India has been missing out a lot of opportunities for investment due to poor infrastructure. The contrast was provided by China: when the summer Olympics of 2008 was held during August at Beijing, one had a glimpse of the tremendous beneficial fallout of the country's focus on infrastructure.

It is just about a decade since India stepped up investments on infrastructure. The opening of the telecom sector for competition through the new investor-friendly telecom policy attracted massive investments. In less than a decade, telecom connectivity registered a more than seven 'fold increase - from around 40 million to around 280 million connections. Perhaps in the next couple of years, statistically, one in two Indians may have a telephone.

The other most visible effect of focus on infrastructure is seen in regard to road connectivity. The imaginative scheme of the Vajpayee government to fund such a development through a cess on diesel and petrol with half of the proceeds going to the states, has contributed to a spectacular expansion and improvement of the road network.

The government planned a similar big thrust for the development of other infrastructure sectors viz. power, ports and airports. An outlay of around $ 500 billion has been proposed for infrastructure development through the Eleventh Plan (2007-12).

Visible signs of slowdown

The global economic crisis is expected to impact severely on this impressive plan of expansion. The drying up of funds from the western countries, both through foreign direct investment and credit, is bound to affect plans of infrastructure development.

There are already visible signs of such a slow down, though there are few exceptions. On the sidelines of CII's economic summit held in mid-November, A.M. Naik, L&T's chief executive, asserted that the engineering giant has not felt the impact of any slow down and that it would maintain the projected 30 per cent growth through the current year.

However, this confidence is not shared widely by most other companies. L&T has been choosy and focuses on large projects which are viable and thus may not be suffering any fund constraint. But down the line, one is already witnessing large corporates putting on hold major plans of expansion. With industry leaders like SAIL, Tata Steel, Tata Motors and Ashok Leyland suffering a fall in demand, capital expansion plans of the industrial sector are bound to be put on hold.

Hardly a year ago, one noticed the euphoria in the expansion of SEZs. When IE organized a seminar on SEZs in July 2007, inaugurated by commerce secretary G.K.Pillai and addressed by 20 experts that included senior policymakers, consultants and business leaders, the 200 delegates exuded optimism. Case studies on the Navi Mumbai Reliance SEZ, Mahindra Industrial Park, the Gujarat and Tamil Nadu experiences and on Singur all pointed to the concept of SEZ expanding rapidly. Yet 2008 witnessed sluggish progress: the Reliance SEZ, and several others have met with stiff local opposition and have made little progress. Severe resource constraint has forced large players like DLF to abandon plans for SEZs. In fact DLF is reported to have requested the Haryana government to refund the hefty fees collected by the state after deciding to scrap its SEZ plans.

A 40 per cent shrinkage

This is a pity. The country received focus on the much neglected infrastructure sector, especially urban infrastructure, hardly a decade ago. Countries like Malaysia, Singapore and South Korea that were in comparable state of development hardly four decades ago, are today way ahead of India in terms of economic growth and prosperity contributed by a strong focus on infrastructure. Sadly the present global melt down led by US is happening at a time when India is just gearing up to make up for the precious time lost.

Till recently global markets appeared to be flush with funds. There was also the facility of leveraging debt. The recent credit crisis has led to the drying of long term funds and has made debt finance much more expensive.

Infrastructure funding in India registered a near 3-4 times increase to around $34 billion between 2003 and 2007. The massive spurt in the price of crude earlier this year and the economic downturn portend the probability of default and a big decline in total funding.

States and private sector will fail…

In planning a big step up in the outlay for infrastructure funding, a substantial contribution, of over $140 billion each by the private sector and state governments, had been anticipated. Today both these assumptions appear grossly exaggerated. With the tendency of the private sector to defer investments in times of changes in market sentiment, expectations on investment of this order appear unrealistic. Again with the impact of the sixth Pay Commission felt more severely in the first two years due to the huge payment of arrears, most state governments would face fund constraints of the type they suffered in the late 1990s in the aftermath of implementation of fifth Pay Commission recommendations. With elections around the corner, states like Tamil Nadu would witness clamour for more freebies and subsidies and turn to the Centre for taking up a larger share of burden for infrastructure development.

Higher inflation, interest rates…

There is yet another component of funding that would seriously affect infrastructure investment - the spurt in interest costs. The earlier two five year plans had the benefit of low rates of inflation and interest. The comfort of either of these is not there today with inflation and interest raging at much higher levels. An expert puts the interest component in total project cost increasing through the current Plan from the earlier estimated 14-15 per cent to 25 per cent; which means a larger allocation would be needed. The slow down in economic growth from the earlier postulated 9 per cent to between 7 and 7.5 per cent would also mean a much lower average rate of growth through the five years - between 6 and 6.5 per cent. In effect this means much reduced availability of funding for infrastructure.

There are still several optimists. These point to larger funding options available from the oil exporting countries which have large lendable resources. Relative insularity of the Indian economy from the effects of the severe slow down of the US and European economies is stated as another factor. Yet another is the success of public-private partnership. The concept of BOT took root in the previous five year plan. In fact, the BOT concept for toll roads succeeded so rapidly that for a while there was scramble for winning projects through hefty upfront payments running into few hundred crores of rupees.

The outlook is mixed. There are positive developments like a steep fall in the price of crude oil, steel and other commodities. Along with these is the trend towards price stability and lower rate of inflation. There is a possibility of directing the huge quantum of arrears to be paid to government servants as a consequence of the sixth pay commission bonanza and channel it for infrastructure development.

There is also the tendency on the part of private sector to shy away from new investments. T his, combined with the pressure on the part of Leftists, may witness the shifting of the balance in favour of the public sector. With great difficulty the country moved away from state control; can it afford a relapse?

Poor involvement of states…

The most serious danger seems to be for the state governments continuing to abdicate their responsibility to encourage savings, generate surpluses and opt for large investments. Sadly, in the liberalisation era, one is witnessing increasing tendency on the part of the states to focus on welfare expenditure and not on infrastructure for sustained growth. These are glibly left to the care of the Centre; the states indulge on offering freebies in ever increasing scale. Tamil Nadu, ruled by DMK, has no problem in allocating close to Rs.2000 crore for the distribution of free colour television sets; but denies investment of even Rs.500 crore for power development that has plunged the state into a severe power crisis. The paradox of the entire population provided access to free colour TVs, but not assured supply of power, has not yet sunk into the electoral calculus of the state leadership. Sadly the weak coalition at the Centre has not been able to impress upon the states the imperative for growth of a much higher rate that alone can take care of effective distribution of benefits. This indeed appears a tragic failure of the strong economic team of the triumvirate - Manmohan Singh, P Chidambaram and M S Ahluwalia.