India - Finding resources for a critical area

The global economic downturn has revived a decades-old macroeconomic prescription to jump-start faltering economies: public investment in infrastructure. Historically, government investments have been a critical factor in providing the required economic stimulus. The current worldwide interest in stepping up public investment in infrastructure is to be seen against the wider international backdrop of shrinking liquidity. More than the developed economies, it is a developing country that needs a substantial rise in public investment in infrastructure. In the present economic climate, the emphasis in developed countries is more on the benefits derived from pump priming the economy to counter recession than on strengthening the foundations of growth. For developing economies such as India, infrastructure investments are important in the short term as well as the long term. Stepping up investment in infrastructure would not only provide an immediate stimulus, but also strengthen an area that is critical for high and sustainable growth in the medium and long terms.

Underscoring the need for higher investment in infrastructure, the recently concluded India Economic Summit made the point that the country’s annual growth could be higher by two percentage points if its infrastructure improves. There would seem to be a consensus at the meeting, with over 90 per cent of the business leaders who participated in the summit identifying the need to improve the quality of and access to infrastructure as the “top priority” to secure future growth. The Eleventh Five Year Plan aims to step up investment in the sector from five per cent of GDP to nine per cent, which translates to Rs.2,056,150 crore. The new challenge is to find the resources in the changed global economic setting. One fallout of the international economic downturn is the drying up of foreign investments; as a result the projected funding-gap to finance infrastructure development is likely to increase. The financial crisis calls for proactive measures to generate resources. Easing restrictions on institutional lending to the infrastructure sector is one option. The reported suggestion by the high-level committee on infrastructure financing for an increase in the exposure limit prescribed for infrastructure-focussed non-banking financial companies is particularly relevant. In addition, the government would do well to consider additional fiscal incentives for investments in infrastructure. Given the multiplier effects of infrastructure development, it will be worthwhile to go the extra mile in securing the resources.