Clogged ports and roads and manufacturers starved for electricity are stale news now. There is great pessimism when it comes to the country achieving key Plan targets. That, however, has not prevented Prime Minister Manmohan Singh from being optimistic: He wants to spend $1 trillion on infrastructure creation during the 12th Plan, double of that in the 11th Plan.
For this vision to translate into reality, the country would need to spend roughly $200 billion a year on building roads, ports, adding new power generation capacity and building railway lines, among other projects. That is a tall order. For an economy of our size, $200 billion a year translates into spending roughly 14% of the equivalent of the gross domestic product on infrastructure. Compared with our difficulties in spending $500 billion over five years (2007-12, 11th Plan), this level of spending seems a bit astounding.
Illustration: Jayachandran / Mint
A reality check is necessary. There are two very different sets of problems here.
First, spending on infrastructure is not just about throwing money at big projects. These projects require equipment and manpower. Those are in short supply and are the slow-moving parts that dampen the speed of execution. Take power generation, for example. Against a target of adding 78,700MW of power from 2007-12, only 19,092MW had been added by December. The reason: delays in sourcing supplies and shortage of manpower for construction and commission of projects. So even if $1 trillion is available, the economy has limited ability to absorb that money for creating infrastructure.
Then there is the problem of funding itself. Where will the $1 trillion come from?
Issues such as gaps in availability of funding, inability of the banking sector to scale up lending for long-term projects and a host of other regulatory issues are likely to derail this spending projection. This is particularly serious, as the Reserve Bank of India has imposed limits on banks on this front. While the central bank is right in imposing such limits, the government is unwilling to explore other options. The insurance sector, for example, has the ability to lend for longer terms compared with banks (which have to worry about asset-liability mismatches). The government, however, is yet to awaken to that possibility.
In sum, $1 trillion is an alluring figure, a magic wand that could take India closer to the 10% growth target that it so badly needs. The problem is that there is something magical about it. Let’s get real.
Can India spend $1 trillion on infrastructure creation? Tell us at firstname.lastname@example.org