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The $1 trillion infra push: Where's the money honey?


The $1 trillion infra push: Where's the money honey?
After being lampooned in the media, the government has decided to kick start the economy once again, by pushing the infrastructure agenda. The Prime Minister's meeting on targets for the infrastructure sector held late on Wednesday has said that $1 trillion is needed in the next five years to implement infrastructure projects. Here are six reasons why the $ 1 trillion target is far fetched, over ambitious and can be dismissed.

Fiscal profligacy of the past leaves the government with no elbow room to fund large projects


The government is facing one of its worst budget deficits at 5.9% of GDP. It just does not have the money to spend on large infrastructure projects. With economic growth rates slowing the revenue mop up through tax collections is likely to dwindle. And, at a 5.9% fiscal deficit, the elbow room to fund gigantic projects is minimal. A press release issued by the PIB reads thus, " Infrastructure needs over $ 1 trillion in the next five years. The government alone cannot invest this amount. Therefore importance being given to PPP (Public Private Partnership)".

Private sector cash strapped

The PPP model is fine, but the private sector is already cash strapped with most of the top corporate facing margin pressures and reporting one of the worst quarter financial performances in recent times. With cash flows dwindling, the private sector certainly has very limited resources to invest, especially in projects that have long gestation period like infrastructure.

Foreign investors reluctant given the global mayhem and bureaucratic inertia

A Chinese company was reportedly reluctant to invest in power projects and was looking at other countries, because of delays and other hurdles. Foreign investors are unlikely to invest in the backdrop of the global mayhem and particularly India's weakening fundamentals. A currency that is unstable only adds to their problems.

High interest rates on capital intensive projects a major drawback


Ports projects, road projects and power projects are all capital intensive. If interest rates in the economy are elevated, capital intensive projects are the first to remain unattractive. With inflation stubbornly high, interest rates are unlikely to go down and hence reluctance to invest in infra projects.

Red tapism, land acquisition issues leading to cost over runs and withdrawal by foreigners

According to a news report in the Economic Times, Global power companies such as Chinese giant CLP India are putting on hold investment plans in India, where fuel, tariff and land acquisition problems have jammed the sector, and are considering opportunities in less risky places like the Middle East and Vietnam.

Recently, Statistics and Programme Implementation Minister Srikant Kumar Jena said during Question Hour in the Rajya Sabha, "Basic reason for time overrun is because of land acquisition ....(and) cost overrun is due to time overrun." And, where there is a land acquisition, there are cases being filed, leading to cost over runs.

Cost over runs leading to lower returns

Cost over runs on large infrastructure projects, which is almost certain, leaves very little room for returns, which makes infrastructure projects unattractive.

Clearly, the big infrastructure push is a herculean effort. It will need large resources, change of bureaucratic mindset, better global conditions, lower interest rates and a better financing model.Till India can achieve these the $ 1 trillion infrastructure push is far fetched and overly ambitious.

Read more about: government gdp infrastructure
Story first published: Thursday, June 7, 2012, 9:45 [IST]
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