Amid turbocharged economic growth that has averaged 8.6 per cent over the past three years, India’s infrastructure is stretched close to breaking point.
Surging demand for hotel rooms, for seats on scheduled flights, for reliable power supply and for efficient ports, roads and railways has not been matched by a proportionate increase in supply. Severe supply-side bottlenecks have revealed a number of deep-seated structural constraints on the economy’s potential rate of growth.
“The Indian economy is facing several classic symptoms of overheating – inflation, current account deficit, higher asset prices, wage pressures and infrastructure bottlenecks,” says Rohini Malkani, an economist at Citigroup in Mumbai. “This possibly implies that, in the near term, India’s economic growth is hitting a speed limit. If overheating symptoms persist, we could expect the authorities to continue to tighten macroeconomic policy conditions.”
India’s Planning Commission, in its approach paper to the 11th five-year plan, acknowledges the gravity of the problem and calls for infrastructure spending to rise to 8 per cent of GDP in the period 2008-2012 from 4.6 per cent.
”Our roads, railways, ports, airports, communication, and above all power supply are not comparable to those prevalent in our competitor countries,” it says. “This gap must be filled within the next 5-10 years if our enterprises are to compete effectively. Indian [companies] no longer expect protection. But they do expect a level playing field.”
Power shortages are acute. During the five-year plan period that ended in March, India added just 18,400 MW out of a targeted 41,000 MW of new generating capacity. The peak electricity deficit this year rose to an eight-year high of nearly 14 per cent, according to Morgan Stanley, leading to blackouts that forced companies to install costly private back-up systems. Mumbai faces the prospect of power cuts this summer. It has not added a single new generating plant for more than a decade.
The national road-building programme has slowed in the past two years, falling to just over 500km last year from 2,500km in 2005, despite soaring sales of trucks and cars. Gridlock afflicts cities such as Bangalore, Mumbai and Gurgaon. Accidents are ever more frequent on the highways. India has just one per cent of the world’s vehicles but 10 per cent of global road fatalities. When goods trucks reach seaports, where capacity utilisation rose to 93 per cent last year, delays loading and unloading penalise exporters trying to plug themselves into global just-in-time supply chains.
To meet the growth target of 9 per cent laid down for the 11th five-year plan, huge investments will be needed to ease these and many other infrastructure bottlenecks. The government has estimated the required expenditure at around $320bn and hopes that about 40 per cent of this will come from the private sector. Economists say that the shallow long-term corporate debt market, the perceived lack of bankable projects and ideological/political opposition to privatisation will leave the government shouldering far more than 60 per cent of the burden.
Robert Prior-Wandesforde, an economist with HSBC bank, says even assuming the government finances just 60 per cent of the average annual investment, that would still imply an additional fiscal burden of about 3 per cent of GDP a year. This would ”almost certainly be inconsistent” with fiscal responsibility law.
“With this in mind, the government will face the choice of missing its ambitious growth objectives or seeing a much higher budget deficit. In our view, infrastructure investment will fall well short of requirements, effectively implying a compromise on the growth target.”
Inadequate spending on infrastructure is just part of the problem. Chetan Ahya, an economist at Morgan Stanley, says a complex set of factors is causing this delayed response in infrastructure development: “Key hurdles include weak regulatory framework (particularly in the case of electricity), land acquisition problems, stretched capacity of domestic construction companies and lack of availability of equipment in certain areas.”
India’s principal advantage as a developing economy – a large, low-cost labour force – is being undermined by a combination of inflexible labour laws and low-quality physical and social infrastructure. Indian manufacturing, despite pockets of excellence, is on the whole struggling to become competitive: India’s share of global goods exports stood at just 1.2 per cent in 2005, compared with China’s 9.9 per cent. Merchandise export growth has slowed to single digits in recent months.
Small and medium-sized businesses, which generate the bulk of new jobs in any economy, are suffering most from the lack of high-quality public infrastructure. Unless this is resolved, economists warn that India’s demographics – half the population is under the age of 25 and 40 per cent under the age of 18 – will prove a liability rather than an advantage. For all its strengths in services, India still urgently needs to create manufacturing jobs for landless labourers migrating to cities.
With India’s working age population set to increase by 71m to reach 762m in the next five years, the Asian Development Bank has warned that the country faces a potential employment crisis. To ride the globalisation bandwagon, a country has to create a good investment climate, in terms of regulation, law and order, physical infrastructure and availability of skilled human capital. India is a very long way from doing any of these things. The World Bank recently rated India 134th in the world (out of 175) for ease of doing business.
India has made considerable progress in the past 10 years in attracting private investment into infrastructure: first in telecommunications, then in ports and roads, and most recently in airports and container freight. But progress elsewhere is painfully slow.
Moreover the private sector is unlikely ever to be a realistic source of funds for the investment needed in vital areas such as rural roads and irrigation. The national addiction to subsidised user charges for passenger fares, power and water pushes up costs to industrial consumers and deters private investors.
As the telecoms and aviation sectors show, where private capital and management disciplines have been introduced, the results have been remarkable. It has become one of the fastest-growing telecommunications markets in the world. The industry added more than 5m subscribers a month on average during 2006 and is expected to have 575m within five years. It has moved from being a country with one of the most expensive tariff rates in the world to one with the cheapest.
India’s civil aviation sector is the fastest growing in the world. Between April andSeptember 2006, amid a flurry of new entrants to the sector, domestic traffic growth accelerated to more than 45 per cent.
The Centre for Asia-Pacific Aviation, a consultancy, predicts that domestic traffic will grow 25-30 per cent per year until 2010, with international traffic growth at 15 per cent, taking the overall market to more than 100m passengers.
Indian carriers have 480 aircraft on order for delivery by 2012, which compares with a fleet size of 310 aircraft operating in the country today.
The government’s preparation for such an expansion has been woefully inadequate. An airport modernisation plan, which proposes a $9bn investment by 2010, has been slow to get under way. In January 2006, joint venture companies with 74 per cent private-sector participation won contracts to upgrade New Delhi and Mumbai airports. Stage I completion is scheduled for 2009-10. Work has yet to start in earnest on a long-delayed overhaul of Chennai and Kolkata, along with 35 smaller airports. With the number of near misses in Indian skies surging to two a month, air traffic control also needs urgent reform.
”The rapid growth in traffic in the last couple of years is already placing significant pressure on airport infrastructure, both in terms of runway/terminal capacity and quality, particularly in Delhi, Mumbai and Bangalore,” says Kapil Kaul, chief executive of the Centre for Asia-Pacific Aviation in New Delhi.
Poor infrastructure is India’s Achilles heel. But it is also the area that is receiving the most attention from policymakers and one that offers significant opportunities to private investors, both domestic and foreign. Failure to make more rapid progress in developing India’s infrastructure, whether ports, rural roads, power plants or mass transit systems, will cost the Congress-led coalition any realistic chance of securing not just its objective of double-digit growth by the end of the five-year plan, but also many of its other goals.
