Friday, June 6, 2008

India favours investment in infrastructure

by Jo Black

Addressing a session on infrastructure, growth and inflation, Mr. Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, said that currently inflation is not in the comfort zone and interest rates can come down only if inflationary expectations are brought under control.

He expressed his hope that two factors will have a moderating effect on inflation: commodity prices should ease with the slowdown in the world economy and food prices should decline with the positive news on agricultural production.

He pointed out that the government has a very significant agenda for infrastructure so that infrastructure investment was expected to play a counter-cyclical role to offset any impact of the global economic slowdown.

He said that the neglect of infrastructure over the last 15-20 years has had an adverse consequence, and as a result, it will take another 10 years for results to show from the current increase in investment in the infrastructure sector.

However, he remained confident that the right policies are in place and infrastructure constraints are being eased.

He went on to highlight some successes in the infrastructure sector.

In railways, he expected large investments to take place in the next 5 - 10 years in the industrial corridors that are being planned.

Opening up container traffic movement to the private sector has been a success, with the private sector now having a 10% share in container movement.

In the power sector, some states have been successful in bringing down their transmission and distribution losses.

He was also optimistic that generation capacity is likely to increase at a much faster rate in the 11th Plan than in previous years, given that project planning at the beginning of the Plan period has been much better.

Mr. Ahluwalia highlighted that while policies are in place, there are still many hurdles to implementation including land acquisition, environmental clearances and allocation of natural resources.

So the real challenge is to ensure that projects move forward.

In addition, the government is working to ensure that projects have access to adequate long-term rupee debt finance.

Mr. P Chidambaram then addressed the session and talked about how the government is working to maintain the growth momentum and control inflation in an age of financial turbulence.

He highlighted four significant crises today: rising prices of food and fuel together with rising fiscal deficits and financial instability in many countries.

The government has put in place policies to increase food production and strengthen the public procurement and distribution system in order to tackle the rise in food prices.

The government cannot do much to control fuel prices, which have risen globally.

On the fiscal front, the prudence of the government has paid off: the fiscal and revenue deficits are under control.

Even after factoring in the off-budget items, the revenue deficit was 2.0 per cent of GDP in 2007-08 while the fiscal deficit was 3.3 per cent.

He pointed out that no country has been immune to the financial instability and India has also been affected.

However, Indian regulators have been more vigilant in ensuring transparency and disclosure so that the losses have been manageable so far.

Amidst these crises, he was confident that India will grow at a rate of more than 8 per cent this year and at a higher rate in the coming year.

However, this growth needs to be inclusive and the government has launched many programmes in the social sector in order to achieve more inclusive growth.

He said that growth had given his government the opportunity to increase funding for a wide range of programmes in the areas of health, primary education, rural infrastructure, old age pension and food security.

Finally, he said that all the good work of this government could be wiped out if inflation is not brought under control.

He expressed his unhappiness with sections of industry that are not co-operating with the government.

For example, they have not passed on some of the fiscal benefits given by the government.

He issued a warning that if fiscal and monetary measures were not effective in controlling inflation, it would become necessary to back them up with administrative measures.

He appealed to industry to work with the government in order to achieve stability in the long term even if it had to eschew some short term gains.

 

 

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