India infrastructure splurge too late for this - or next - government
NEW DELHI (Reuters) - India's drive to break an infrastructure investment logjam has come too late to revive the economy before the forthcoming general election - and it could be years before it pays growth dividends for the next government.
Although a cabinet task force set up by Prime Minister Manmohan Singh has fast-tracked approvals for projects worth 5 percent of gross domestic product, severe bottlenecks will limit the scope for his successor to achieve a turnaround.
Figures out on Friday are expected to show that the economy grew by 4.9 percent in the last three months of 2013 from a year earlier, near a decade low, as stubbornly high inflation and increased borrowing costs depress confidence that has yet to recover from the global financial crisis.
Opposition leader Narendra Modi, widely favored to become the next leader of the world's most populous nation, has the backing of big business and a strong growth record running his home state of Gujarat.
The election must be held in May at the latest. But economists see no quick fix after the polls that can overcome the malaise and bring a return to the double-digit rates of investment growth that drove India's boom of the past decade.
"Despite the recent spate of clearances an early revival seems unlikely, given the long gestation period of projects," says Aditi Nayar, an economist with ratings agency ICRA.
Officials concede that rapid approvals won't revive investment overnight, but they argue that India's $1.8 trillion economy could still achieve growth rates of 7 percent if projects are executed on time.
"Delays in projects and critical inputs are hitting economic growth," C. Rangarajan, chairman of Singh's Economic Advisory Council, said this week.
The government had set a five-year target of investing $1 trillion in infrastructure by 2017, with half coming from the private sector, in a bid to lift economic growth to 8.4 percent.
The Asian Development Bank, in a report last October, identified a funding gap of more than $100 billion.
The International Monetary Fund attributes India's slowdown in large part to infrastructure delays. India's trend growth has declined as a result to 6-7 percent from 8 percent before the crisis, it estimates.
BETTER LATE THAN NEVER
A dire shortage of warehouses and leaky distribution channels mean that 57 percent of food aid fails to reach 800 million intended recipients, according to a report by the Independent Evaluation Office, a new watchdog set up by the government.
And although much freight moves over long distances in India that could be served efficiently by rail and waterways, nearly three-fifths is transported on its potholed roads - compared to 22 percent in China.
Chronic shortages of power generation capacity persist, too, although the broader economic lull has made it possible to narrow the deficit to an estimated 4.2 percent of peak demand this fiscal year from 9 percent last year.
One project that has been a long time coming is the $2.3 billion North Karanpura thermal power plant in the eastern state of Jharkhand, where the foundation was laid as long ago as 2001 by Singh's predecessor.
The location of the plant, to be built by NTPC Ltd., was long a bone of contention between the coal and power ministries. The dispute was resolved only a year ago and the plant will not enter service before 2018.
"Maybe this should have been done four years back," said a board member of the company. "But it's better late than never."
Investment projects worth a combined $52 billion are at least now starting to move forward, out of the $80 billion cleared last year, which should lift demand for raw materials such as steel and cement.
Capital investment contributes nearly 35 percent to India's economy, but it is forecast to barely grow in the current fiscal year that ends in March.
A broad-based investment recovery "holds the key to a sustainable uptick in GDP", says economist Nayar. Yet, inflation running at 9 percent and strained government and banking sector balance sheets pose significant constraints.
China's roll-out of 'shovel-ready' projects to offset the impact of the 2008 global financial meltdown has kept growth rates above 7 percent in the world's second-largest economy.
However, India's sprawling democracy is less responsive to such a top-down approach, with many projects encountering major opposition on the ground in addition to the country's notorious amount of bureaucratic red tape.
Despite winning government approval, Monnet Power Company Ltd.'s $840 million power project in the eastern state of Odisha has been delayed by two years due to protests by villagers against building key water pipelines and power lines.
"For any greenfield project, issues related to land acquisition, finance and law and order are major hurdles," said B.D. Mohapatra, the plant's chief operating officer.
A slump in the tally of new investment proposals underscores his point. The number of new project announcements fell 83 percent to 266 in the last quarter from 1,588 in the first quarter of 2011, according to CMIE, an economic think tank.