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Here's what can drag down India's growth for years

FP Editors December 20, 2014, 06:09:21 IST

What is shocking, is that despite knowing how critical adequate infrastructure is to India’s growth, very little is being done to improve the situation.

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Here's what can drag down India's growth for years

What is India’s biggest hurdle to growth? Lack of infrastructure.

Does that surprise anyone? Probably not. What IS shocking, however, is that despite knowing how critical adequate infrastructure is to India’s growth, very little is being done to improve the situation. Inaction on this front will, no doubt, cost the country dearly by stunting future growth, even when interest rates ease up.

[caption id=“attachment_178542” align=“alignright” width=“380” caption=“Infrastructure will be India’s key challenge in the coming years. Reuters”] [/caption]

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For proof, consider this: according to a report in The Economic Times, investment proposals plunged to a five-year low in 2011 on the back of government policy paralysis and high borrowing costs. Data from the Centre for Monitoring Indian economy showed that new investment proposals fell 45 percent to total Rs 10.5 lakh crore, the newspaper said.

That’s a frightening statistic because it shows that not only is the country screwing up the present but also the future.

A Subba Rao, chief financial officer, GMR Group, summed-up the situation perfectly when he told the newspaper: “If investment-led growth does not happen, we will manage to have a GDP of around 6.5 percent over the next 3-5 years.”

Yes, even if there are massive interest rate cuts over the next year (and that’s being highly overly optimistic), given the poor state of our roads, railways, ports, and other facilities, India won’t be achieving economic superpower status any time soon.

Infrastructure projects typically have long gestation periods – anywhere from five to 20 years. If we make investments in infrastructure now, they pay off in the form of improved roads, bridges, ports and other facilities after a few years.

Sadly, given that so little is being invested currently, there’s little to look forward to by way of improved infrastructure over the next few years. If anything, the deadlines of most ongoing projects have been delayed significantly because of significant cost overruns caused by high borrowing costs.

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According to the government’s own assessment, India needs infrastructure spending of close to $1.5 trillion to grow at 10 percent every year.

It looks increasingly likely that will remain a pipe dream. Infrastructure spending in India is not for the play-it-safe investor. Investments in a sector that seems like a winning bet are guaranteed to turn into a terrible and never-ending nightmare. Delayed approvals, cost-overruns and poor planning and execution have plagued infrastructure projects for years, despite supportive statements from the government.

According to one estimate, up to 70 percent of projects in India seek extensions.

Policy flip-flops have also caused heartburn – frequent changes in investor qualification requirements and abrupt changes to agreements and procedures for public-private partnerships have put off several investors in the past few years.

Lower interest rates alone will not change the situation for infrastructure projects– many of them are dogged by other hurdles, the biggest being land acquisition.

Making matters worse, the government itself is in no position to fund, even partly, large projects because it is struggling to contain a ballooning fiscal deficit.

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It’s a realisation that has hit several state governments, many of which have now decided to pursue private investors with their own brand of friendly policies. At a recent convention for Non-Resident Indians , government officials from several states lined up to showcase their state’s investment potential.

Almost every state from Rajasthan to Jharkhand was seeking infrastruture-related investments. They already know that without the proper infrastructure, there can be no economic development in their states.

To be sure, everyone agrees on the urgency of infrastructure development. In a recent interview with Business Standard, K V Kamath, Infosys chairman and non-executive director of ICICI Bank, said that infrastructure could become the biggest ‘game stopper’ for India’s economic growth.

So, why isn’t the central government doing more?

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