With the global financial crisis simmering for over a year, India and the rest of the world has been grappling with the twin global shocks of a world-wide liquidity crunch and deepening recession.



In India, the liquidity shock was felt immediately, with vanishing external trade credit, surging FII outflows and liabilities of Indian bank branches abroad drying up and needing to be substituted by credit lines from home. The recessionary shock began to hit Indian exports and investments particularly in sectors like textiles, automotive components, gems and jewellery. However, other sectors catering mainly to domestic needs like steel, cement, etc, as well as manufacturing were not affected to a large extent.

To remedy the situation, the government has resorted to large investments in infrastructure with a two-pronged aim: generating large scale employment as well as reinvigorating the economy. Also reflected in the country’s fiscal budget are hopes that the bet on infrastructure will produce returns and help the nation tide over rough times.

Response to the continuing crisis
The world community including the G-20 countries as well as the multilateral financial institutions (the World Bank/ADB/IMF) have broadly endorsed India’s continuing well-calibrated, rational response to the ongoing crisis through a variety of wide ranging monetary or fiscal measures or exchange rate policies including, inter alia, a much-needed fillip to the infrastructure sector. In an emerging economy like India, infrastructure not only provides essential services but also promotes
reliability, low-cost production and market competitiveness. Massive investment opportunities in this sector, broadly defined, include generation and distribution of thermal, hydro, wind, and nuclear energy, roads, highways, bridges, ports, airports, railways, telecommunication, hospitals, schools, townships, etc.

The construction component in infrastructural activities is about 60–80 percent of the project cost in sectors like roads/housing. In power plants/industrial units/MRTS, etc, it has a substantial, though a lower share. The multiplier effect in this context is significant due to the demand for inputs like steel, cement, capital and equipment for power or material handling, electronic and IT control systems, transport, etc.

Investment in infrastructure
The total investment in infrastructure in 2006–2007 was estimated to be around 5 percent of the GDP. The gross capital formation (GCF) in infrastructure is expected to rise as a share of GDP from 5 percent in 2006-2007 to 9 percent by the end of the 11th Plan period. The total investment in infrastructure during the 11th Plan is projected at $514 billion (at Rs 40/$) or an average of 7.6 percent of the GDP. This will be 2.36 times the amount of $218 billion (approximately) at 2006-2007 prices in the 10th Plan. In order to reduce the deficit in infrastructural development, a few sector-specific requirements have been identified for the 11th Plan, which are shown in Table 1.

Public-private partnership
It is evident that very large private investment through appropriate public-private sector partnership formats would be required to meet the overall investment requirements. In the 10th Plan, the public sector share of investment across ten major sectors was estimated at 80 percent, the remaining 20 percent was coming from the private sector. In the 11th Plan, private sector contribution would grow to around 30 percent ($154.90 billion). Road and bridges, telecommunications, ports, airports, gas storage and distribution are projected to receive private sector investment at a higher rate (between 34 to 50 percent).



Achieving such high volumes of private investment would not be easy. Experience with various public-private partnership (PPP) formats shows the need to have a flexible approach for creating an environment that is both attractive to the investors and also fair to the consumers. This would be supported by an appropriate regulatory system limiting user charges to reasonable levels and setting up the necessary rules and regulations for ensuring suitable standards of service.

• Six core infrastructure industries recorded a production growth of 2.9 percent in March 2009, the highest since September 2008, indicating some degree of recovery in the Indian economy. However, compared to March 2008, the core sector did not register any expansion.
• The quarterly results (January–March 2009) declared by 514 Indian companies indicate that
  the net profit decline by 16.3 percent of these companies is lesser than the 32.7-percent drop reported in the October–December 2008 quarter. It appears that cement, construction, fertiliser, power, telecom and two-wheeler units will do well in the final count. Software services and pharmaceuticals are poised for moderate growth, while trading, metals, automobiles and engineering sector fared badly.
• The Indian share market recovered vigorously.

However, many experts have commented that the pain is far from over and it would be unfair to paint a rosy picture based on a few isolated instances. We are still in a crisis situation and the test of true leadership would lie in converting such dire challenges into shining opportunities for the benefit of all.

The author is the Chairman, CES Pvt Ltd