Financing mechanism for building infrastructure in India-FM
Following is the extract from the address made by the Finance Minister, Shri P. Chidambaram at the London Business School on 28th June 2007

The challenge before India is how to sustain the high rate of growth. If there is one economic factor that will determine success or failure in this behalf, it is infrastructure.

It is now widely acknowledged that there exist strong linkages between infrastructure on the one hand and economic growth and poverty alleviation on the other. Not only will good quality infrastructure give a fillip to economic growth, robust economic growth will, in turn, make investment in infrastructure projects more attractive and rewarding.

According to some perceptive commentators, India is strong on institutional infrastructure but weak on physical infrastructure. In my view, this is indeed the position and, I may add, India fares poorly on social infrastructure as well. To illustrate, we have done a splendid job of putting in place constitutional and legal institutions such as an elected Parliament, an independent judiciary, a strong supreme audit organization, regulatory authorities with vast powers for various sectors, a free and vocal media, and many other bodies that characterize a vibrant civil society. Where we have not succeeded to the same extent is in building world class roads and railways, airports and seaports, and power and telecommunication systems. We have also not succeeded in ensuring adequate and good quality services in education, health care, water supply and sanitation.

Rural infrastructure is poor and requires to be built. The need is more investment. Urban infrastructure was built many years ago, but it is crumbling. The need here is more investment and better governance.

The challenge of infrastructure is huge; the requirement of funds is humungous. It has been estimated that during the Eleventh five year plan period (2007 to 2012), we would need to invest over US$320 billion in the infrastructure alone. This number includes US$130 billion for power, US$ 66 billion for railways, US$49 billion for national highways, US$11 billion for seaports and US$ 9 billion for civil aviation. The Committee on Infrastructure Financing that submitted its report in May 2007 has already advised that the target for infrastructure investment should be revised from US$ 320 billion to US$384 billion at 2005-06 prices, which is equivalent to US$ 475 billion at current prices. I can say with confidence that no country than India needs and no country than India can absorb so much funds for the infrastructure sector.

The Approach Paper to the Eleventh Five Year plan states that: “….the total resources required to correct the infrastructure deficit exceed the capacity of the public sector. The strategy for infrastructure development must therefore encourage public private partnerships wherever possible. However the PPP strategy must be based on principles which ensure that PPPs are seen to be in the public interest in the sense of achieving additional supply at reasonable cost. PPPs must serve to put private resources into public projects and not the other way around.”

We have identified the key issues in infrastructure development. They are: (i) the legal and regulatory framework; (ii) affordability of service; (iii) quality of service; and (iv) the financing mechanism.

The last issue – financing – is perhaps the one that interests you most and, therefore, let me dwell on that for a minute.

How does India hope to obtain this level of investment? As I said earlier, we intend to find the resources through public investment, private investment and public private partnerships. Savings and investment, as proportions of GDP, have been on the rise during the last five years. In 2005-06, the savings ratio estimated at 32.4 per cent and the investment ratio was estimated at 33.8 per cent. While we do not yet have the ratios for 2006-07, we have an estimate of Gross Domestic Capital Formation (GDCF) in that year. The number stands at 35.1 per cent, which is an increase of 1.3 percentage points over the previous year. By inference, therefore, it is possible to conclude that the savings and investment ratios for 2006-07 ought to have increased by about 1.3 percentage points. We believe that at the end of 2006-07 the investment to GDP ratio stood at 35 per cent. By any measure, that is an impressive number. Our endeavour will be to channelize a significant proportion of that investment into the infrastructure sector.

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