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Building a new India

Investment in infrastructure is expected to double in the latest five-year-plan - and boost GDP growth. By Shehla Raza Hasan

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90% - Annual growth in the number of foreign direct investment projects in India in 2011

- Source: Ernst & Young in 2011

This article appeared in the March edition of Business Voice, the CBI magazine

The government of India has pinned its hopes on infrastructure development to help reform the economy.

In its 12th five-year plan, which started last year, it slates investment in infrastructure to double to £653bn compared with the previous five-year period. Half of this investment is expected to come from the private sector.

Goldman Sachs estimates that infrastructure in India will require more than £1trn in investment by 2023 if everything goes to plan. But will it?

The private sector is finding it difficult to raise the necessary finance, especially debt. But a number of steps have been taken to address this.

In the 2012-13 budget the Reserve Bank of India allowed infrastructure firms to increase external commercial borrowings to £6.4bn to repay outstanding rupee loans and fund new projects. The government has also set up infrastructure debt funds and reduced tax on overseas borrowings from 20 per cent to five per cent, making it easier for local companies to raise finance overseas.

Other problems that need to be addressed include the lack of consistency in land-acquisition regulations among states; challenging political relationships between central government and some state administrations; and a lack of project-monitoring mechanisms. There have also been long delays in obtaining approvals, which are leading to huge cost overruns.

Route to success

But these problems are not proving a huge deterrent for foreign firms, which are treating the opportunity with cautious optimism. According to “Ready for the transition”, Ernst & Young’s 2012 report on India’s attractiveness to foreign investors, the number of FDI projects in India’s infrastructure sector grew by 90 per cent from 2010-11 to 2011-12.

The UK government has identified a number of big infrastructure projects that offer opportunities for British firms. These are:
> Metro Rail projects in Delhi, Hyderabad and Mumbai, worth an estimated £7bn.
> Navi Mumbai international airport, worth £53bn.
> Kolkata urban regeneration project, valued at £600bn.
> The Delhi-Mumbai industrial-corridor project, valued at between £60bn and £70bn.
> The Bangalore-Mumbai industrial-corridor project, worth more than £16bn.
Foreign investors’ confidence in India is clearly founded on the belief that short-term pain will convert to long-term gain. The run-up to the elections will propel the government to push through pending legislation and allow some large, fast-tracked projects to get off the ground. For businesses, patience is, as usual, the key.

Shehla Raza Hasan is policy director at CBI New Delhi. shehla.hasan@cbi.org.uk

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