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Subject ECONOMICS

Paper No and Title 8: Economic Planning in India: Overview & Challenges

Module No and Title 25: Economic Infrastructure

Module Tag ECO_P8_M25

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

Module 25: Economic Infrastructure
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TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Economic Infrastructure in India
4. Role of Infrastructure
5. Financing & Foreign Investments
6. Recent Developments
7. Government Initiative
8. Summary

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

Module 25: Economic Infrastructure
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1. Learning Outcomes

After studying this module, you shall be able to

 The basic economic infrastructure in India

 Reforms undertaken to facilitate infrastructure development in the past.
 The role of infrastructure in economic growth & development
 The financial resources to fund infrastructure development
 The recent developments and the government initiatives taken to promote
development
 The future prospects

2. Introduction

India today is one of the fastest growing economies and has emerged as a major global
economic power and a favourite for international investment. Economy’s health of any
country is reflected by Infrastructure development because infrastructure varies directly
with the development and growth of the nation. Being a fastly growing nation, India has
always given priority to the infrastructure sector and it has received noticeable attention
from the government as well as private players. However our country’s poor economic
infrastructure is a major setback to the growth prospects. Ever since independence there
have been several reforms and policies to improve and facilitate infrastructure
development. But we first need to define what economic infrastructure is. Economic
Infrastructure can be defined as the basic internal facilities of a country that make all
business and other activities possible. These include the communication system,
transportation system, roads & bridges, railways, sewage system, water, gas, ports,
airports, electricity, financial and banking services and all high costs investments that play
a key role in the economic development of and prosperity of a country. All these services
foster the business activities in a country and any company that wishes to expand globally
looks always looks at the economic infrastructure of the country it plans on entering. To
unleash its full potential improvement in infrastructure is important to meet its growing
demand.

3. Economic Infrastructure in India

Transportation:

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

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Transportation is an important part of any economy. It includes roads, bridges, railways,
ports & airports. India’s primary mode of transport is the public transport which is used
in the world to a considerable extent.

 Railways: Indian railways have been supporting the economic and industrial
landscape for over 150 years. India today supports the 4th largest railway network
in the world employing about 1.6 million people and spreads across more than
65000 km. There are several constraints in connectivity and Indian Railways is now
looking for private partnership to modernize railways and bring it to world-class
levels.

 Roads: The most prominent part of India’s economic infrastructure development

in recent years is the spread of road network across the country; per sq. km. of
surface area in India is now bestowed with roadways of one km. One of the largest
road networks in the world is in India. The road network of country consists of
Expressways, National Highways, State Highways, Major District Roads, Other
District Roads and Village Roads. However India has a congested network of roads,
which are not in very good conditions. The estimated increase in road traffic is
about 15% in passenger movement every year. Efforts are being made to make the
road connectivity better. India now has a large network of National Highways
which is connecting all major cities and capitals forming a strong economic support
of the country. India had a total of 70,934 km of National Highways in 2013.

 Ports: India has 12 major ports that are managed by the Port Trust of India and
regulated by the central government. These ports handle 95% of foreign trade in
quantity and 70% in terms of value. Of these Vishakapatnam is the largest port in
India. India also has 187 non-major ports. Inspite of having sufficient capacity and
modern facilities the average turnaround is 3.5 days as compared to 10 hours in
Hong Kong, which greatly hinder Indian goods competitiveness. Congestion is
mainly due to slow evacuation of cargo rather than poor management, as the ports
are not well connected with the hinterland.

 Aviation: Air India is India's national flag carrier after integrating with Indian
airline in 2011 and now plays a significant role in connecting India with the rest of
the world. IndiGo, Jet Airways, Air India, Spicejet and GoAir are the significant
carriers in order of their market share. These airlines connect over 80 cities all over
India and also operate routes which are overseas after the liberalization phase of

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

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Indian aviation. Many other foreign airlines connect Indian cities with other
eminent cities all over the world. But, a major section of country's air transport
potential remains untapped, despite the fact that Mumbai-Delhi air corridor was
ranked 10th by Amadeus in 2012 among the world's busiest routes.

 Waterways: India has a widespread network of inland waterways constituting

rivers, canals, backwaters and creeks. 14,500 kilometers is the total navigable
length, out of which about 5,200 km of river and 485 km of canals are used by
mechanized crafts. Freight transport by waterways is largely underutilized in India
ralative to other big countries. In totality, the cargo moved by inland waterways is
merely 0.15% of the total inland traffic in India, compared to the corresponding
figures of 20% for Germany and 32% for Bangladesh. Cargo which is transported
in an organized manner is limited to a few waterways in Goa, West
Bengal, Assam and Kerala. The statutory authority which is in charge of the India
waterways is the Inland Waterways Authority of India (IWAI). It plays the role of
building the required infrastructure in these waterways, examining the economic
feasibility of new projects and also administration and regulation.

Power and Electricity

The energy provision in India is a major limitation to the country’s economic
infrastructure. The increasing manufacturing activities and the growing population has led
to a surge in demand for power. The installed capacity is 275.912 GW as on July 2015.
Renewable Power plants account for 28% of the total capacity and Non-Renewable Power
Plants accounts for 72%.

Telecommunications and the Internet

Indian telecom industry went through a high pace of market liberalisation and growth since
the economic reforms of 1990s and now has become the world's most competitive and one
of the fastest growing telecom markets. From under 37 million subscribers in 2001 to above
846 million subscribers in 2011, this Industry has grown over twenty times in just ten years.
Indian telecommunication industry’s major sectors are telephony, internet and television
broadcast Industry in the country which is in an continuing process of transforming
into next generation network, employs a widespread system of modern network elements
e.g., digital telephone exchanges, mobile switching centres, media gateways and signaling
gateways at the core, interconnected by a large variety of transmission systems using fibre-

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

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optics or Microwave radio relay networks. It is now the world's second-largest mobile
phone user base with more than 929.37 million users as of May 2012. It has the world's
second-largest Internet user-base with over 300 million as of June 2015.

Banking & Financial Services

The Indian banking sector is broadly classified into scheduled banks and non-scheduled
banks. The scheduled banks are the banks which are included under the 2nd Schedule of
the Reserve Bank of India Act (1934). The scheduled banks are segmented into:
nationalised banks; State Bank of India and its associates; Regional Rural Banks (RRBs);
foreign banks; and other Indian private sector banks. The term commercial bank include
both scheduled and non-scheduled commercial banks, that are regulated under Banking
Regulation Act, 1949.

4. Role of Economic Infrastructure

The link between infrastructure and economic development is not a once and for all affair.
It is an ongoing process and developmental progress has to be preceded, accompanied, and
followed by infrastructure progress, if we want to realize our declared objectives of
generating a self-accelerating process of economic development. Some of the reasons
development of infrastructure is crucial is
1. Large public investment raises aggregate demand of the economy and gives short-
term impetus to growth.
2. It serves as an input to private investment and encourages productivity and output.
3. A country with good infrastructure facilities attracts foreign capital, which further
raises demand and productive capacity. In a country like India where the market
has huge potential it is important to attract capital both domestic and foreign in
order to ensure economic growth.
4. Development of transport enables easier and quicker movement of goods, which
increases efficiency and also reduces freight costs.

5. Financing & Foreign Investment

Historically, it was the public sector that financed infrastructure spending almost entirely.
Today, India requires $1 trillion for its development in infrastructure sector, with private
capital to contribute half of it. In 2010, India partnered with the United States to launch the
ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges
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$10 billion dedicated Infrastructure Debt Fund. But despite that the country still faces
shortage of huge funds that has most recently been filled by its neighbors. In early 2014,
China had offered to finance 30 percent of targeted infrastructure plan of India—this
proposal if accepted, would spot China largest single foreign investment in this
infrastructure sector. The offer is contentious, given Delhi's bad history with Beijing; India
has in the past refused Chinese investment over national security concerns. It has also been
in competition with China over growth, juggling an uneasy rapport of rivalry and
partnership. Before Chinese President Xi Jinping's first official visit to India in mid-
September 2014, India was expecting a pledge of $100 billion investments. However,
China finally made a moderate commitment of only $20 billion over five years, principally
devoted to the modernization of India's railway and the development of two industrial
parks.
Conversely Japan, which has enjoyed good relations with Delhi, has emerged as a robust
investor. Two-thirds of the Delhi metro investment was financed via loan granted by Japan
International Cooperation Agency, which also funded more than half of the $7.7 billion
Delhi-Mumbai Dedicated Freight Corridor project. Japan has also contributed to the Delhi-
Mumbai Industrial Corridor, as well as city roads and urban projects. Prime Minister
Shinzo Abe continued the flow of funding in early September 2014, during a five-day visit
by Modi, with a pledge of $33.8 billion to fund various infrastructure needs over the next
five years—a deal that could prove lucrative for Japan's high speed rail companies, which
face competition Chinese counterparts hoping to penetrate into the market. While the
United States has policy tools in place to promote investment in India, its commitments are
way lesser in comparison to those made by the world's second and third largest economies.
In late September 2014, Modi made a landmark visit to the United States to meet with both
President Obama and top American business leaders with the intention of restablishing
confidence in India's economy and attracting foreign investment.
Yet challenges for attracting foreign direct investment (FDI) remain. Inspite of the huge
triumph for Modi's party that many view as an authorization for sweeping economic
reform, FDI remains politically divisive. Rigid FDI policies had been a significant
hindrance until the government liberalized them in 2005, allowing 100 percent FDI in a
broad range of sectors and expediting approvals. The U.S.-India Business Council recently
compiled a list of initiatives, including a resolution to outstanding issues around the civil
nuclear deal and an increase in FDI that would help the United States hit its target of $500
billion per year in bilateral trade. But recently domestic and foreign firms have been driven
away from long-term projects due to high inflation and interest rates. Commercial banks
hit their liable limits for the sector, and have even been discouraged from investing
further by the Reserve Bank of India.

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

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$225 billion—or roughly 12 percent of GDP have been invested by private sector in India's
infrastructure between 2007 and 2012, largely through PPPs, which have proliferated. Yet
these projects have suffered myriad dysfunctions due to poor structure. In 2013, the
London-based private equity, infrastructure, and debt management firm 3i, which has the
world's largest India-dedicated infrastructure fund, exited all its portfolio companies in the
country after investments faultered in meeting investor expectations. India, which barely
has a municipal bond market, also needs capital markets reformation to create a source of
long-term debt. But a recent ban by the Reserve Bank of India on bank purchases of new
infrastructure bonds has handicapped new Prime Minister Narendra Modi's efforts of
raising funds through the bond market.

6. Recent Developments

Infrastructure space. Many Spanish companies have an interest in collaborating with

India on infrastructure, high speed trains, renewable energy and developing smart cities

 The Government of India has designated Rs 50,000 crore (US$ 7.53 billion) for the
development of 100 smart cities across the country. The Government released its
list of 98 cities for the smart cities project in August 2015.

 The Indian Government has disclosed plans to invest US$ 137 billion in its rail
network in the next five coming years, indicating Prime Minister Narendra Modi's
aggressive approach to building infrastructure needed to unlock faster economic
growth.

 The Indian Government has declared highway projects valuing US$ 93 billion,
including government flagship National Highways Building Project (NHDP) with
total investment of US$ 45 billion in the next three years.
 Part of The World Bank group, International Finance Corporation (IFC), intends to
invest at least US$ 700 million in transport and logistics infrastructure projects
already existing in India.

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

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 The World Bank has authorized a US$ 650 million debt funding for a component
of the eastern arm of the Dedicated Freight Corridor (DFC) project in India.
 Eight aircrafts will be added by Andhra Pradesh-based regional airline Air Costa
to its existing four aircrafts before 2016. The airline, which reported an operating
profit in the month of December, 2014 for the first time, said that it will be a pan-
India player by the end of 2015.

 Kolkata Port Trust owned by government has signed an agreement with the West
Bengal government to establish a new port at Sagar Island in South 24 Parganas
district. The Sagar Island port is projected to cost Rs 11,900 crore (US$ 1.79 billion)
and will be regarded as the first port to be built by the Union government in 14
years. India off lately is witnessing significant interest from international investors
in the Indostar Capital Finance Limited and Reliance Capital Limited have invested
Rs 200 crore (US$ 30.10 million) in Alliance group which is a real estate company.
Investment has been made in the holding company of Alliance group, Alliance
Infrastructure Projects Private Limited by the consortium of institutions.

 Recently, private investment in Indian Railways (state-run) has been given

approval by the cabinet for the construction of new plants and lines with augmented
capacity. This reform will help foreign players to connect railways with industrial
plant, mines and port by offering services at lower costs.

7. Government Initiatives

When it comes to development in infrastructure sector, the Government of India has always
been very proactive. Execution of associated projects through Public Private Partnerships
(PPPs), fiscal incentives, tariff policies, budgetary allocations and participation of private
companies have been the focal point.

According to research done by Infrastructure Development Finance Co. the infrastructure

sector of India contributes more than 8% of the country’s GDP. The figures are going to
touch 10% by year 2017 to uphold the growth objectives. Indian infrastructure sector is
well poised to take a big leap and it provides several investment opportunities for foreign
investors from across the world.

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

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The Government of India is taking every possible initiative to boost the infrastructure
sector. Some of the steps taken in the recent past are being discussed hereafter.
 The Reserve Bank of India (RBI) has notified 100 per cent foreign direct investment
(FDI) under automatic route in the construction development sector. The new limit
came into effect in December 2014.

 FDI rules have been relaxed by Indian government in the construction sector by
lowering minimum built-up area and capital requirement. Exit norms have been
liberalised. In fact, the Cabinet has also approved the proposal to rephrase the FDI
policy.

 The capital expenditure for roads and railways have been increased by Rs 140.3
billion (US$ 2.11 billion) and Rs 100.5 billion (US$ 1.51 billion) respectively in
the Budget 2015-16.

 India and the US have signed a memorandum of understanding (MoU) in order to

Institute Infrastructure Collaboration Platform. The document demonstrate the
relationship between both the Governments that mean to make easy participation
of US industry in Indian infrastructure projects to improve the bilateral relationship
and benefit both economies. The MoU’s scope envision efforts in the areas of
Railways, Road Transport and Highways, Commerce and Industry , Micro Small
and Medium Enterprises, Urban Development, Power, New & Renewable Energy,
among others.

 The Government of India has also projected the Indian Railways Vision 2020 which
targets to tackle the issues related with infrastructure, by opening up doors for NRIs
in Indian infrastructure sector for investment.

 Recently, the Indian government has approved 9 different road projects worth US$
2 billion to be implemented by State Governments under Public Private Partnership
model.

 Indian Finance Ministry is ready to fund 20% of financial requirement, while the
other 20% would come from Highways Ministry. Foreign investment may be
invited in order to make all the projects financially feasible.

Road Ahead

Indian port sector is ready to make huge success in the forthcoming years. It has been
estimated that till 2017 end port traffic will sum to 943.06 MT for India’s major ports and
815.20 MT for its minor ports.

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

Module 25: Economic Infrastructure
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Along with that, Indian aviation market is expected to become the third largest across the
globe by 2020, according to industry estimates. The sector is casted to handle 336 million
domestic and 85 million international passengers with extended investment to the value of
US$ 120 billion. Indian Aviation Industry, which currently comes to 1.5 per cent of the
gross domestic product (GDP), has been instrumental in the overall economic development
of the country. Given the large gap between current and potential air travel penetration in
India, the prospects and possibilities of Indian aviation market growth are enormous.
Government is taking several initiatives to modernise railways as well. The FDI reforms
of 2014 have opened a plethora of opportunities for the Indian markets. There is an urgent
need to address the infrastructure sector so India can achieve its full potential. Finance
minister Arun Jaitley has announced a significant increase of Rs.70, 000 crore in
investment for the current year in infrastructure in 2015-16, with a focus on railways and
roads. The main objective is to spur the business cycle by increasing government
expenditure and increasing aggregate demand. The source of money will be an additional
public investment outlay of Rs.1.25 trillion over that of 2014-15.

8. Summary

 Economy’s health of any country is reflected by Infrastructure development

because infrastructure varies directly with the development and growth of the
nation.
 Transportation is an important part of any economy. It includes roads, bridges,
railways, ports & airports.
 The energy provision in India is a major limitation to the country’s economic
infrastructure.
 Indian telecom industry went through a high pace of market liberalisation and
growth since the economic reforms of 1990s and now has become the world's most
competitive and one of the fastest growing telecom markets.
 According to research done by Infrastructure Development Finance Co. the
infrastructure sector of India contributes more than 8% of the country’s GDP.
 Indian port sector is ready to make huge success in the forthcoming years. It has
been estimated that till 2017 end port traffic will sum to 943.06 MT for India’s
major ports and 815.20 MT for its minor ports.

ECONOMICS Paper 8: Economic Planning in India: Overview & Challenges

Module 25: Economic Infrastructure