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Resource centre on India's rural distress
 
 

Infrastructure push vital to achieve growth target by Sujay Mehdudia
Continued poor performance of some key infrastructure sectors cause for concern

As India is on the path of achieving 8.5 per cent economic growth, aiming to exceed the 9 per cent growth mark next fiscal, the biggest worrying factor that could derail this horse power of growth and play spoilsport in the “growth story” of the UPA II government is the poor state of infrastructure and its tardy pace of development across the length and breadth of the country.

As Finance Minister, Pranab Mukherjee prepares for his budget speech on February 28, the lagging infrastructure set up in the country, the continued poor performance of some key infrastructure sectors including the power sector would be playing up in his mind. India desperately needs to put its house in order as far as shaping the infrastructure is concerned as its poor health would require the Finance Minister to do a clinical job and perform dramatic surgery to give a major boost to this sector that requires an investment of $5 billion in the next five years. Right from economists, experts and foreign investors each one of them has aired serious concern over the poor infrastructure prevailing in the country putting it far behind the fastest growing economy in the world — China.

Infrastructure debt funds

Indicating that infrastructure development was behind the mind of the government, the Prime Minister, Manmohan Singh recently gave an indication of the things to come. He hinted at dedicated infrastructure debt funds making their debut in the coming budget. Physical infrastructure has emerged as the biggest constraint to the country's attempts to achieve 9 per cent plus growth. India is ranked 86th out of 139 countries in quality of overall infrastructure, below other emerging countries such as China at 50 and Brazil at 62 in World Economic Forum's 2010-11 global competitiveness index.

The Prime Minister stated that India needs to develop a corporate debt market to meet the projected investment of $1 trillion required to sustain the country's economic growth rate in the 12th Five-Year Plan (2012-2017). More than 50 per cent of this investment has to come from the private sector. The Finance Ministry is already understood to have readied a draft framework for infrastructure debt funds, on the lines of venture capital funds, to tap investment from foreign insurance and pensions funds. It has initiated discussions with financial sector regulators on regulatory changes required for creation of such funds.

A committee headed by HDFC Chairman Deepak Parekh also endorsed the idea of infrastructure funds and said they be allowed to re-finance up to 85 per cent of outstanding debt of infrastructure projects. Additional avenues of financing are needed for infrastructure as the capacity of banks to fund infrastructure projects is limited. The industry is of the view that the government should make investments in long-term bonds issued by banks tax free.

Restoration of tax incentives

Similarly, there is also a demand for restoration of tax incentives to infrastructure financing. The government had in 2007 removed the Section 10(23G) of the Income Tax Act. The provision exempted from income tax the net income (in the form of dividend of interest or long term capital gains) from investments in infrastructure projects.

The National Council of Applied Economic Research (NCAER) has called for the sharp increase in the planned investment levels for infrastructure and the expanding role for the private sector. Its report on Infrastructure Development has suggested full exploitation of the current potential of the infrastructure sectors; slack capacity in one sector also implies less than full utilisation of capacity elsewhere; institutional measures to make the various legal, financial and fiscal arrangements effective; independence of regulators, efficient pricing of service, reducing the time needed for achieving implementation of plan targets.

According to Naveen Raheja, chairman and managing director, Raheja Developers, housing and real estate is a vital segment of the economy and infrastructure in the sense as it has multiple connectivity with the economy. Housing and real estate generates demand for steel and cement, consumer durable goods, plastics, sanitary ware, electrical goods and a variety of services.

It is therefore important to give a thrust to the housing sector by raising the Interest deduction limit of Rs.1.5 lakh in the computation of income under section 24 of the Income Tax Act, to Rs.3 lakh.

A global survey by PwC (PricewaterhouseCoopers) recently pointed out that inadequate basic infrastructure could hamper country's economic expansion programme.

The findings are part of the survey which is based on responses from 1,201 chief executives from 69 countries. A majority of those surveyed opined that government leadership in building infrastructure is critical for ensuring competitiveness of countries.

A recent WEF report said that annually $3 trillion needs to be spent on infrastructure development worldwide. India is likely to achieve about 9 per cent growth rate during 2010-11 and is aiming to breach the double-digit barrier in the coming years.