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– by Prabir De
The Indian government wants to attract private-sector investors to the sectors of rail transport and tourism
India’s rise in recent years has been noticed by the whole world. This country has emerged as one of the fastest growing economies, next to China. Thanks to increasing investments and improving macroeconomic performance, the future looks bright. According to many commentators, however, India must improve its infrastructure to realise its full potential. Inadequate infrastructure is already becoming a drag on the economy.
While the central government has been stepping up public infrastructure spending, it has also made efforts to involve the private sector. According to the government’s Planning Commission, the demand for infrastructure investment during the 11th Five Year Plan (2007–2011) has accumulated to about $ 514 billion. The target is to spend 7.6 % of GDP on infrastructure, up from 5.2 % in the previous Five Year Plan. So far, the actual figure is 7.55 %, which is almost the target. The private sector, moreover, accounts for more than a third of infrastructure investments.
The government has obviously succeeded in mobilising private capital. Nonetheless, more needs to be done. For the next Five Year Plan, the Planning Commission would like to see infrastructure investment rise to around 10 % of GDP or $ 1 trillion. The private sector is meant to provide half of the capital needed. The central government has done quite a bit to facilitate public-private partnerships (see box). The state governments, however, should step up their efforts.
Crucially important transport
Developing an efficient and accessible transport system is essential for spurring growth and reducing poverty. India has been investing heavily in roads recently. However, higher growth and bigger incomes will multiply the transport requirements in coming years. At the same time, the budgets of India’s central and state governments are constrained. Private sector investments in transport infrastructure are thus very important. However, they have not come forward as expected. The private sector is unlikely to take a much greater role unless government agencies at all levels address private investors concerns. The regulatory environment has to become more inviting, and government agencies at all levels must do more to mitigate investors’ risks.
From January 2007 to January 2011, India attracted $ 31.24 billion of private capital for PPP projects in transport-related infrastructure. The most dynamic sector was roads. For instance, India is developing a system of national toll roads. Intersection-free multi-lane expressways will link the major metropolitan areas of Delhi in the north, Mumbai (Bombay) in the west , Bengaluru (Bangalore) and Chennai (Madras) in the south and Kolkata (Calcutta) in the east. Important parts are already under construction – including the route from Bengaluru to Chennai.
An innovative PPP project relates to rail transport. At present, passenger and freight trains use the same tracks in India. The railway links between Mumbai to Delhi and from Delhi to Howrah (Kolkata’s railway hub) are congested. They account for 58 % of Indian railways’ freight traffic and 52 % of passenger traffic.
Economic growth will certainly lead to even more demand. The government therefore plans to set up dedicated freight corridors in cooperation with the private sector. Construction has begun on important stretches.
To plan, build and maintain the new high-speed rail infrastructure, the central government has set up the Dedicated Freight Corridor Corporation of India Ltd (DFCCIL) in 2006. This special purpose vehicle is also in charge of mobilising private capital. Whereas rail traffic was exclusively run by the public sector in the past, the DFCCIL is involving private investors. The economic benefits of the project are obvious.
Global manufacturing hub
The Delhi-Mumbai Industrial Corridor (DMIC) is perhaps the most spectacular PPP project in Indian infrastructure so far. The idea is to make the most of the new freight train corridor between the two mega-cities concerned. An “influence area” of up to 200 kilometres on either side of the tracks is to open up for industrial development. The DMIC was initiated by the central government. Seven Indian states (Delhi, Uttar Pradesh, Haryana, Rajasthan, Gujarat, Madhya Pradesh and Maharashtra) will benefit.
The total costs for setting up the corridor are expected to amount to $ 90 billion. The central government is prepared to bear one third of the costs. The DMIC will get financial and technical aid from Japan. A large share of the investments is expected to be made by the private sector.
The development agency is the Delhi-Mumbai Industrial Corridor Development Corporation (DMICDC), incorporated in January 2008. Its job is to facilitate, promote and establish industrial development. For this purpose, it also ensures feeder rail/road connectivity to the hinterland and ports on the western coast.
The DMIC is conceived to become a global hub for manufacturing and trade. The emphasis is on expanding the manufacturing and services base. To attract foreign direct investment, the infrastructure must be world class. No doubt, local businesses will benefit too.
Among other things, the project incorporates:
– nine mega industrial zones of about 200 to 250 square kilometres,
– the above mentioned high-speed freight line,
– three ports,
– six airports,
– the above mentioned intersection-free highway and
– a 4000 megawatt power plant.
Several industrial estates and clusters, industrial hubs, with top-of-the-line infrastructure are to be developed along this corridor to attract foreign investment.
In April 2010, MoUs were signed by DMICDC and the state governments of Haryana, Gujarat, and Maharashtra with Japanese companies for developing “smart communities” and “eco-friendly townships” (townships with optimised energy supplies, 24-hour drinking water supply, bicycle and walking tracks, and waste and water recycling system). According to the agreements, Japanese consultants will prepare feasibility studies for the development of townships in the states of Haryana, Gujarat and Maharashtra.
Provision of adequate and high quality infrastructure is necessary for improving the competitiveness of the Indian economy as well as for promoting inclusive growth and improving the quality of life of the common people. India, while stepping up public investment in infrastructure, has been actively engaged in involving private sector to meet the growing demand.
Nonetheless, more needs to be done to raise awareness for PPP issues. There is an urgent need for capacity building among the state governments to enable them to help, guide and prepare PPP projects. Investment in infrastructure in India has to rise in order to support double-digit growth in coming years. PPP projects should tap global capital pools as well as domestic savings in India. The key challenge is to develop efficient mechanisms to achieve the right balance between international and domestic capital and between the private and public sectors.