Evolution of Infrastructure Development & Into the Future

Transcription

1

2 Evolution of Infrastructure Development & Into the Future Dr Sambit Basu Pune November

3 Infrastructure Development: Context Infrastructure critical for economic growth and development strong positive externalities & economies of scale, improves productivity & livelihood, facilitates sustainable development What makes infrastructure unique? Natural monopoly with public good characteristics, high sunk costs and non-rivalry in consumption Infrastructure broadly includes road, electric power, communication network, ports, airports, etc but may evolve to include social and institutional infra What comprises infrastructure is not fixed and evolves over time Till 4 th Plan irrigation was included in infrastructure but since considered in agriculture Infrastructure development is closely linked with political histories India s infrastructure development so far and into the future could be viewed in the wider context of the evolution of the country s political economy 3

4 India s GDP has risen steadily since Independence GDP at Factor cost (Rs Billion) 5.0% Recorded an average 9.46% growth in % 5.6% 7.6% 8.0% % 3.9% 5.6% 0.0 Source: RBI, Handbook of Statistics ( ) GDP at Factor cost (Rs Billion) 4

5 Percent Volatility in GDP growth declined over the last 2 decades Year Mean 10 Year Volatility Source: RBI, Handbook of Statistics ( ) 5

6 Growth in initial years more vulnerable to external shocks % Foreign Exchang e Crisis 4.2% 64 Nehru s death 2.8% drought 65 Pakistan War 3.9% 71 Bangladesh war oil shock 3.3% 77 political crisis 4.7% oil shock 5.5% 84 Indira Gandhi assassinated 0.01% 91 Irajiv Gandhi assassinated & IMF Crisis 5.6% 3.3% 6.5% 5.7% 7.6% 8.0% 5.0% Shocks affecting GDP also cut short and pulled down infrastructure spend, which in turn moderated growth in ensuing years 6

7 Phases of infrastructure development Ph - I Ph - II Ph - III Ph - IV Ph - V Ph - IV Ph - V Growth of GDP Infra Inv to GDP ratio Growth of GDP Infra Inv to GDP ratio Phase I ( ) & Phase II ( ): Run in infra spend, but cut short with external shocks, but picked up again as GDP growth picked up Phase III ( ): Infra failed to pick-up pace despite real GDP rates accelerated Phase IV ( ): Infra spend moderately picking up after mid 1990 s, sans high telecom FDI flow & govt spend on NH 4 laning program, but did not keep pace with the sharply accelerating GDP growth. Phase V: Pattern of Phase IV continued, which could be explained by the structural reform driven growth of the GDP much stronger than the impact of infra spend Infra constraints are faced since , and sustained GDP growth is a challenge without infra build-up 7

8 Infra build-up phases find construct in political-economy Political Focus Policy Focus Macro Management Phase I Phase II Phase III Fabian Socialist Rhetorical Socialist with anti-urban bias tending to populism Populist Phase IV - Neo-populist 1991 onwards (Coalition based) Industrialisation, pro-public sector, Central Govt bias, centralised planning Food security, reduce unemployment, raise percapita income, anti-private sector, banks nationalised, import substitution tariff & non-tariff barriers Industrial de-licensing and deregulation, technological modernisation Structural economic reforms to address crisis, globalisation. Politically easier reforms - trade regime liberalised, investment rules simplified, currency devalued, capital market & investment relaxed Fiscal conservatism, foreign exchange controls Fiscal conservatism hawkish on inflation, despite politicisation of fiscal policy (subsidies, public & government spending, loan mela) Fiscal profligacy and debt monetisation unproductive spending a legacy from previous phase, high CAD; led to 1991 economic crisis Fiscal consolidation, 8 Source: Rajiv Lall and Anupam Rastogi (2007)

9 9 Phase I Phase II Infra focus in phases of development Source: Rajiv Lall and Anupam Rastogi (2007) Infra Focus Major multi-purpose irrigation Bhakra Nangal, Hirakud, Chambal, Tungabhadra, Nagarjunasagar, DVC; to address food crisis, power & roads to facilitate industrial development, rehabilitation of critical assets. Infrastructure treated as anciliary & main focus on centralised planning Infra with village focus rural roads, village electrification facilitating minor & groundwater irrigation. REC was set up to provide loans to SEBs. NTPC set up in Subsidised electricity to agriculture and distortionary tariff structure with industry cross subsidizing agriculture & residential. National highways added to road network & rural road sector attracted attention with govt funds chanellised through special poverty alleviation schemes. Scheme implementation was poor, resulting in poor quality roads. Other infra sectors remained largely neglected; telecom sector neglected as considered luxury Infrastructure was not part of strategic thinking Phase III Telecommunication assumed high importance & Centre for Development of Telematics established on However all investments remained in public sector Growing use of digital technology & linkages with computers and advent of satellite reduced telecom costs and ushered in a new era This phase sown the seeds for restructuring of telecom sector Power sector spend continued, despite deteriorating financial condition on SEBs and wasteful government spending Transportation and Urban infra remained neglected due to fiscal constraints posed by power sector and other revenue expenditures Phase IV Fiscal constraints and consolidation for almost decade and half, sans spurt of FDI flow in telecom ( ) and govt support for 4 lanning of national highways ( ) Seeds for ushering in private sector in infrastructure, burdened by wasteful public spending

10 Million Ha Infrastructure build-up during pre-reform phases Rise in minor irrigation Village electrification Major & Medium Minor

11 '000 kms Infrastructure build-up Progress of Road Network Installed electricity generation capacity 2,500 2,000 1,500 1, In 1971 only 24000kms were NH of total km road network 629 1, , National Highways Rural Roads State Highways & Other PWD Roads Gen Installed capacity (GW) 11

12 New era of reform - sharp rise in teledensity

13 Per cent Seventh Plan ended in financial crisis Fiscal Deficit (Centre & state) & Current Account Balance as percent of GDP Fiscal Deficit Current Account Balance Source: RBI, Handbook of Statistics ( ) 13

14 Per cent Not so productive Government Expenditure rising Rising revenue expn & declining capital exp Rising share of Govt subsidy in GDP 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Percent Share in GDP Central Govt Expn Central Govt Rev Expn Central Govt Cap Expn Central Govt non-plan Rev Expn 14

15 Compelling situation for facilitating Private Sector Investment Government spending wasteful; slow down in investment on productive assets Government resource crunch, creates an urgency to attract private investment in productive assets Structural reforms introduced an enabling environment for private participation Initial efforts at attracting private participation yielded positive results the telecom experience and the IT boom that ensued Infrastructure development takes a strategic approach; recognition to sustain development 15

16 Infrastructure reforms driven by legacy issues Infrastructure traditionally provided by Government controlled monopolies Under pricing of services out of political interest Poor fiscal health of Governments leading to underinvestment High cost and poor performance Vested Interests Bureaucratic decision making leading to delays Inadequate compensation to attract talent Infrastructure reforms driven by Realization of fiscal shortfall Rapid advances in technology Advances in economic thinking Mounting evidence of high cost of Government intervention Reforms Competitive restructuring Privatization / Public Private Partnerships Regulatory Reforms 16

17 Infrastructure reforms driven by legacy issues Benefits of Private Participation Challenges Efficiency Competition - benefits consumers Capital Availability Quality of service Improved accountability Scarce government resources chanellized to meet other social commitments For the Government Infrastructure services essentially monopolistic in nature Outright privatization - not good public policy Efficiency vs. Equity Regulation For the Private Sector High up-front costs, late returns on investment High multi-faceted risks and uncertainty Limited access to financial markets PPP is a solution where outright privatisation may face political resistance combines benefits of private sector and public policy concern of Government 17

18 Interests of different stakeholders involved in PPP Government Ensure growth of the sector, formulate effective public policy Private Sector Consumer Conflicting interests of the different stakeholders Returns maximisation Value for Money Regulator Ensure transparency, balance the interests of different stakeholders 18

19 Role of the Government Government to step away as operator, restricting itself to policy formulation; create independent facilitator / regulator 19

20 Key steps taken to attract private sector in infrastructure Simply opening up infrastructure sector for private participation not adequate Independent regulatory and clear policy frameworks - a necessity 20

21 Per cent What ensued was a steady rise in private investment in infrastructure Ratio of Investment in Infrastructure to GDP Ratio of Public Investment in Infrastructure to GDP Ratio of Private Investment in Infrastructure to GDP Infrastructure spending has grown from only about 5% of GDP in 2003 to 7.3% of GDP in 2012 In order to sustain growth targets, this would need to increase further to nearly 9% of GDP by Source: Interim Report of the High Level Expert Committee on Financing Infrastructure (2012)

22 Private corporate contribution to GDCF as percent of GDP rose sharply 20.00% 18.00% 16.00% 17.31% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 9.92% 8.41% 8.38% 6.63% 7.13% 5.87% 6.73% 5.80% 4.27% 4.15% 14.53% 13.56% 12.71% 12.10% 12.35% 10.33% 11.30% 6.99% 4.91% 6.56% 5.73% 5.16% GDCF, Public GDCF, Private corporate Central govt. expenditure 0.00% Source: Planning Commission 22

23 23 Significant achievements over the last decade

24 Generation Capacity installed in Power Sector Total Power Generating Capacity has grown from about 123,000 MW in 2003 to 225,000 MW today Private sector at 71,088MW currently constitutes 31 percent of the total installed capacity of 225,000 MW, up from single digit levels in 2004 Renewable Energy generation has gained momentum: Of the 27,500 MW Renewable Capacity in the country, nearly 21,000 MW has been added since 2008, higher than any prior period 24

25 Unprecedented growth in mobile connections over past decade Cellular tariffs have decreased from over Rs. 7 per minute in 2000 to about 50 paise per minute today. Overall teledensity has increased from 5 percent in 2003 to 73 percent today. Rural teledensity has increased from less than 1 percent in 2003 to nearly 40 percent today 25

26 Road network have grown under NHDP National highways comprise kms of the total road length of 33 lakh kms Expressways constitute 200 kms, while rural & district roads cover 31 lakh kms The Pradhan Mantri Gram Sadak Yojana has been used by Govt to add/upgrade 3 lakh km of all weather roads since 2004 Only 2% of the Indian roads carry 40% of traffic Significant road length added under the NHDP, but have been falling short of targets 26

27 National Highways Significant increase in Concessions Awarded (km) Contracts / Concessions awarded Road length complete Sources: Ministry of Road Transport and Highways (MORTH); Planning Commission Note: * Projected Targets as per MORTH 27

28 Private investment is yet to pick-up momentum in some key sectors Sector-wise Proportion of Private and Public Investment in Infrastructure (Per cent) Tenth Plan Eleventh Plan Twelfth Plan Sectors Public Private Public Private Public Private Electricity Roads & Bridges Telecommunications Railways Irrigation Water Supply & Sanitation Ports Airports Oil & Gas Pipelines Storage Total Investment

29 Rs. Crore Rs. Crore Investments in some sectors fall short of targets in 10 th & 11 th Plan 6,00,000 10,00,000 5,00,000 4,00,000 3,00,000 2,00,000 Tenth Plan (Projection) Tenth Plan (Actual) 9,00,000 8,00,000 7,00,000 6,00,000 5,00,000 4,00,000 Eleventh Plan (Projection) Eleventh Plan (Actual) 1,00, ,00,000 2,00,000 1,00,000 0 Source: Mid-Term Appraisal for Eleventh Five Year Plan (2011); Interim Report of the High Level Expert Committee on Financing Infrastructure (2012) 29

30 Huge investment in infrastructure projected for 12th Plan period Projected investment in infrastructure (Rs 000 Cr in prices) Projection for private sector in investment Rs 51 lakh Cr is estimated as the requirement for infra development over 12 th Plan, which is double that of the 11 th Plan The share of private sector is expected to rise to 47% against 38% in 11 th Plan Significant investments are projected for renewable energy, ports & storage Private sector is considered key to drive infra development 30

31 Private sector expected to drive 12 th plan is critical in the context of the prevailing challenges impeding investment & development Riding the high tide for nearly a decade, despite the global financial crisis triggered by the sub-prime crisis and the sector slowing down only for a year, severe challenges are now looming large on future projected & sustainable growth Investment gaps may not appear large, but large gap in physical achievement in many sectors is a major concern Challenges are sector specific, but the key generic challenges are: Land-related (i.e. acquisition, compensation, etc) Environment-related Project implementation Lack of clarity or absence of appropriate regulations and policies Financeability of projects bigger challenge than finance Resource challenge natural & skilled personnel Labour-related 31

32 32 Successful private participation or PPP in infrastructure require

33 Emergence of inclusive & equitable growth mandates Govt to attract greater private investment in infrastructure Telecom revolution has democratised digital access and communication compelling government step-up social spending Govt spending on programs like MGREGS, food security and mid-day meals shall continue to grow to address equity aspects Allocating greater share of revenue towards supporting minimum consumption levels will not allow Govt to drive economic growth Infrastructure build-up needed to sustain high growth (so very necessary for inclusive development), Govt has to attract greater private spending on infrastructure Emerging political economy of infrastructure development would require infrastructure to be more inclusive rapidly building much neglected rural infrastructure and also include social infratsructure 33

34 Large rural population, despite rise in urban population Population of India (2001 & 2011) Rural Urban Total 742,490,639 (72%) 833,463,448 (69%) 286,119,689 (28%) 1,028,610, ,106,125 (31%) 1,210,569,573 Sources: Census of India (2001; 2011) 34

35 Percent Percent Poverty ratio Purchasing power and literacy in rural India are increasing Rural poverty head count ratio Rural consumption growth Sources: NSS unit-level data from Household Consumption Expenditure Surveys (38 th, 43 rd, 49 th, 55 th, 61 st & 66 th Rounds) Rural literacy Period to to to Growth (% p.a.) Sources: NSSO press release dated 1 st August 2012; Authors estimates; NSS unit-level data from Household Consumption Expenditure Surveys (49 th, 61 st & 66 th Rounds) Gross enrolment ratio in elementary education Total literacy Female literacy 35

36 Percent Percent Percent Percent... and village connectivity is improving Share of rural habitations connected by road Share of villages electrified Source: PMGSY website Source: Central Electricity Authority (CEA) Rural teledensity Share of village panchayats covered by broadband services End June 2012 Source: Performance Indicators Reports (various years), TRAI Source: Rajya Sabha unstarred question no. 1462, dated

37 Percent Percent Basic Infrastructure is missing in rural areas Distribution of rural households by three facilities: drinking water within premises, latrine and electricity for domestic use th Round ( ) All three facilities 30 58th Round ( ) th Round ( ) None of these All Quintile class All three facilities None of the facilities All Others OBC SC 9 33 ST Percent All three facilities None of the facilities Source: NSS 65th Round, Note: NSS 65th and 58th Rounds gives data on households with exclusive and shared latrine use whereas NSS 49th Round presents data on households with latrine facilities within premises. 37

38 Government spend on rural infrastructure inadequate Central Government Spending on Rural Infrastructure ( ) ( prices) Total expenditure (Rs. Crore) Share (%) Rural roads 90, Rural housing 48, Irrigation 48, Watershed 10, Rural drinking water and sanitation 62, Rural electrification 24, Telecommunication 13, Storage 1, PURA Integrated Action Plan (IAP) 3, Actual expenditure on rural infrastructure 303, Source: IRDR ( ) 38

39 Rising income & aspirations of the poor in rural & urban Population Below Poverty Line (in Lakh and %) Rural Urban Total ,258 (41.8) 814 (25.7) 4,072 (37.2) ,782 (33.8) 765 (20.9) 3,547 (29.8) ,167 (25.7) 531 (13.7) 2,698 (21.9) Sources: Press Note on Poverty Estimates, Planning Commission (2010; 2013) 39

40 Large young population entering workforce Distribution of Rural Population by Age-group (Per cent) Below & above All Rural Male Rural Female Distribution of Urban Population by Age-group (Per cent) Below & above All Urban Male Urban Female Source: NSS 66 th Round, Report No. 537, Employment and Unemployment Situation in India,

41 Per cent.. would demand greater social spending 8 Spending on Social Services as share of GDP Expenditure on Social Services Expenditure on Health Expenditure on Education Expenditure on Others Source: Economic Survey of India ( )c 41

42 India face pressure for higher social spending at lower level of development Source: Rajiv Lall, Business Standard, 6 Nov

43 Average household disposable income Thousand; Indian rupees; 2000 Household Incomes will accelerate across India Compound annual growth rates Actual Forecast 5.8% Urban % All India % 3.6% 3.6% % Rural Source: McKinsey Global Institute 43 43

44 Shape of India s Income Pyramid will change dramatically as Incomes grow Household income brackets Thousand, Indian rupees, 2000 Globals (>1,000) Strivers (500 1,000) Seekers ( ) Aspirers (90 200) Deprived (<90) Globals (>1,000) Strivers (500 1,000) Seekers ( ) Aspirers (90 200) Deprived (<90) Globals (>1,000) Strivers (500 1,000) Seekers ( ) Aspirers (90 200) Deprived (<90) Number of households Million Aggregate consumption Trillion, Indian rupees, 2000 Middle class to swell from just under 50 million today to about 583 million by 2025 By 2025, India will produce 2 million globals annually Share of incomes of the middle class and globals will rise from less than 30% today to more than 80% by 2025 Source: MGI India Consumer Demand Model, v1.0 44

45 Strong Growth of the Middle Class Share of population in each income bracket Per cent, millions of people % Globals (>1,000) , , , Household income brackets Thousand, Indian rupees, 2000 Strivers (500 1,000) Seekers ( ) Middle class Aspirers (90 200) Deprived (<90) E 2015F 2025F Note: Figures are rounded to the nearest integer and may not add up to 100% Source: McKinsey Global Institute 45

46 Into the future Large young age population with low but rising income and aspirations, empowered by greater access to communication, and a right to vote, is resulting in the politics of social security provisioning by the Government This social spend is primarily to support the consumption levels Growing share of revenue spend on social security, government is faced with the daunting task of ensuring infrastructure build-up to sustain high growth necessary for inclusive development Government cannot neglect the immense role of private sector in infrastructure provision and do all that it takes to attract private investment Government would also do well to allocate larger share of social spending on social infrastructure education & health as well as physical infrastructure in rural areas and cut down on wasteful and inefficient spending Government with its political leadership, judiciary and bureaucracy should remove all prevailing hindrances and facilitate private investment 46

47 47 IDFC has evolved and grown...

48 IDFC Building Nation IDFC has contributed Rs Cr to power 35,524MW (also the largest private sector financier of renewable projects) Rs 700 Cr to 2 Airports Rs 14,927 Cr to 1,80,000 Telecom Towers Rs 1800 Cr to 11 ports and Terminals Rs 10,600 Cr to build 4054 Kms of Road 48

49 Thank You!