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India - Infrastructure Introduction

 

INFRASTRUCTURE IN INDIA REQUIREMENTS AND FAVORABLE CLIMATE FOR
FOREIGN INVESTMENT

India initiated an ambitious reform programme, involving a shift from a controlled to an open market economy showing signs of overheating because of basic infrastructure constraints, both physical and human. So far, the bulk of infrastructure was in the public sector. Public sector in India operating in a protected set up has been largely subsidised by the Government. Since the launching of reform, Government 

is trying to reduce its borrowing which means that further subsidization will not be possible. There is one area where there is a need for private sector and foreign investment to come in. Because of the long gestation period, and many social implications, the infrastructure sector compares unfavorably with manufacturing and many other sectors. For this, specific policies in this area are need to make infrastructure attractive. Clearly, there is a wide gap between the potential demand for infrastructure for high growth and the available supply. This is the challenge placed before the economy, i.e. before the public and private sector and foreign investors. This can also be seen as an opportunity for a widening market and enhanced production.


TOTAL CAPITAL NEEDS FOR INVESTMENTS

According to the India infrastructure Report (IIR), currently 5.5 percent of the GDP is invested in the infrastructure sector. This needs to be increased to 7 percent within the next three years and 8 per cent by 2005-06, by which time the annual level of investment in infrastructural facilities is projected to treble or rise even more, from the current level of Rs. 6000 billion (US$52 billion) by 2005-2006.

The total infrastructure investment requirements for the next five years again have been estimated in the report at about Rs. 4000-4500 billion (US$ 115-130 billion).

The task of finding such large amounts and thereafter deploying them productively calls for a close partnership between the public and private sectors, with a vital role reserved for foreign capital. To finance this large short fall, the domestic saving rate needs to be increased by a minimum of 26.7%. besides this has to be supplemented at the margin by FDI. However, this "margin is indeed very important since the role of foreign investment has to be read not only as a gap filler between saving and investment but also as a means for bringing better technology and management.
 

Further, for filling this gap, the ODA flow may not be very helpful in future, given the aid weariness of most developed countries. Hence, FDI may prove to be the prime substitute. But a sustained FDI inflow would call for the creation of a fair, open and rational tariff structure. Besides, the availability of critical infrastructure base is also becoming an essential precondition.  The projected net foreign investment inflow includes both foreign direct and portfolio inflows. This will entail an increase from the current US $ 4-4.5 billion to about US $ 9-10 billion by 2000-01 and US $ 15-16 billion per annum by 2005-06. IIR's expectation is that about 40 per cent of external capital inflows could flow into the infrastructure sector. This is indeed a very ambitious target. The sustained inflow of such volumes of external capital would require an open foreign investment regime. Simultaneously, attention should be paid to keeping the macro-economic fundamentals stable.


THE ROLE OF FID IN INFRASTRUCTURE

The importance of infrastructure sector also follows from the fact that foreign investors are now looking at infrastructural development as a yardstick for directing their investments. In fact infrastructural development had taken precedence over wage levels in assessing the investment potential in developing countries. In India infrastructure sector itself is becoming an attractive investment area for FDIs.

Already there is a huge demand for funds from the manufacturing sector. On top of that is the demand from the infrastructure sector. Both draw heavily from the savings of the household sector. The growth of financial savings of household sector however is not rising fast. In this context, the importance of increased obligation of domestic saving needs underscoring.



GOVERNMENT POLICY FOR INVITING PRIVATE AND FOREIGN INVESTMENT

To encourage feign funds flow into the infrastructure sector, the Financing Ministry has allowed Foreign Institutional Investors (FIIs) also to invest in unlisted companies.

This was aimed at helping infrastructure companies as they would not be in a position to list their shares in the initial phase. FIIs now deploy 100 per cent of their funds in corporate debt. However, the Ministry has not dispensed with the 20 percent withholding tax on such investment as per the suggestions of the IIR report.

Speaking at the World Infrastructure Forum, John Taylor, Director, Infrastructure, Energy and Financial Sector Department, ADB, emphasised that the "counter guarantee" scheme was designed to cover specific risks including "discriminatory government action of various kinds, non-delivery of inputs or non-payment for output by State-owned entitles, availability of essential public services, changes in the agreed regulatory framework or tax regime, provision of essential complementary infrastructure, compensation or delays caused by government action or political uncertainty, transfer risks, foreign currency availability and convertibility."

In a bid to make the core sector attractive for FDI, the Cabinet Committee on Foreign Investment (CCFI) has modified the 49 percent cap on foreign equity in the infrastructure sector to render fund mobilisation easier. This major policy decision which will indirectly raise the foreign equity investment in infrastructure sector to well over 51 per cent it a domestic partner fails to meet his commitment from internal sources, including borrowing, should help the large industrial houses. The new mechanism is designed to over come the constraints for foreign equity cap in the infrastructure sector. Under the norms, companies operating in the sector can bring in equity through the mechanism of an investing company for the purpose of making investment in a licensee company n the service sector where there is a prescribed foreign equity cap.



INFRASTRUCTURE : THE RECENT BUDGET 

Following were the specific proposals relating to infrastructure; 1) Telecommunications, oil exploration and industrial parks have been accorded the status of infrastructure; 2) the policy regarding oil exploration which was realised sometimes back was highlight; 3) The Finance Minister reiterated his commitment to many recommendations of the India infrastructure Report; and4) budgetary support to the National Highways Authority of India was enhanced from Rs. 2bn. to Rs.5bn. The Finance Minister opened up the health insurance sector to Indian private firms. Although, a small niche area, this is a significant move as it indicates the likely future deregulation of the sector.

The Central Plan outlay for 1996-97 including mainly on infrastructure has not shown any improvement, Inspite of a near crisis situation in infrastructure. This may be result of hypothesis made by the Government all along; i.e. private sector will take over whenever Government vacates, thus solving the problem. The feasibility and pragmatism of this hypothesis remain to be watched.

Compared to the allocation on Central Plan outlay and their growth in 1995-96, the performance in 1996-97 was not significant. The growth rate in the energy sector which declined both in real and nominal terms in 1996-97. The 1997-98 budget support for this sector has virtually been negated by the impact of inflation when the real increase has become negative. The same scenario emerges in the budgetary support to communication in 1997-98 with respect to science, technology and environment, although the growth is definitely better than what was provided in the last five years, it still remains very low.

Besides, even if allocation in the sector is raised with a greater inflow of FDI and a large participation of private sector, the immediate problem will still remain, since, infrastructure is prone to long gestation. Consequently, the inadequacy of infrastructure will continue for quite some time, unless technology upgradation can be done in the infrastructure production, including construction activities, for reducing the gestation lags and simultaneously improving the quality of products. With this infrastructure constraint any indiscriminate growth may lead the economy to a situation of over-heating and a further rise in inflation.

This poses challenges before the sector in several areas :

i) Capital accounts convertibility could also lead to large funds kept by Indians abroad flowing into India. The various estimates have put the NRI funds abroad at & 150-200 billion

ii) India is not alone in seeking foreign funds in the core sector. China requires US $ 5000 billion in the next two decades. So does Korea. India has to complete with them.

iii) One of the key problems in the commercialization of infrastructure is allocation or risks. The successful design of a project involves correct demarcation and allocation or risks. So far, projects were opened upto the private sector without adequate feasibility studies. The result projects once considered viable turn unviable when the bidders find their costs shooting up. This needs correction.

iv) The other problem is that infrastructure demand for funds is mostly long term and can come from the insurance and pension funds. But, these two areas have not been opened up. Here early action is needs.

v) Official and private perceptions over the viability of a project vary often widely. Differences have to be narrowed.

vi) In an infrastructure constrained economy with a high interest rate any large programme of investment may add to inflationary potential unless gestation lags in the projects are reduce. Here comes the choice of an appropriate technology to reduce investment lags which in infrastructure projects in India are very high compared to that in many successful reforming countries.

vii) The report (IIR) says that on the basis of existing tariff levels, it will be possible for port authorities to service debt obligations and pay a reasonable return on equity. But there is a need to delegate adequate power to port trust to facilitate speedy creation and operation of assets.

viii) The Ports will have to upgrade the facilities to international levels. In the modernised ports, cargo would be mechanically handled; there would be special facilities for handling container and bulk cargo and computer-based cargo clearance including customs clearance. 

ix) Similarly, the future of road development lies in finding out innovative ways of leveraging funds from the market to augment budgetary resources as also in adopting modern equipment-based technology leading to expeditious, construction of the much wanted roads.

INFRASTRUCTURE INDICATOR 


Growth rate of six-core infrastructure industries picked up by 5.2% in November 20003 pushing up the overall growth rate in April-November 2003-2004 to 4.2%.  the segments that did well in November 2003 included petroleum refinery (20%) and coal (6%) sectors.  Power generation also picked up by 4.3% during the latest month.  Manufacturing sector did even better with growth rates surging to 8.1% in November 2003, the highest recorded over the past 45 months.

Similarly, there was some improvement in growth rates in mining and electricity segments.  But the trends have been fluctuating in the recent period in both these sectors. Growth of industry and the manufacturing sector in April-November 2003-04 is the highest recorded over the past six years and it almost rivals the peak levels of growth achieved in the mid nineties.

 
 
 

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