August , 2019
Infrastructure spending key to revive the fledging economy
15:32 pm

Tushar K. Mahanti

“You and I come by road or rail, but economists come by infrastructure,” Margaret Thatcher, Britain’s longest-serving prime minister and the first woman elected to that office had observed while highlighting the role of infrastructure in a nation’s life. For economists rail and roads are not just ways to move around but are parts of infrastructure and vehicles of growth.

This ironic observation rings particularly true when applied to India today. India needs to expand its infrastructure facilities in the form of road and railway transport system, ports, power, airports, communication system, health and education.    

Infrastructure is the basic requirement of economic development. It does not directly produce goods and services but facilitates production in primary, secondary and tertiary economic activities by creating positive external economies. The level of economic development in any country directly depends on the development of infrastructure.

Lee (2011) claims in a study that “Without adequate infrastructure, modern commerce characterised by production specialisation and exchange across markets would grind to a halt." Economic globalisation would not take place without the reduction in communication and transportation costs brought about by the progress achieved in the development of infrastructure within and across countries.

In Indian planning, high priority was given to the development of infrastructure and a huge amount of fund was allocated in different plans for building various infrastructural facilities. In the first seven plans, more than half of the total plan outlay was devoted to the development of infrastructure.

But in recent times, the old paradigm of infrastructure being a public sector monopoly is under duress due to fiscal constraints and technological innovations. Limits on budgetary allocations and public debt and the dismantling of the allocated system of credit have catalysed the encouragement of private entry in infrastructure. The onus of building basic infrastructure, however, still lies largely with the government.

Government’s recent initiatives to improve infrastructure

In her maiden Budget, Finance Minister (FM) Nirmala Sitharaman has done exactly that. She has given a massive push to the infrastructure sector by allocating Rs. 4.56 lakh crore ($63.20 billion). Her budget speech emphasised the importance of infrastructure creation and connectivity across rural and urban India.

This included taking forward programmes and services across various key sub-sectors through existing programmes like Bharatmala, Sagarmala, Pradhan Mantri Gram Sadak Yojana, Dedicated Freight Corridors, Jal Marg Vikas and UDAN, as well as a focus on newer themes and reforms across segments like Electric Vehicles (EVs) and charging infrastructure, aircraft financing and leasing, Maintenance Repair and Overhaul (MRO) of commercial aircraft, transformation of discoms etc.

FM has announced a number of steps to scale up the country’s infrastructure, including supplementing and expanding 1,25,000 km of rural roads under the Pradhan Mantri Gram Sadak Yojana (PMGSY) at a cost of Rs. 80,250 crore and creating a national highways grid.

The Budget also proposes investment of `50 lakh crore in expanding railways infrastructure by 2030 as well as substantial investments for roadways upgradation and connectivity. The government’s emphasis on investing Rs. 20 lakh crore every year in infrastructure development will help the growth of key infrastructure industries including steel and cement.

India needs to almost double its annual spending on infrastructure at $ 200 billion and the real challenge lies in harnessing private investment, said the Economic Survey 2018-19. To achieve the target of $5 trillion economy by 2025, a robust and resilient infrastructure system is required. As the country has only been able to put $100 to 110 billion annually into infrastructure development. This huge investment gaps of about $90 billion needs to be funded through ‘innovative approaches’, the Survey has suggested, underlining the strong relations between the economy and infrastructure as “the correlation of investments in inland, road, rail and airport infrastructure to GDP are higher than 0.90.” It also observed that there is an urgent need to accelerate the flow of private capital into infrastructure, given the fiscal constraints that leave less room for expanding public investment at the scale required.

With the aim of boosting investment in infrastructure, the survey added, “The National Investment and Infrastructure Fund has been created with a capital of approximately Rs. 400 billion to provide investment opportunities to commercially viable projects.” It also added that a Credit Enhancement Fund for projects for increasing the credit rating of bonds floated by infra companies is going to be launched in the country. A new credit rating system for infrastructure projects, based on expected loss approach has also been launched besides measures like infrastructure investment trusts and Real Estate Investment Trusts which have been formulated to pool investment in infrastructure.

Also stressing the need for creating "next generation infra", it said physical infrastructure attained a rapid pace with more than 20% of the existing highway length of 132,000 km being constructed in the last four years. It also emphasised on creation of additional 40 lakh seating capacity under UDAN and expansion of key bridges.

Private players are usually eager to bring their capital only into developed Indian states and therefore, the real challenge lies in bringing adequate private investment across the country with the collaboration of the public sector.

Sustainable Development Goal (SDG) number 9 aims to "develop quality, reliable, sustainable and resilient infrastructure, including regional and trans-border infrastructure to support economic development and human well-being, with a focus on affordable and equitable access for all.”

As for the real estate sector – which is undergoing a bad phase with a huge amount of unsold residential and commercial spaces – the push for affordable housing and infrastructure, along with the promotion of rental housing has given some solace.  FM has raised the tax deduction limit to Rs. 3.5 lakh on the interest paid on home loans sanctioned during this financial year for the purchase of the first home  worth up to Rs. 45 lakh. The real estate sector has welcomed the move. However, they continue to remain miffed as the Budget 2019 failed to address long-standing expectations regarding industry status for the sector, single-window clearances and reforms in the Goods and Services Tax (GST).

Power – ‘One Nation One Grid’

The vision ‘One Nation One Grid’ for electricity and a similar plan for gas grids, water grids, i-ways and regional airports is expected to have significant impact on the economy. According to FM, the much-needed power reforms, such as the power tariff reform, should be soon taken up to provide last-mile connectivity and electricity connections to all households in rural and urban areas. She said that this was a part of the 'Pradhan Mantri Sahaj Bijli Har Ghar Yojana' scheme, popularly known as the 'Saubhagya' scheme, which was launched by PM Narendra Modi in September 2017.

According to government data, with 100% electrification target being achieved, the government's focus is now to provide consistent electricity at affordable rates. A NITI Aayog review of the Ujjwal Discom Assurance Yojana (UDAY) has pointed out that government departments and local bodies have run up electricity bills of Rs. 41,386 crore in the first nine months of 2018-19. According to a report by ratings agency CRISIL, this increase in the aggregate external debt of state-owned electricity distribution companies (discoms) will reach pre-Ujwal Discom Assurance Yojana (UDAY) levels.

And if there are debates on government’s claim of achieving its 100% electrification target, the fact is that both electricity generation and consumption has grown steadily in the country. India’s per capita power consumption has increased at 4.79% annually compounded rate, from 348 kWh in 1992 to 1149 kWh in 2018. To keep up with the pace of the rise in consumption, the generation capacity has increased at 6.42% annually from 69.1 GW to 344 GW during the same period. However, the sector now faces challenges due to stressed assets, rising liabilities, constraints in supply of fuels, financial health of distribution companies and vast number of underutilised assets.

Sagarmala project

FM has this time highlighted the importance of the Sagarmala project in her Budget. This project is expected to reduce logistics costs and raise competitiveness of Indian goods abroad. Sagarmala project is a port-led development programme of the Ministry of Shipping. A shipping ministry study has claimed that the project could lead to an annual saving of Rs. 40,000 crore by optimising logistics. The study estimates the potential to save around Rs. 35,000-40,000 crore per annum by optimising logistics flows for key commodities by 2025.

Sagarmala is a port led development project that would include establishing of new trans-shipment ports, creating dedicated coastal berths ports for coastal shipping, setting up storage capacities at origin-destination ports to shorten turnaround time and developing adequate ship-repair facilities in the maritime states. The government has prepared a Rs. 5 lakh crore plan, including private investment, to implement the Sagarmala project.

Flipside of infrastructure growth drive

But while the government is giving high priority to infrastructure growth and allocating huge funds to various projects, the implementation of these projects is often facing multiple obstructions leading to time and cost overrun.

As many as 369 infrastructure projects of the total 1,420 under implementation were facing cost overruns, while another 366 were significantly delayed at the end of last fiscal, according to a report titled "Infrastructure & Real Estate: A fulcrum for Change & Economic Growth" by Property consultant ANAROCK and Association of Infrastructure Industry (India).

The report said that India's vision to enter the $5 trillion club economy by 2025 greatly depends on development of infrastructure and real estate that contribute 29.5% to the GDP.  The sheer impact of challenges faced by the infrastructure projects is visible from these statistics; of the total 1,420 projects under implementation, 369 projects were facing cost overruns of Rs. 3.38 trillion while 366 delayed projects were running at an average 46 months behind schedule at the end of last fiscal.

According to the Ministry of Statistics and Programme Implementation, the extent of cost overrun in the last 10 years with respect to the originally approved costs has increased from 13.45% in March, 2009 to 17.45% in January 2019. However, during the same period, the percentage of projects having time overrun has come down from 48.11% to 26.56%.

What is disturbing is that many of the reasons for time overrunning and in turn, cost escalation such as delay in environment, forest and wildlife clearances, industrial license permission, grant of work permission, land acquisition issues,  removal of encroachments and power and water supply rest with either the Union or the state governments.


While the importance and the role of infrastructure as a facilitator of economic growth is a global reality, the investment in the sector assumes a special purpose in India right now. The country is hoping to revive its decelerating economy through investment in infrastructure, most of which will come from the government.

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