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How the infrastructure slowdown has hurt India
India’s growth story is getting increasingly gloomier. The growth rate has plunged from 9.3 per cent in 2010-11 to less than 5 per cent.
In a recent speech, Reserve Bank of India deputy governor K C Chakrabarty highlighted infrastructure sector troubles.
Infrastructure sector is the backbone of the economy. They are support structures – like roads, power, telecommunication and others. A solid infrastructure makes an economic activity efficient and leads to more productivity.
As important as they are, infrastructure projects are not easy to undertake. They are costly, often commercially unviable, and take a long time to generate profits. They also need a lot of initial capital investment, which means high debt levels. Such projects are thus risky. To top it all, they are subject to various regulations.
Here is a blow-by-blow account given by the RBI deputy governor:
Currently, more than 50% of infrastructure projects are stuck due to regulatory hurdles like lack of approvals and delays in land acquisition. Certain sector-specific bottlenecks --- like the one in the telecom sector after the Supreme Court’s judgment in the 2G case --- leading to increase in expenses and delays in completion. This also puts pressure on the banking sector, as banks lend money to such projects and they turn bad
Road building blocked
Against a target of awarding road projects aggregating 50,621 km during five years to March 2013, approximately less than 1/3rd have been awarded. Making things worse, many of the projects awarded have yet to see commencement of work due to problems in achieving financial closure, delays in land acquisition and obtaining environmental clearances. So there are less roads to travel.
Out of 16 Ultra Mega Power Projects (UMPP) planned, contracts for only 4 are awarded. Out of this, only one has become operational and another project is nearing completion, and that too much beyond the scheduled dates. Even the one project that has commenced operations is running much below capacity. Lack of clarity on coal import, forest clearances and land acquisition delays are the main hurdle. Without power, production of goods and services are affected.
Crude oil and natural gas are key sources of energy. Government allotted 251 blocks for exploration of crude oil and natural gas under the New Exploration and Licensing Policy. Good news: 110 have reported discoveries. Bad news: only 6 are actually operational. This means more oil will be imported. So, there is no drop in oil bill for India soon. Cue for widening of current account deficit.
Rs. 7,86,045 crore
Banks have lent Rs. 7,86,045 crore to the infrastructure sector in 2012-13. This is up from Rs 7,243 crore in 1999-2000, reflecting a compounded annual growth rate of 43.41%. In contrast, bank credit to all industries rose 20.38% over the same period. This means banks are lending more to infrastructure sector today than 13 years back.