Last week Cherian Thomas and Anand Krishnamoorthy had an article on Bloomberg where they suggested that lack of clear investment rules may impede the inflow of investment funds which could make possible the truly daunting programme of infrastructural works which are needed in India between now and 2010.
Indian Prime Minister Manmohan Singh may struggle to convince investors to help fund $320 billion of infrastructure spending by 2010 because he can’t persuade his government to draw up investment rules.
Singh, 74, doubled his budget for roads, railways and ports in New Delhi on Oct. 7, saying industry regulators are needed to spur investment and balance higher returns with low user charges. Railway Minister Lalu Prasad, who needs $66 billion to upgrade the world’s second-biggest rail network, rejected the plan.
Infrastructures are hugely strained:
Infrastructure utilities are strained. Highways, which move about 70 percent of the goods transported in India, account for only about 2 percent of the country’s 3.32 million kilometers (2.1 million miles) of roads. It takes an average 85 hours to unload and reload a ship at India’s major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.
Regulators are needed, but there is no consensus on what kind of regulators India needs, or what objectives they should be pursuing:
Railway Minister Prasad opposed Prime Minister Singh’s idea of establishing a regulator for Asia’s oldest network, which moves 6.6 billion people a year. He contends only the government will be able to balance fares and returns on investments.
“We can’t have regulators as we have social obligations which only the government can deliver,” said Prasad, whose ministry employs 1.5 million people and has a separate budget. Indian Railways subsidizes passenger fares by charging freight customers more, losing half its share of the goods transport market to road operators in Asia’s fourth-biggest economy.
So resources are constrained, and competing objectives complicate the decision making process. In addition, as has been argued in the last post, fiscal excesses in India in recent years mean that the role of public funding in the infrastructure programme will inevitably be relatively limited:
Singh wants to spur investment by setting up public-private partnerships to build air, land and sea facilities. Attracting private capital can be successful if there is a policy framework regarding returns, tariffs and service quality, he said.
“Public resources available for investment in infrastructure will be limited,” Singh said. “Our experience shows that public-private partnership is best suited for the infrastructure sector. The telecoms sector is a case in point.”
Now given my continuing and profound ignorance about the details of how such matters work in India, I thought it might be useful to avail myself yet one more time of the more detailed knowledge of commenters Aninda, Nandan and Venkat, to find out just how they see the situation. You can read their main input in the comments below, here, for now, are some brief extracts:
Increasing investments by such a large extent in such a short time with such little planning seems rather far fetched to me. The Bloomberg article discusses the regulatory impediments to public-private partnerships and these could be challenging, given the scope of the PMs stated objectives.
At current rates of 8% trend growth and a rising I/GDP ratio that goes from 28% today to 33% by 2010, with incremental capital deepening of 11 to 12% per year, the $160Bln of additional capital –the base case- is easily attained, with a sustained incremental-capital-to-output-ratio (ICOR) of just over 2.
However, when you get to doubling the required investment outlay, to prompt the economy to grow at 10% between now and 2010, the incremental capital deepening doubles per year, and the ICOR deteriorates sharply by 40% to 1.3.
The size of the infrastructure investment needed for india is enormous : USD 150 bn – USD 300 bn – USD 500 bn. The numbers are in 3 digit + USD bn, and this is significantly more than the total investment in the country : personal + corporate + infrastructure + government! This is nothing new.
Yes the country has made some progress
a) Indian telecom : Is the usual poster boy. The kickstart to this sector came thru the introduction of new technology : mobile telephony, which customers liked. This led to competition – different players (indian – foreign – telecom cos – financial investors) wanted a share of the pie hence new technologies and new areas were exposed. To ensure that it was not chaos allround – the regulator had perforce to step in and we now have a sector which is about 100 mn mobile connections + about 50 mn fixed line connections + 2 mn broad band. All this while, I think Indian telecom : voice – mobile – leased line for data would be amongst the cheapest in the world. Quality wise it is slowly improving. (continued below)
Manmohan Singh? He is a reformer and an economic progressive; but I fear he might be too irretrievably attached to the old order to have a substantial impact on the future. What about Narayan Murthy and the Infosys guys? Perhaps; they would probably get the most NRI votes. But, tellingly, that might be because their biggest customers are abroad. In my view, the honor belongs to Dr. E. Shreedharan, the chief architect of the Delhi Metro. (continued below)
Just one final point, since I am in no position to make a substantial contribution to this debate: the global implications (since the global economy is something which I do, to some extent, know about). The numbers that are being talked about here are enormous, and an inflow of funds into India on this sort of scale would have important consequences across the global economy. Now, assuming, as I am inclined to, that China more or less maintains the present head of steam up to the 2008 Olympics, and imagining that what is being talked about here really starts to happen, then this may well place a lower platform *under* next years global slowdown. In other words we may well see a soft landing in the global context (so eat your heart out on the US housing “crash” Nouriel Roubini for one), but if we do then it will be for quite different reasons from the ones which most commentators have been suggesting would be the case. In general the expectation was that the German and Japanese economies would take the strain on global growth as the US and China slowed. This is not happening, and the Japanese and German economies both seem to be slowing in their turn. But what we may well have in front of us is a situation where infrastructural (and possibly in the case of China, consumer) demand in the two newly developing global giants generates the momentum and velocity needed to help the rest of the globe avoid driving straight into the proverbial brick wall. This is truly new, and very exciting.