This article is a part of an EXCLUSIVE SERIES on slowdown. If you haven’t yet read the previous part of this series, check it out here: PART IV
Imagine that you are a multinational company looking to enter India through the green-field investment route. You conduct your research on the possible hindrances to the business with respect to the economy and you figure out that one of them is the infrastructure. Would your company have second thoughts on entering? The analysis would dig down further deep to figure out the potential loss that the company would incur due to the lack of adequate infrastructure in the country.
This is why infrastructure is considered as the biggest piece in the jigsaw puzzle without which the puzzle would never be completed. India’s ambition to grow at a solid pace and not head towards any kind of a plateau largely depends upon the kind of infrastructure it could provide. Timely execution of the key projects within the budgeted costs will be the key challenge, even if the funding is available for the economically viable projects.
There are massive economic benefits that could be reaped from the infrastructure developments. According to S&P Global Ratings, the multiplier effect of spending 1% of the total GDP would help in boosting India’s GDP by at least double the amount.
IMPETUS TO THE MANUFACTURING SECTOR AND OVERALL SECTORAL GROWTH:
“The link between infrastructure and economic development is not a once and for all affair. It is a continuous process; and progress in development has to be preceded, accompanied, and followed by progress infrastructure, if we are to fulfil our declared objectives of generating a self-accelerating process of economic development.” – Dr. V.K.R.V. Rao (noted Indian economist, early 1980s).
The crux of the matter is that the developments under the manufacturing sector would be of no use if the government is not able to provide the adequate infrastructure for the same. In my view, the biggest hurdle for the “Make in India” campaign is the lack of adequate infrastructure in the country. Infrastructure deficit could be one of the biggest dents to the GDP and can hurt it by 4-5% and can reduce the corporate and investment growth.
The government would have to lead the way and execute the projects in the stipulated time period to avoid excessive costs which are incurred due to the delay of the project. The power infrastructure faced a wholesome of issues but it seems that tides are changing, however but the transportation infrastructure still faces huge capacity constraints and efficient connectivity is still not achieved in areas where cheap labour is available.
Steel, cement, real estate and automobiles would become the biggest beneficiaries if the push towards infrastructure goes as planned.
Creation of Jobs
In a situation where the growth is slowing down and the unemployment rate is really high, infrastructure could provide the platform for various job opportunities across various regions. Now, another important analysis that can be drawn is about the effect of spending one percentage of the GDP and the projected jobs which could be created from the same.
As you can see in the above table that if 1% of the GDP is spent on infrastructure then the multiplier effect of 2 makes 1.36 million jobs available in that fiscal.
A Comparison with China
India ranks 63rd out of the 140 countries under the infrastructure category, according to the Global Competitiveness Index (a study by the World Economic Forum). The country is performing really poorly with respect to its Asian counterparts like China (rank 28), Thailand (rank 32) and Indonesia (rank 37). However, when we keep a holistic view, the infrastructure in China is also relatively really poor.
In India, the key urban and trade centres also face connectivity issue with other trade centres but when you talk about China, most of the trade happens through the eastern and the coastline cities, hence there is strong export based infrastructure in that region with limited connectivity with the interiors parts of the country. This actually does not affect the competitiveness of the country in terms of trade. Below is the table attached for the same:
While, India plans to pump in $1.5 trillion in infrastructure over the next ten years, China invested $720 billion alone in a span of two years from 2016-2018 but the crux of the matter is that India needs to find private investments under the infrastructure segment or else the debt burden could be a major road block to infuse more money into the system. Resolute commitment, timely execution and commercially viable projects would be the only way to drag investments into the infrastructure sector.
ANALYSIS OF THE NEEDS OF THE POWER AND TRANSPORTATION INFRASTRUCTURE:
Although the power infrastructure has improved massively in the past few years, India still needs to infuse a whopping $60-80 billion over the next five years to strengthen its grid transmission network. US-based Institute for Energy Economics and Financial Analysis (IEEFA) suggested that such an amount would be needed to cater to the continued structural growth in power demand and overcome operational limitations of the country’s national transmission grid. The country was able to expand the transmission network capacity at a compounded annual growth rate (CAGR) of 12% from 2012-13 to 2017-18. For sustained and inclusive economic growth, this rate of growth is to be maintained or even increased for that matter so that the rapid modernisation could be accommodated.
Significant reforms are required to turn around the transportation infrastructure. Land acquisition process is becoming a really time consuming process, which in turn is stalling many rail, road and airport projects. Inordinate delays from railroads do not make them the preferred option despite being the cheaper one. Tariff disputes in the past under various metro projects would discourage private investments. China has three times more freight on similar networks. Transportation infrastructure requires significantly stable regulatory environment with independent regulatory and supportive, comprehensive policies. These changes would reduce the volatility of the cash flows or an otherwise a highly volatile cash flow for the contractors.
CONCLUSION
Infrastructure would be one of the single largest push that the government would need to provide so that the growth remains intact. The government needs to make sure that there is no infrastructure deficit or else growth could slump even further. A strong resolute is required from the government and timely execution would be the key for attracting more investments from the private sector. The country is in dire need right now to set itself as a manufacturing hub so that the economy becomes export competitive to fuel the growth and infrastructure would be the missing piece to solve this problem. Spending on infrastructure would be an ongoing process majorly because of the multiplier effect it leaves on the economy and hence the government needs to be resolute about the same.