INFRASTRUCTURE FOR ECONOMIC GROWTH - ECONOMY

INFRASTRUCTURE FOR ECONOMIC GROWTH - ECONOMY

News: Help bring capital into National Infrastructure Pipeline, PM Gati Shakti: FM to NIIF

What's in the news?

●       Finance Minister Nirmala Sitharaman has urged the National Investment and Infrastructure Fund (NIIF) to expand its operations and explore ways to crowd in private capital for projects under the National Infrastructure Pipeline, PM Gati Shakti and National Infrastructure Corridor.  

Infrastructure:

●       The basic physical facilities (roads, buildings, power supplies) and organizational structures (schools, hospitals, banks) needed for the operation of society are known as infrastructure.

●       Infrastructure contributes to economic development of a country both by increasing the productivity of the factors of production and improving the quality of life of its people.

Infrastructure facilitates growth:

1. Increases agriculture production and productivity:

●       Development of the primary sector depends on development of irrigation, power, credit, transportation, marketing, research and development and other facilities.

2. Increases flow of foreign capital:

●       Increases the confidence of foreign investors to do business in India and thus bring FDIs.

3. Employment opportunities:

●       Road and railway infrastructure generate more jobs in construction and maintenance sector.

4. Backward linkage:

●       Economic growth makes demands for infrastructure which further facilitates more growth.

Infrastructure prevents recession:

1. Multiplier Effect:

●       High-quality public infrastructure supports economic growth, generates jobs, and improves the well-being of the citizens.

2. Investment in education:

●       Directly contribute to more productivity, efficiency, and hence higher earnings, and less vulnerability to unemployment.

3. Improvement in productivity:

●       Infrastructure development in sectors such as transport sector improves productivity

●       Studies show 1% growth in infrastructure stock leads to 1% growth in GDP.

4. Key to modern technology:

●       Infrastructure bring new technology which help the country in competition with international players.

●       E.g.: Internet of things, Big Data etc

Government Initiatives to boost infrastructure sector:

1. National Infrastructure Pipeline:

●       It is a group of social and economic infrastructure projects in India over a period of five years with a sanctioned amount of ₹102 lakh crore.

2. National Infrastructure Investment Fund:

●       Launched with an initial corpus of Rs 40,000 crore, aims to develop commercially viable greenfield and brownfield projects.

3. Public-Private Partnership:

●       Government associates itself with private entities to develop projects.

●       E.g.: Golden Quadrilateral, North–South and East–West Corridor.

4. Infrastructure Debt Funds:

●       To address the issue of sourcing long term debt for infrastructure projects in India.

5. Viability Gap Funding:

●       Government financially supports the viability gap to the tune of 20% of the cost of the project in the form of a capital grant from its viability gap fund.

6. Foreign Direct Investment and Infrastructure Development:

●       100% FDI is allowed under the automatic route in sectors such as mining, power etc.

●       FDI is also allowed through the approval route in sectors such as the civil aviation sector etc.

7. India Infrastructure Finance Company Limited (IIFCL):

●       To provide long term finance to viable infrastructure projects through the Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle.

8. Complementary Schemes:

●       Initiatives such as ‘Housing for All’ and ‘Smart Cities,’ are working on reducing the bottlenecks that impede growth in the infrastructure sector.

9. Masala Bonds:

●       National Highways Authority of India (NHAI) launched Masala Bonds in 2017, for raising capital for funding the infrastructure projects in India.

10. Other sector-specific schemes:

Energy Infrastructure:

●       Hydrocarbon Exploration and Licensing Policy (HELP): enable E&P operators to explore and extract all hydrocarbon resources under a single license.

●       UDAY scheme to improve operational and financial parameters of discoms.

●       KUSUM Scheme to install solar pumps and sell surplus electricity 

Transport Infrastructure:

●       Mission Avataran to transform Indian Railways through 100% electrification by 2024.

●       National Highway Development Programme, 1998 includes Golden Quadrilateral and Diamond Quadrilateral.

●       BharatMala Project to upgrade & expand 24800km NHs by 2022.

●       Sagarmala Project: Develop minor ports and improve existing ones.

●       Faster Adoption & Manufacture of (Hybrid &) Electric Vehicles (FAME).

Logistics Infrastructure:

●       Dedicated Freight Corridor: Eastern Corridor: Ludhiana – Kolkata.

●       Multi-modal Logistic Park that interconnects different modes of transport – air, sea, and land.

Communication Infrastructure:

●       Bharatnet Project: Connect all 2.50 lakh plus gram panchayat with broadband National Optical Fibre Network (NOFN).

●       Samarth Udyog Bharat 4.0: Make Indian industry Industrial revolution 4.0 ready by 2025.

Challenges in infrastructure sector:

1. Fiscal Burden:

●       Almost half of the total investment in the infrastructure sector is done by the government through budget allocations.

●       But, the government funds have competing demands, such as, education, health, employment generation, among others.

2. Asset-Liability Mismatch of Commercial Banks:

●       Commercial banking sector’s ability to extend long-term loans to the infrastructure sector is limited.

3. Subdued Investments in PPP Projects:

●       Private sector investment is yet to revive in the backdrop of subdued interest from potential stakeholders.

●       Legacy issues and weak balance sheets have led to limited participation from existing infrastructure players in India.

4. Investment Obligations of Insurance and Pension Funds:

●       Insurance and pension funds are constrained by their obligation to invest a substantial portion of their funds in Government securities.

5. Need for an Efficient and Vibrant Corporate Bond Market:

●       The corporate bond market is still a long way to go in providing adequate financing to the infrastructure sector in India.

6. Insufficiency of User Charges:

●       A large part of the infrastructure sector in India especially irrigation, water supply, urban sanitation, and state road transport is not amenable to commercialisation for various reasons.

●       Due to this, the government is not in a position to levy sufficient user charges on these services.

7. Legal and Procedural Issues:

●       Issues relating to land acquisition and environmental clearances add uncertainty which affects the risk appetite of investors as well as banks.

WAYS FORWARD:

1. Invest in sustainable infrastructure:

●       South Korea, which directed 80% of its stimulus towards green measures, rebounded faster from the 2008 financial crisis than economies in the OECD.

2. Facilitating infrastructure investment:

●       Setting up of a Development Finance Institution (DFI) with an initial capital of ₹20,000 Cr

3. National Monetisation Pipeline:

●       To sell assets created by PSUs such as NHAI, PGCIL, Railways etc. and money raised would then be used for the creation of new infrastructure assets.

India runs among the largest infrastructure programmes in the world and has invested over $1.1 trillion on it in the last decade. An efficient infrastructure is the biggest enabler for growth that can materialize the goal of reaching a 5 trillion-dollar economy in India.