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An analysis of infrastructure development in india

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Published: Mon, 5 Dec 2016

Infrastructure development plays a very significant role in its economic growth of a nation. Taking examples from other countries, a fast growing economy drive demand and lead to an even faster development of infrastructure. However, India’s case is a bit disappointing, which currently ranked 91st out of 139 nations in quality of infrastructure according to IMF, though India has always been quoted as the country with highest growth potential after China. The worst is low quality infrastructure system becomes an obstacles presenting India from breaking into the world of developed nations and bringing the citizens out of poverty. The following will summarize the reason for this underperformance and discuss the potential and treat along the path of development.

Summary of excerpts

Numerous problems now causing the failure of India’s infrastructure are land clearance issues; insufficient compensation, unclear regulations, access to financing etc. After all, Indian’s philosophical attitude and the democracy system contribute a deep-rooted cause on the failure. Comparing with China, China used infrastructure as a policy instrument and political tool to reduce poverty and generate growth trading off with the cost of enlarged inequality and huge regional disparity, while India emphasis more on redistribution which proved to be unsuccessful for it is self-destroying the impetus to generate robust and sustained growth. China managed to have strong integration and coordination between policy-making and implementation. India is more technical rather then political driven and adopt a more participatory and democratic approach, causing duplication of responsibilities and weakened accountability among different levels of government and political parties, resulting in inefficient implementation and resource allocation.

Nevertheless, Indian Government did have a strong will in growing infrastructure. Structural and procedural reforms at various government levels have been taken place to facilitate infrastructure growth. Apart from local private capital and return from public user fees, Indian Government acknowledge that foreign investment is major source of investment into infrastructure sector, therefore she is providing more flexibility towards capital flow and is setting policy to lower the risk and increase private capital return.

Though the potential is promising, India inevitably face different present and future challenges during the path. Over the subsidy and investment issues, a good economic as well as incentive balance between tax-payers, public users, private local and foreign investors must be strived for. Consequently, pricing, tax regimes, stability in exchange rate and real interest rates will be the other conditions to formulate the model. Also, a transparent and equitable regulatory framework, reliable judicial system with efficient dispute resolution mechanism will be vital. Given Indian democracy has got its stand in the decade of poverty, it will be a real challenge for this system to prove that it can lead the way to growing prosperity over this transition path.

Introduction on India inward and outward international investment

FDI can leverage development efforts in a number of ways, including boosting export competitiveness; generating employment and strengthening the skill base as well as enhancing technological capabilities, enriching financial resources for development and help integrating a country in the international trading system and eventually promoting a more competitive business environment. Following an overview of the infrastructure development in India, it is again a bit disappointing to find that inward and outward international investment sector have not been developing on its full potential either. According to United Nations Conference on trade and Development’s report, India’s FDI inflow in 2008-2009 is in the ninth place, behind Russia Germany and Saudi Arabia, while China is in the second place just behind US. For FDI outflows, India is not among the 20 top economies. The next part will summarize the performance of India in this area and discuss the problem and potential for growth.

Summary of excerpts

India’s outbound FDI has been functional and is market oriented rather than political. For example, investment aiming at acquiring raw material, acquisitions in the IT and IT services sectors to leverage IT development. Skewing towards the service sector and towards countries with high income and established large markets are found in India’s OFDI. This also explains why Indian OFDI went down during financial crisis in 2009 while Chinese OFDI doubled. Indicating that China’s OFDI is mainly political, and depending on her own security and economic interests rather than inducing by market forces.

It was after the 1991 reform that inbound FDI into India become more important, mainly because of the inward looking strategy which the government of India has adopted over the years. In recent years, though India has significant rise in IFDI inflows and has been regarded as the second most attractive destination for IFDI after China, it still receives far less IFDI flows than China and is behind HK and Russia etc.

By linking between IFDI and economy growth, empirical study suggest that in order to attract foreign investment, an economy has to reach a threshold level, instead of a blind belief that IFDI cause economic growth in case of underdeveloped countries behind that threshold. Inducing to a thought that India need to be equipped with her education, technology and infrastructure before being qualified to reap the full potential benefits of inbound FDI.

Looking more detail into what is lagging behind the threshold, abundant deficiencies have been identified and is found unsatisfactory by outside investors. As mentioned above, poor state of infrastructure is the most apparent problem. Rigidities in Indian labor markets causing inefficient labor market, this reduce overall competitiveness of Indian labor. Though having well defined legal system, enforcing contracts is costly and timely in India, which is another core factor damaging business incentive. Another issue is with health and primary education, which is a potential threat for India to truly enjoy her demographic dividend. Though the country has a huge working age population, a shortage of talent has already been observed, creating negative repercussions on both OFDI and IFDI. The above persistent business environment problems are what the Indian government have to put their priorities on in order to achieve the her attainable dynamic growth potential.

Personal thoughts

Probably India will not be able to follow the same stir-fry strategy of China, for it lack the conditions to have central planning development, export-led growth, to fund high quality infrastructure by tapping the capital gains on state land from economic growth etc. In this part, instead of further criticizing India for its poor government capacity, slow decision-making, bulky procedures, bureaucratic inefficiency and so on, which may be inevitably inherited from colonial rulers, and instead of comparing her with China unfairly, I try to rationalize all these into the projection of her growing trajectory towards 2020.

India is trying to apply the development model of “small government and big society”, which has its own nature benefit under the law of market economy. This model also generate greater economic recovery ability, such a society will have a corrective mechanism to prevent the problem from deteriorating on a timely manner whenever there is an economic problem. In the recent global financial crisis, India is one of the less affected one and the economic recovery is remarkably fast. While other countries in the world are urging for looser monetary policy, India has quietly ended hers. India quickly run out of the shadow and return to 8% GDP growth. India’s model does have a place worthy of study. This mechanism may be India’s strength for auto-corrections and self-balancing over the growing track. This is also good model in fitting the technocratic genes of Indians and matches their desire towards check and balance, ensuring rationality and achieving managerial efficiency.

Though India has not achieved its desired growth, which is also a by-product of “small government and big society”, creating various problems which constrains economic development and foreign investment, the undefeatable fact is India owns a large potential market demand. India’s economy today is about a quarter of the size of China, is it possible for India to surpass China within ten years? My own opinion is that it won’t. Towards 2020, India will continue to move piece by piece through improving the condition for economic growth, e.g. develop better vision for growth (their strength overall), show government commitment and political will, boost investors’ confidence, have further open policy and remove unnecessary roadblocks, make human capital more productive and improve education before turning demography to a threat. Cooperation with China will continue with am aiming to enjoy mutual benefit between the two great economies which have different strength and weaknesses. Continuous double digit growth will be possible towards 2020.


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