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Achieving economic growth through rapid infrastructure development, Shri R V Shahi, Former Secretary, Ministry of Power

Under the shadow of slow down in the U.S. economy and also in a number of European economies, the process of growth throughout the world is getting affected. The countries whose growths are largely dependant on export, particularly exports to U.S. and Europe, would obviously have greater degree of impact of these slow downs. The countries whose economic growth rates are primarily driven by their domestic consumption may be affected comparatively less. When the process of slow down started, about a year back, many of us believed that India could not be affected to any visible level by these slow downs because our growth was primarily dependant on domestic consumption. People went to the extent of coining a phrase that "Our economy is decoupled from those of U.S. or Europe". Subsequently, besides these slow downs, which have in recent months increased, and there are many who believed that these economies are more or less going to face a period of recession, some other recent developments include very sharp increases in the prices of crude and severe shortages of food in a large number of countries. These have led to inflationary consequences in almost all the countries. India could not have been and has not remained insulated from these developments.

Thus, we are faced with (a) slow down in U.S. with a likelihood of economic recession for a year or two, (b) slow downs in European countries, (c) unprecendently steep rises in prices of petroleum products (crude price has increased from 60 dollars a barrel to 137 dollars a barrel in just about one year), (d) food shortage is being experienced throughout the world leading to talks, now-a-days, of food security more than energy security and (e) steep inflationary trend in varying degrees in different countries. Lead article of the Economist (May 30, 2008) predicts: "Double-digit price rises are likely to afflict two thirds of the world's population". All of these have global as well as local influences on growth rates. For the 11th Plan when the average economic growth rate of 9% was targeted as an average rate - slightly less in the initial years and crossing 10% in the subsequent years - none of the above factors were so sharply predominant. Obviously, we cannot talk of total isolation of Indian economic growth rate from whatever happens in the rest of the world. Total decoupling will be hard to accept. Effect of steep crude price rise, general inflation and its consequential impact on interest rates, and food shortage will obviously be there in so far as our targets for the growth rate of economy are concerned. The challenge is how to minimize these effects and achieve a growth as near as targeted.

It is a fact that to a great extent the growth rates could be achieved through innovative approaches structured mainly around the infrastructural development efforts and activities. There is considerable strength in the argument that Indian economic growth is greatly dependant, if not mostly dependant, on our domestic consumption. It is true that in most of the infrastructure sectors of our economy as also in the social sector, which directly relate to more than 90% of our population (which is now close 1.05 billlion), we have done pretty little and we have a long way to go. If we just analyse the per capita consumption of energy, per capita consumption of electricity, length of railway lines in relation to our geographical area and population, our capability to handle volumes of different commodities in our ports, the volume of air passengers in relation to our population (not withstanding the rapid rise in last three to four years), extent of housing coverage to the people particularly those in the middle income, lower income groups and those below poverty line, and facilities linked to education and health, we will find that there are huge gaps and hence enormous scope to do a lot. We will find that in most cases we have done less than 30 to 40% and we have to cover the balance 60 to 70%, and in many cases, even more.

All these infrastructural works, if carried out in a period of next five to fifteen years, would lead to enormous amount of demands for various types of products like cement, steel, other construction materials, construction machinery etc. These, in turn, will need several types of raw materials. All these in turn, will open up enormous amount of employment opportunities which in turn will provide greater amount of purchasing powers to those who are already engaged and more importantly those who have remained unemployed. If we particularly pick up such infrastructural activities which leads to demands of construction materials and at the same time create large opportunities for employment, these have direct positive effect on enhancing domestic consumption. Thus, thrust on development of infrastructure would lead to, as mentioned above, rise in demands both for producer goods as well as for consumer goods which, in turn, accelerates or propels manufacturing and services leading, in turn, to overall economic growth.

For the infrastructure sector alone, for the 11th Five Year Plan, a capital expenditure of the order of about Rs. 20 lakh crores (500 billion dollars) was estimated, of which about 40% i.e. Rs. 8 lakh crores (200 billion dollars) was estimated for power sector. In fact, the Working Group on Power for XI Plan had estimated a requirement of Rs. 10 lakh crores (approx. 250 billion dollars). If we only ensure that these projects happen and capital outlays as estimated for different segments for infrastructure are really and effectively spent, even if we do not succeed in decoupling fully our growth rate from the rest of the world, we will definitely succeed in minimizing the effect of slow downs elsewhere. The only area of concern could be whether we will be able to mobilize various related resources and inputs. Mobilizing fund could obviously rank at the top of the list. Mobilising fund would also have a related issues of interest rates. Interest rate may rise or may remain steady. However, any sharp rise will obviously render many of the investment schemes unviable thereby leading to many of the projects not taking off. A balanced approach will be needed. If for controlling inflation it has to rise, equally important will have to be the consideration that a sharp rise will demotivate capital investments which, in turn, will deprive the economy of all the pluses and advantages which have been mentioned earlier.

The present momentum of activities and economic growth are necessary not only for the purpose to reflect that the country is progressing at a rate which it did not demonstrate in the past. It has to rise and has to sustain for the purpose that more and more of our population gets involved and deployed in the process of developmental activities, that standards of living of people rise, that we are in a position to reduce and ultimately eliminate the proportion of people below poverty line. As per one estimate, more than 30% of our people manage with income of just a dollar per day. If we consider the income of two dollars per day the classification covers almost 80% of our population. The requirement of sustained economic growth rate is also associated with - and perhaps more strongly linked to - the need for inclusive growth. Infrastructural development across the country holds the real key to the inclusive growth. When we talk of less of energy consumption, less of roads, less of electricity, less of railways, in relation to the size of our country and the population, what it really means that our proportions are abysmally poor even as compared to some of the recently developed economies, and they are primarily because of very little that we have been able to achieve in all these fields particularly in rural India. Road connectivity, drinking water, electrification, education and health infrastructure, internet access etc. in rural India present a highly skewed structure of our development.

If we compare with China, and their development strategy in last 25 years, it appears that we are trying to target a similar rate of growth in next 20 to 25 years. Having achieved, on a sustained basis, about 10% growth in last 25 years as compared to about 6 to 7% in the case of India, China is not stopping at that. In the next 10 years they are going to spend enormous amount of capital on infrastructural development.

The latest issue of the Economist has carried a very comprehensive piece, an extract of which is relevant:

"Morgan Stanley predicts that emerging economies will spend US Dollar 22 trillion (in today's prices) on infrastructure over the next ten years, of which China will account for 43%. China is already spending 12% of its GDP on infrastructure. Indeed, China has spent more (in real terms) in the past five years than in whole of the 20th Century."

Infrastructure Investments in Emerging Markets 2008-17 Forecasts (In Trillion of US Dollar)



BRIC - 15.4







Other Asia


Middle East






Source : Morgan Stanley, Goldman Sachs, The Economist

As a matter of fact, if they could achieve a 10% growth in last 20 years it was mainly because they took care of infrastructure which could be required to match and support such a growth. To give a feel of this issue, in the year 1950 China had an installed capacity of about 2,300 MW while India had about 1,500 MW (about 800 MW less). Today, China has achieved an installed capacity of over 600,000 MW while we are at 145,000 MW (almost 4,55,000 MW). Similar is the situation with other infrastructure. The idea behind presenting these statistics is not to suggest that India follows their method of handling the economic development. Perhaps we cannot. We have a different governance structure and our contexts are different. However, their levels of achievements should definitely inspire us.

In most cases, we have decided to open up our economies and encourage public private partnerships. These are, no doubt, right approaches and required initiatives. These are necessary, but to presume that they are also sufficient for things to happen would be grossly wrong. Various Government agencies have to do a lot more than just putting policy initiatives in place for things to happen and projects to fructify. Mere legislative and policy instruments, though they are important, may not be adequate. Ultra Mega Project scheme in the case of power sector is an example. Legislation existed, policy instruments were in place, but it did not happen without the required hand holding by the Government with a clear commitment and assurance that essential inputs will be put in place. And, when the Government inputs were facilitated, it took off in a powerful way. If 500 billion dollar of infrastructural development outlays have to be spent, in each sector it will have to be analysed as to how it should happen.

Thus far, experience shows that if credible projects have been structured, the financial sector has been very positive and financial resources have not been standing in the way. Even now in the case of a number of power projects, where developers are keen to move forward, financial sector is positive both for part equity support and for financial closure in respect of debts. If anything is holding up the process it is the inputs from either the State Governments or Central Government or their agencies. Though this situation of inflow of fund may also become an area of concern later - and I will deal with this subsequently - at this stage it is important that an Inter Institutional Group (IIG) is created by each of the Ministeries and Departments on the lines we did in the year 2004, with rewarding results, in the Power Ministry. This IIG should identify, on a dynamic basis, the hurdles and hold points sort them out and facilitate the projects to happen. The IIG with banks and financial institutions was a very successful experience which in a period of about one year could finalize the financial closures of more than 10 power projects (Rs. 20,000 crores of capital). The nodal Ministry, through such an instrument, can identify the areas of concerns and can get them resolved in coordination with concerned sister Ministeries and their agencies in the Central Government and in the State Governments. The crux of the issue is good project management - from concept to commissioning.

As mentioned earlier, finance has not posed a problem so far. Because of inter-plays of various factors - both global and local - and when all the activities in various sectors pitch up, this resource may also start emerging as a constraint. Keeping in view the national imperative of ensuring that the capital outlays for infrastructure are spent on projects which were anticipated, and on capacity expansions or infrastructure expansions which were projected, it would be necessary that if any gap in the availability of financial resources occurs, we quickly respond with remedies. In one of my earlier weekly articles I had suggested that tapping the equity capital market with IPO's and other instruments could partly mitigate this problem. Another suggestion was about the use of foreign exchange reserves. Now, we have foreign exchange reserve which are almost 320 billion dollars. A part of these could meet the gaps, if any.

Project activities in terms of their taking off and materializing can be ensured by Government hand holding as suggested above. Matching of financial resource gaps, if any, could also be appropriately addressed. These would ensure spending on various infrastructure projects, and their completion would lead to following outcomes (a) we can achieve a sustained economic growth rate around infrastructural development as articulated earlier and succeed, to a great extent, in minimizing the adverse impact of global slow downs, (b) We would have attained, to a great extent, our mission of an inclusive growth because in a number of infrastructural sectors for example rural electricity, rural roads, education and health etc., the projects to be executed would fall in these categories, (c) manufacturing will get a boost in view of the demands of construction materials and construction machinery to support these infrastructural developments, (d) in view of the activities at a pace which would be unprecedented, the need for manpower in all categories will radically rise, in turn, leading to enormous employment opportunities, (e) this in turn will lead to higher amount of purchasing power in the market, which will further boost demands and hence the economic growth. Infrastructure development and economic growth are so closely interwined, particularly in our context, that it is difficult to say which one is the cause and which of these two is the consequence. For rapid economic growth, infrastructural development is a must and similarly for developing infrastructure required inputs from various sectors of economy are essential, and therefore accelerated growth in all these would be a pre-requisite to achieve what we target on developing infrastructure.