required for achieving the required higher growth
rate. As per the estimation of the Planning Commission of India, the total
requirement of funds for financing the infrastructure requirements during the
Eleventh Five Year Plan (2007-12) is to the tune of USD 500 billion, which is about
2.5 times of the funds provided for this purpose during the Tenth Five Year Plan.

Realizing that the government may not be able to fund the huge requirement for
infrastructure projects required to be taken up for rapid growth of the economy,
the Union government and various State governments have come up with the
required Public-Private Partnership (PPP) framework to facilitate the private
participation in the infrastructure sector in a big way. The government has also
asked the Infrastructure Investment Finance Company to earmark a corpus of
over 8.15 billion US dollars for this purpose. This is in addition to $320 billion to
be spent by the government for up-gradation of sea ports, railroads, highways
and airports over the next about 15 years.

A massive 494 billion dollar investment is proposed in the Eleventh Five-Year Plan
(2007-12), which would increase the share of infrastructure investment in this
sector from 5 per cent of the GDP at the beginning of Eleventh Plan to 9 per cent
during the Plan. This massive investment in the infrastructure sector is envisaged
through huge doses of public spending through several flagship national
programmes, as well as through active participation of the private sector in this
gigantic effort. To facilitate PPP in infrastructure sectors, the government has not
only introduced the model concession agreements but also permitted increased
percentages of Foreign Direct Investment (FDI) in various sectors. Major
expansion of infrastructure in the sub-sectors like
railways, ports, civil aviation, road, power, telecommunications and housing is
planned to be achieved during the plan period. Urban infrastructure is targeted to
be strengthened through the Jawaharlal Nehru National Urban Renewable
Mission, while the general rural infrastructure is proposed to be up-graded
through implementation of national programmes like Bharat Nirman, Rajiv
Gandhi Gramin Vidyutikaran Yojana, and National Rural Health Mission etc.

Private Participation
Policy makers realise that the basic goal of inclusive development laid down for
the Eleventh Five Year Plan may not be achieved if the basic infrastructure
facilities are not available in the urban as well as rural areas of the country. In this
regard, the participation of the private sector is considered to be very important.
Partnership with the private sector had been continuing in the country during the
past several years but there was no defined uniform policy and legal framework
till recently.
With a view to facilitate the private and foreign investors to pump funds into
Indian infrastructure projects, and to standardize the concessions to be extended
to the private investors under the PPP, the government of India carried out
special workshops in various parts of the country. Main objectives of these
workshops were to bring out the developmental relevance of the PPP in the
current context, assist interested in the PPP to go ahead, understand and address
the concerns of the potential PPP investors, and international experience sharing
from successful PPP models across the world.

The government of India has set up a PPP cell in the Ministry of Finance,
Department of Economic Affairs. It is also felt that many PPP projects may not be
economically viable but are essentially required to be executed. For such projects,
Viability Gap Funding (VGF) Scheme has been introduced. This is a special facility
aimed at supporting such infrastructure projects which are economically and
socially justifiable but are not commercially viable. Under the VGF Scheme,
upfront assistance upto 20 per cent of the project cost can be sanctioned as grant
for such PPP projects.

No facilitation is complete without making institutional arrangements for

financing. The government of India has set up India Infrastructure Finance
Company Ltd (IIFCL) as a wholly government-owned company to facilitate long-
term funding of infrastructure projects. IIFCL provides direct financing, as well as
refinancing of such projects in public, private or PPP sector.

The government has also paid special attention towards the capacity building at
the Central and State levels. Capacity building needs include training of the key
personnel, development of standard toolkits, Model Concession Agreements,
development of Project Manuals, preparation of standard bidding documents,
consultancy support and project preparation manuals. This effort is also being
supported by the Asian Development Bank.

Over the past three to four years, the government of India has worked towards
creating institutional framework to facilitate it. But at the same time, the overall
environment is very important before the private investors commit funds into
such projects. Simplicity of government procedures, reduction in corruption level
and reduction in time taken for decision making in government are some of the
areas of concern that may have to be addressed before the PPP picks up in the
country. Efficiency in government as well as enforcement of market-driven tariffs
are two other important determinants of the enabling environment.

Precursor to Rapid Growth

Infrastructure development has been identified as an effective tool for taking the
economy out of the effects of global recession. There has been stiff increase in
the proposed expenditure for infrastructure projects particularly in the rural
areas. Hefty 31 per cent increase has been proposed in the interim Budget 2009-
10 for Bharat Nirman programme, aimed at strengthening the rural infrastructure
in the country. This would not only increase the economic activity in the
countryside but would also provide the rural people with the required
infrastructure and increased employment opportunities.
One of the ambitious ongoing infrastructure projects is the Golden Quadrilateral
Project, which is aimed at improving the road infrastructure on the
highways/expressways connecting major cities of the country. The Project, on
completion, would connect the metropolitan cities of Delhi, Mumbai, Bangalore,
Chennai and Kolkata with expressways. It is the largest expressway project of the
country, aimed at constructing 5,846 kilometres of six/four lane express highways
at a cost of Rs 60,000 crores. Its North South and East West sections are nearing
completion while the work on other sections is going on.

Road infrastructure, world class telecommunications, availability of efficient sea

ports and airports, capacity creation in electricity generation and strong rural and
urban infrastructure were some of the areas identified for improvement by the
policy makers. After the planning stage, it is now the implementation stage and it
is expected that within next five to ten years, India would have all the world class
infrastructure facilities available.

In addition to creation of sustainable infrastructure in the country, the

government effort would also result in ensuring huge doses of investment into
the economy, including the rural economy, at a time when most of the western
and developed markets are reeling under the influence of worldwide recession.
Investment in this sector has ensured that the economy grew at 7 per cent during
the previous financial year, when the world growth rate was around one per cent.
During the current fiscal also, when the world economy is likely to record zero
growth rate, Indian economy may still record reasonable growth rate.