Macroeconomics

Infrastructure development: Current bottlenecks and way forward

  • Blog Post Date 19 February, 2020
  • Print Page
Author Image

Meenakshi Sinha

Indian School of Business

Meenakshi_Sinha@isb.edu

Infrastructure development remains a key constraint in India’s economic development. Given the budgetary constraints of the government, private financing for infrastructure provisioning through public private partnerships has become imperative. In this post, Meenakshi Sinha discusses the challenges and issues of partnership agreements between the public and private sectors, and the need to explore alternative pathways for land acquisition that work to the benefit of all stakeholders.

Infrastructure development remains a key constraint in India’s economic development (Nataraj 2014). Although investments in infrastructure alone do not guarantee growth, in general, scholarly studies estimate that strong association exists between availability of infrastructure provisions and economic growth measured in terms of gross domestic product (GDP) (Mishra et al. 2013, Nataraj 2014). In other words, industrial growth is contingent upon development of other infrastructural facilities such as transportation, energy and electricity, and communications (Economic Survey 2018-19). Moreover, infrastructure development facilitates provisioning of social services (Chong and Poole 2013). Infrastructure development, then, is at the crux of enhancing productive investment, job creation, and poverty reduction by ensuring inclusive growth (Infrastructure Finance, 2019). However, infrastructure development in itself remains both a financial and a regulatory challenge.

Infrastructure provisioning requires massive investments, often over a prolonged duration of time, coupled with procedural delays and returns expected after a long period of investment. Consequently, given the high fiscal requirements, particularly of large-scale infrastructure development projects, public investments alone may not be sufficient to fund infrastructure development in India. Consequently, time and again there have been recommendations to encourage private participation in infrastructure development through various forms of public-private partnerships or PPPs (Planning Commission, 2008; Ministry of Finance, 2015; Economic Survey 2018-19).  However, opportunities for PPPs in India, in general, are constrained by a weak regulatory environment (Nataraj 2014; World Bank, 2006). Lastly, cumbersome land acquisition processes continue to add to the cost of already heightened expenses for infrastructure development (Mishra et al. 2013, Nataraj 2014). In this post, I outline some of the issues surrounding the aforementioned bottlenecks impeding infrastructure development in India and contemplate plausible solutions that can mitigate costs of infrastructure provisioning in the future.        

Public private partnerships

Given the budgetary constraints of the government, private financing for infrastructure provisioning through PPPs has become imperative. However, partnership agreements between the public and the private sector have their own challenges and issues. International experience suggests that in order to maximise benefits from PPPs, they must be executed in an environment of: a clear and stable policy and regulatory framework with strong legal protection for investors; an efficient oversight and dispute resolution mechanism; an effective public sector capacity to manage and implement PPP contracts; allocation of appropriate PPP arrangement to a particular project; and lastly, adequate risk-sharing between the public and the private sector (Chong and Poole 2013; Nataraj 2014; van der Geest and Nunez-Ferrer 2012; World Bank, 2006). The absence of aforementioned prerequisites can lead to risks of mistrust and accelerated conflicts between the involved stakeholders, compromise of public exchequer and rent-seekingby the private sector actors, and ultimately inordinate delays in project execution – even temporary or permanent suspension of the project resulting in time and cost overruns (Mishra et al. 2013, Nataraj 2014).

Although governments at both the central and state levels in India have nudged for PPP models for infrastructure development, a promotive ecosystem for PPPs to flourish is yet to evolve. The Eleventh Five Year Plan for the years 2007-2012 emphatically pushed for PPPs. The plan was followed by another report by the Ministry of Finance in 2015 (popularly known as the Kelkar Committee report) on the status of PPP projects in India, and proposed reforms to enhance the capacity and efficiency of PPPs in the country. Prior to the Eleventh Five Year Plan, a Committee on Infrastructure (CoI) under the Chairmanship of the Prime Minister in 2004 recommended several measures in order to maximise the role of PPPs in India (Planning Commission, 2008).

Nonetheless, despite the recommended reforms by the successive committees, according to World Bank’s ‘Doing Business 2020’ report, India continues to be a laggard when it comes to contract enforcement (World Bank, 2019). While India’s overall ranking is 63 out of 190 countries in the ease of doing business, in the area of enforcing contracts, it ranks 163rd. The other area of concern is of property registration, where the country again lags behind several other economies to a position of 154 (World Bank, 2019). PPPs are essentially contracts, and in the absence of efficient monitoring and taut enforcement, problems of rampant rent-seeking and loss to public exchequer have been witnessed across projects (Haldea 2019, Singh 2018, Sinha 2019).         

Availability of land

Availability of adequate land remains India’s single biggest constraint to infrastructure development. Delays in land acquisition lead to cost overruns, dismaying the private sector to invest in infrastructure development projects. Land acquisition through compulsory takings or through legal fiat of ‘eminent domain’ has been a prevalent practice in India. However, in recent years, compulsory acquisition of land has come under scrutiny for widespread conflicts over issues of displacement and inadequate compensation to the land losers (Chakravorty 2013, Nataraj 2014).  The discontent over issues surrounding compulsory land acquisition has led to the formulation and enactment of the ‘Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 201’ (henceforth, the Fair Compensation Act, 2013). The Fair Compensation Act, 2013 mandated enhanced compensation to land losers and introduced provisions for generation of consent prior to the land acquisition (see, Chakravorty 2013). However, scholarly appraisals of the law called into question both the manner in which the law set out to determine the compensation granted to the land losers and the tortuous procedures established by the law for land acquisition (Chakravorty 2013, Ghatak and Ghosh 2011).   

Beyond the dissonance with the legal processes leading to compulsory acquisition, the idea of compulsory acquisition of land itself has been reconsidered at instances by various quarters, such as scholars, policymakers, etc. While the compulsory acquisition of land undertaken by a legally empowered state authority eliminates problems of holdouts, it is difficult to rule out possibilities of cost-incurring litigations that are imminent to the compulsory acquisition of land.

To this end, suggestions have been made for formulation of more participatory approaches to land acquisition. For instance, Ghatak and Ghosh (2011) have advocated for an auction-based approach to land acquisition over state-driven compulsory acquisition of land (see, Ghatak and Ghosh, 2011 for more details). Likewise, there have been other approaches to land acquisition such as land-pooling and town-planning schemes, which offer alternative pathways to prevalent forms of compulsory acquisition, by persuading land losers to become stakeholders in the development projects (Ahluwalia and Mohanty 2015, Sanyal and Deuskar 2012). It must be noted that, even in cases of any of the alternative schemes of land acquisition, there may be some element of coercion involved in the sense that, when the land is acquired or pooled, the land losers have to be convinced to part with a portion or whole of their land in return for some future benefits. Overall, given the scarcity of land as a resource and its ever-increasing demand, there is a need to chalk out alternative pathways to land acquisition that work to the benefit of all stakeholders. 

Conclusion       

The deteriorating quality of infrastructure development in India needs urgent attention if the country intends to realise its economic and growth potential. In order to do so, in addition to the available provisions for public investments, efforts must be made to adequately channelise the opportunities for private participation in the sector. Although no set of measures can guarantee absolute rates of success for PPPs across all sectors of infrastructure development, a well-considered set of reforms, if carefully implemented, can lay down a path for future advancement and augmentation in the sector. As outlined above, many of the reforms have already been laid down by successive government committees and delegated authorities. A concerted effort must be made to constantly build on the proposed reforms, through both rigorous periodic evaluations and scrupulous mechanisms of execution, before they run out of steam. The other area of concern that needs addressing is of land acquisition. Here again, we need to move in a direction that is realistic to the extent it promises inclusiveness to all the involved stakeholders, without compromising on prospects of industrial and infrastructure development, which again are important for economic prosperity and wealth generation.

Note:

  1. Rent-seeking refers to the act of seeking financial gains or benefits or share over scarce resources by manipulating the system of distribution of economic resources. Companies often do this through political lobbying. Rent-seeking can lead firms to secure unfair advantages and hampers market competition. Rent-seeking also leads to rise in economic inequalities by concentrating scarce resources in the hands of small groups. 

Further Reading      

No comments yet
Join the conversation
Captcha Captcha Reload

Comments will be held for moderation. Your contact information will not be made public.

Related content

Sign up to our newsletter