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India: Suspended Animation

James Fontanella-Khan
Friday, 2 Nov 2012 | 12:48 AM ET
The Bandra-Worli sea link, also know as the Rajiv Gandhi Sea Link, in Mumbai, India.
Bloomberg | Getty Images
The Bandra-Worli sea link, also know as the Rajiv Gandhi Sea Link, in Mumbai, India.

When Mumbai’s Rajiv Gandhi Sea Link – a 6km bridge connecting the western suburbs to the midtown area of India’s financial capital – was inaugurated three years ago, millions flocked to admire the country’s very own marvel of modern engineering. People wanted to touch the smooth tarmac and the massive cables that suspended the structure above the Arabian Sea. Some had picnics on the bridge, others blocked traffic to take family photographs.

But national pride in the Sea Link eclipsed a less auspicious story. Despite enjoying two decades of rapid economic growth, India – unlike its emerging market peers Brazil and China – continues to lack the most basic infrastructure. Even a relatively minor engineering feat such as the Sea Link – which cuts 13 minutes off the daily commute – is treated like the moon landing.

People are craving for infrastructure,” says Sanjay Reddy, managing director of GVK, one of India’s largest developers of such projects. “It’s tragic that people get so excited about one bridge: it tells you that we need more projects than we currently have ... If the government changes a few things there will be a trillion opportunities in Indian infrastructure – this can be a success story.”

Infrastructure is critical to the fortunes of Asia’s third largest economy. Inadequate transport connections, electricity supplies and the like are often ranked by both foreigners and Indians as the biggest impediments to doing business in the country – which means by turn that they form a significant hindrance to growth. Poor infrastructure costs the economy $65bn a year, according to the Confederation of Indian Industries, a business lobby.

While the investment opportunities are vast – out of a projected $40tn needed to be spent on global public infrastructure in the next 25 years, India is estimated to be worth nearly $5tn, according to estimates by independent consultancies – government inaction on reforming archaic, red-tape laden processes and corruption form a powerful deterrent to overseas groups.

Failure to increase the speed of development is not an option if India is to take its place by 2030 as the third largest economy behind China and the US, as forecast by emerging markets bank Standard Chartered. With the urban population forecast by the McKinsey consultancy to soar from 350m to 590m in 2030, as millions of people migrate to metropolises in search of jobs, it is essential to bolster infrastructure investment to avoid the spectre of social instability.

New Delhi says it is determined to reverse the infrastructural deficit. The Planning Commission’s Soviet-style “twelfth plan” – for 2012 to 2017 – aims to attract and invest $1tn in the next five years to fix some of the nation’s pot-holed roads, antiquated ports and dilapidated airports as well as build 100 cities from scratch, powered by hundreds of new power plants. It is a tall order: the ruling Congress-led coalition has little to show for its previous 11 five-year plans. But for the first time it plans to share the cost of investment equally with the private sector. This will create a multitude of opportunities for domestic and global companies.

Stuart Fraser, the head of policy at the City of London Corporation who travels regularly to Delhi and Mumbai to promote British financial services, says that to return to sustainable growth of 9 per cent, India will need to attract significant capital and expertise from abroad. “If you are talking that amount of money – $1tn – you need some foreign investment: you can’t do it alone,” he says.

Of late, technocrats and politicians in Delhi have declared themselves quite pleased with their progress, claiming to have almost doubled annual investment in infrastructure in the past five years to about $414bn. But many of the projects – including modernising 35 secondary airports, adding 78,000 megawatts of electricity capacity and boosting 387 port-related developments – have not been completed, according to many analysts, financiers and construction groups. “The reality lags behind the ambitions,” says Rajiv Lall, chief executive of lender Infrastructure Development Finance Company in Mumbai.

The reality on the ground is indeed stark. The overall capacity of state-run ports has remained unchanged for nearly 20 years. Contrary to government claims, airports – apart from those in Hyderabad, Bangalore, Delhi and Mumbai – have not been upgraded since the 1960s, though passenger numbers have soared by about 20 per cent annually to nearly 60m in 2011. Railways rely on track laid during the British colonial era, with no lines dedicated to commercial use.

Roads and power have enjoyed significant investment in recent years – about $50bn and $100bn respectively, according to government estimates. However, roads in rural areas – where about 840m people live – remain shoddy, while power generation has been crippled by rising fuel costs. Thousands of factories have to rely on their own generators, and 40 per cent of rural households lack electricity.

Anita Marangoly George of the In­ternational Finance Corporation, the private-sector arm of the World Bank, says the investment opportunities are “evident to the common person who comes here and looks around – there’s obviously the need for more infrastructure”. But she adds that regulatory uncertainty and a lack of reform have deterred foreign companies from coming to India.

Apart from a few global groups such as ABB, Alstom, Areva and Siemens, most projects are handled by Indian groups. Of these, only a handful, such as GVK, GMR and Larsen & Toubro, have strong records in executing large assignments. “There is appetite by investors to come in and take risks,” says Ms George. “But the reason they don’t is because there are not enough projects to bid for ... We should be having 100 times the number of projects we have coming through.”

A lack of such projects has made the bidding process for the few available more aggressive. According to Shailesh Pathak, president of Srei Infrastructure Finance in Calcutta, an investment fund with nearly $6bn worth of assets under management, this results in businesses issuing tenders at below the real cost of the work to win projects.

“This is an enormous problem as later, many companies are not in a position to complete projects [because they] run out of cash,” he says. “This means that as soon as one wins a project he has to immediately try to refinance it, slowing down the execution process.”

Lack of transparency compounds these problems, say infrastructure analysts. A wave of corruption scandals involving ministers and foreign companies – and said by the national auditor to be worth billions of dollars – exemplifies an often murky relationship between business and politics, and the impact on investors and infrastructural development. “The biggest problem in India is that unless you have the right political connections nothing will ever happen,” says one foreign investor.

Once a project is awarded, many companies complain financing is hard to obtain. To improve the situation, India needs to foster a large corporate bond market to provide long-term capital, say industrialists.

Acquiring the necessary land, too, is often tricky, and obtaining environmental clearances can take months or even years. Mr Reddy, whose GVK is close to completing a $2.3bn overhaul of Mumbai’s airport, says lawsuits have been an impediment: “We had about 220 litigation cases over property, environmental and labour disputes.” Creating a one-stop shop for project approvals and unifying regulations across state borders would smooth the road for developers.

As the economy cools – growth fell from 8 per cent in the fourth quarter of 2010 to 6.1 per cent in the same period last year – the need to enact reforms to ease infrastructural development has grown more urgent.

Sunand Sharma, country head of France’s Alstom, says Delhi should push to pass crucial reforms. The land acquisition law, for example, has not been modified since 1894. A draft act has been held up in parliament for months as lawmakers struggle to find middle ground between industrial development and defending the rights of small landowners. “This is what happens in a country where there are checks and balances,” says Mr Lall of IDFC. “You can say that this is the price we pay for having a democracy.”

Indeed, a vibrant democracy is often blamed for hindering development. Many Indian business leaders say privately that they wish their country boasted the efficiency of China’s dictatorship, which in the past 20 years has spent trillions of dollars on projects that have helped make it the world’s second largest economy.

Mr Pathak of Srei Infrastructure Finance calls for Delhi to focus on building greenfield projects. “The private sector has proved to do things better when it comes to overhauling existing assets,” he says. “The government should sell them and use that cash to build new projects.” Others argue that, since state-run enterprises have a dismal record in executing landmark projects, private companies should be involved from the early phases of development.

What is clear is that the clock is ticking, says Rajiv Kumar, head of the Federation of Indian Chambers of Commerce and Industry. Further delay could lead to a return to the 3.5 per cent growth rate experienced from the 1930s to the 1980s, and an increased risk of civil disorder. “The lack of infrastructure hits hardest on the poor,” says Ms George of the IFC. “When you couple bursting infrastructure with other concerns like utilities that don’t work, noise about corruption, growing inequality, it is a recipe for social unrest of generational proportions.”

Still, India has proved that, when Delhi does not become too involved, it can complete major projects. Its biggest infrastructure success story is the liberalisation of the telecoms industry. Despite a scandal in which a minister has been charged with conspiracy, cheating, forgery of documents, abuse of official position and abetment, this created the world’s second-largest mobile market with 900m subscribers. While millions lack 24-hour electricity and water, they now at least have 24-hour phone connections. Apart from a metro system in the capital, the country has also completed 3,600 miles of highway connecting four of its biggest cities – a project that cost $6bn and took 12 years to complete.

Nobody seems to know what might finally force the government to push through the reforms that will enable it to give its citizens the infrastructure they so badly need, but at IDFC Mr Lall has one idea: “We are at our best in moments of crisis.”

Unless Delhi acts soon, that is exactly what the country will have on its hands.

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