Why India’s poor infrastructure is a detractor

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Infrastructure and the economy

Infrastructure development has been closely associated with economic development, as higher investment in infrastructure leads to greater output. Poor infrastructure not only makes a country unattractive for investment, it also promotes inefficiency.

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India’s poor infrastructure

The International Monetary Fund’s (or IMF) world economic outlook report for 2014 observed that for India, along with other emerging economies, infrastructure bottlenecks are not only a medium-term worry, but can affect near-term growth as well. The quality of present infrastructure was one of the summit’s focuses that several panels addressed.

State of Project Execution Across Sectors

India has found it difficult to attract investment to its infrastructure sector. Yorihiko Kojima, the chair of Mitsubishi Corporation and co-chair of the summit, said “infrastructure companies always invest cautiously in India, partly because different states have different laws and taxation regimes.” He believes that electricity is the most important of all infrastructure needs in India.

How slow is infrastructure implementation?

The primary reason for India’s slow infrastructure development is poor implementation. As we described earlier in this series, the Ministry of Statistics and Programme Implementation’s (or MOSPI) 342nd flash report showed that out of 727 infrastructure projects on its monitor, 317 had no information on commissioning dates. Of the remaining 410 projects that had a schedule, only five were ahead of time, 123 were on time, and 282 were delayed.

These delays result in multi-fold cost overruns. Plus, once they are commissioned, they become outdated soon and are unable to serve their purpose.

The graph above shows major sectors and their status. The “remaining projects” include projects that are ahead of schedule and those that do not even have a commissioning date yet. For sectors like road transport and highways, power, petroleum, coal and steel, more than 50% of projects on monitor are delayed.

These delays not only affect component stocks of ETFs like the EGShares India Infrastructure ETF (INXX), the WisdomTree India Earnings Fund (EPI), and the PowerShares India Portfolio (PIN), but also banks like HDFC Bank (HDB) and ICICI Bank (IBN) that have lent to these projects.

Since financing for the infrastructure sector is hard to come by, we’ll take a look at the investment requirement of this sector in the next article.

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