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Low capital spending hurts India's growth: Morgan Stanley

November 11, 2005 02:04 IST

Low spending on infrastructure is holding back India's average growth with the actual amount spent beingĀ  miniscule compared to the requirement.

At present, China spends seven times more on infrastructure (excluding real estate) than India, according to investment bank Morgan Stanley's research on 'India Economics - Infrastructure: Changing Gears'.

In 2003, total capital spending on electricity, roads, airports, seaports and telecom was $150 billion (about Rs 685,500 crore) in China, which is 10.6 per cent of its gross domestic product, compared with $21 billion (about Rs 95,000 crore) in India, which was 3.5 per cent of GDP.

India needs to chalk out a national plan to increase infrastructure spending gradually to $100 billion (about Rs 450,000 crore) per annum, about 8 per cent of GDP by 2010, from an estimated $24 billion (about Rs 109,600 crore) in 2004, to push the country on to a sustained growth path of 8-9 per cent, said Chetan Ahya, analyst with Morgan Stanley.

The report said the complexity around infrastructure development in India is unlikely to be resolved quickly. The biggest hurdle is the political environment.

This is evident from the trend in government capital expenditure, which has witnessed a significant cut since the emergence of coalition government in the mid-1990s. The pulls and pushes of the coalition government inhibit a change in spending mix.

Lack of political will to work towards longer payback period oriented infrastructure spending was the overriding generic concern.

Morgan Stanley said first, among other things, the current state of the government balance sheet allows little scope for a major rise in infrastructure spending from public resources. Second, over the years, the ability of the government administrative machinery to handle large infrastructure projects efficiently has deteriorated.

Third, political interference has resulted in a large gap between user charges and the costs of operating infrastructure utilities. Often the government covers the subsidy gap by overburdening the paying customer - mostly industrial users.

In many cases, the gap in collection is due not only to legitimate subsidisation, but also to widespread theft. This is a critical problem, considering that a substantial proportion of infrastructure utilities are owned by the government or government-owned entities.

Fourth, poor private participation is also a hurdle to improving efficiency. Morgan Stanley said for many infrastructure sectors (such as electricity), the only way to ensure significant improvements in service is privatisation.

The electricity distribution network is over 90%-owned by the government or government bodies.

However, it will be difficult to achieve any major privatisation of public utilities.

Despite the challenges, Morgan Stanley expects a rise in infrastructure spending over the next few years. Infrastructure spending peaked to 6.1 per cent in 1991-92 before declining to a 33-year low of 3.3 per cent of GDP in 2002-03. Following an improvement to 3.5 per cent of GDP ($24 billion) in 2004-05, it is expected to rise to 4.7 per cent of GDP ($47 billion) in 2008-09.

Morgan Stanley expects the rise in infrastructure investments to help drive a pick up in manufacturing investments although at a gradual pace. Private corporate capital expenditure plus public investments are expected to rise to 13 per cent of GDP in 2008-09 from an estimated 10 per cent in 2004-05.

This rise in investments in turn should help improve employment growth in the organised sector, which has started to recover after recording negative growth from 2000-01 to 2003-04. Except for telecom, the cost of most infrastructure services is 50-100 per cent higher in India than in China.

For instance, average electricity costs for manufacturing in India are roughly double those in China. Railway transport cost in India is three times that in China! Similarly, the average cost of freight payments as a percentage of imports is about 10 per cent in India, compared with around 5 per cent in developed countries and an overall global average of 6 per cent. High costs aside, the simple lack of basic infrastructure facilities is impeding efficiency of production.

The gap is evident in almost all areas of infrastructure, including roads, airports, seaports, railways, electricity and industrial clusters/estates, Morgan Stanley said.

India's strengths of a huge skilled and semi-skilled work force, entrepreneurial expertise and natural resources are currently being inadequately utilised because of lack of infrastructure.

According to UN estimates, the working-age population (15-64 years of age) in India will increase by 71 million to 762 million in 2010. India is set to be the largest contributor to the additional working-age population globally over the next five years, accounting for 23 per cent of the worldwide increase, according to UN estimates.

India already has an unemployed population of 36 million, based on official estimates (actual unemployment could be double this). India is undergoing a transition, in which the working-age population is likely to keep rising faster than the non-working-age population.

The manufacturing sector is constrained by relatively inefficient and high-cost infrastructure - namely roads, railways, airports, seaports and electricity. The lack of adequate infrastructure is becoming a constraint on inter-state as well as global trade.

With the exception of a select few, Indian companies that have globally competitive cost structures are not able to scale up their operations. Low government spending on infrastructure hurts high employment-generating, labour-intensive small enterprises the most, the report said.

Source: source