India faces a shortfall of as much as $190bn in financing key infrastructure projects as the global crisis chokes off urgently needed capital, according to a study by McKinsey, the management consultants.

Infrastructure development is one of the most important challenges facing New Delhi as it strives to sustain high levels of economic growth. The Indian government has identified the need for $500bn (385bn, �357bn) in infrastructure spending between 2007 and 2012. But a liquidity squeeze in the local banking system and the draining away of foreign investment has cast doubt on this goal.

Decades of underinvestment in roads, ports, airports and power has left the country crippled by a severe infrastructure deficit.

Roads in the main cities are frequently clogged with heavy traffic and 90 per cent are structurally unsuitable for loaded trucks. Ports are running close to capacity.

Financial constraints threaten to block a transformation to a more modern economy.

"Structural impediments in the financial system coupled with the global credit crisis will constrain capital flows to the sector, perpetuating the deficit in core public goods and persistent inefficiencies in the economy," the study said.

Some economists claim that if India improved its physical infrastructure the country's entrepreneurial drive would comfortably propel it to double-digit economic growth to rival China's. Frequent comparisons are made between China's focus on infrastructure development and India's often Victorian-era systems.

According to a government blueprint, a quarter of new investment in core infrastructure is expected to come from the private sector.

New projects include the $50bn Delhi-Mumbai industrial corridor, high-speed rail links between main cities and improved cargo handling at ports. The country also aims to have 500 airports operational in the next decade.

To avert a funding shortfall in infrastructure development "that India can ill afford", McKinsey called for urgent reform of the financial system to free up capital, attract new investors � such as mutual and pension funds, and overseas infrastructure funds � and new mechanisms to facilitate investment.

Its study was critical of restrictions on insurance, pension and provident funds, a shallow bond market and constraints on external commercial borrowings.

A separate study by the Federation of Indian Chambers of Commerce and Industry and Deloitte, the audit firm, earlier this week highlighted similar concerns. It said the country's task of mobilising $320bn for infrastructure over the next three years was severely hampered by a lack of policy clarity, cost escalations and limited long-term finance.

Copyright: The Financial Times Limited 2009