India Needs More Foreign Investment In Infrastructure

People migrate to cities to share the infrastructure and other resources in urban areas. But when more and more people compete to share infrastructure, a crisis ensues.

The population of Indian cities has grown manifold in the past few decades. This exerts enormous stress on the existing infrastructure. For example, when the population of a city grows, there are more people on streets; more vehicles competing for the road space; more people in the airports; and higher demand for better sanitation and water supply. Without greater investment in sanitation and water supply, the quality of such services is likely to decline when more people live in cities.  As Indian cities are so densely populated,  and average income levels so low, it may seem that we do not have enough resources to build better infrastructure. But Indian cities seem to be productive enough to fund infrastructure. The central and state governments play a much larger role in the management of Indian cities, and this leads to lower investment in infrastructure.

Government, however, is not the only entity that can build infrastructure. Greater private participation is necessary. In the early 19th Century, much of the infrastructure in the United States and England was provided by private enterprises. The Union Urban Development Minister M Venkaiah Naidu has invited German firms to invest in infrastructure in Indian cities. Naidu thinks that foreign investment is necessary because 40 per cent of Indians will live in cities by 2030.

According to an estimate by Deloitte, India must raise its spending on infrastructure to 10 per cent of its GDP to grow by nine per cent every year. As the amount of capital needed to build better infrastructure is enormous, this would be impossible to do without foreign capital. The Modi government, for example, had to loosen the fiscal deficit target to spend more on infrastructure. Investors and rating agencies did not respond well to this. When the government spends more than it can take in as taxes, not surprisingly, the economy performs poorly.

To understand what this mean, consider this analogy. How large would have been the software industry in India without foreign investment? The software industry as we see today would not even have existed without foreign investment, without globalisation. The same principles applies to infrastructure too, though most people find this difficult to believe because there is insufficient globalisation in many aspects. This is why infrastructure in India has not kept up with the growth of the private sector.

As infrastructure projects take even 10-30 years, firms need large amounts of capital, and long-term plans to get involved in it. The government has often invited private firms to fund half of the infrastructural needs of the country through public-private partnerships. Very few Indian firms would be able and willing to make such huge capital investments. Investors are not willing to invest in such projects because the policy atmosphere is quite uncertain. Land acquisition is unusually difficult in cities. Inflation in India has been high for much of its Independent history, and this makes it almost impossible for firms investing in infrastructure projects to make long term plans. For greater foreign investment to happen, all this needs to change.