India: Growth Potential Remains Subservient to Infrastructure Deficiencies

The Indian economy and population continue to rise but infrastructure development has not kept pace with this growth. As a result, energy shortages and traffic gridlocks are a daily occurrence and this affects the productivity of the residents and the country’s economic potential. One would assume, therefore, that New Delhi’s response would be to accelerate development projects throughout the country. This would a false assumption because, according the Indian Central Bank, the value of planned ventures decreased by 52 percent in 2011-12.

One reason for this disparity is the Indian – and in all honesty, South Asian – mentality of waiting too long to begin anything. Indeed, J.P. Morgan has noted that city development in India is based on the attitude “wherein the infrastructure problems are being sorted out after population has started to move in.” Which is not to say that no development is taking place. Examples of new projects include the Sea Link, a metro line and the Eastern Freeway in Mumbai. While these projects, when completed and functional, will greatly assist in alleviating the misery of thousands of daily commuters, it’s unclear if they will ever be finished. In addition, they do not solve the underlying institutional problem of reactive rather than proactive solutions.

One example of the impact of this mentality is the Delhi Gurgaon Super Connectivity Limited’s management of the Delhi Gurgaon Expressway. This public-private partnership project cost $200 million and “is part of the Golden Quadrilateral connecting Delhi with Mumbai.” While quite successful in alleviating some road congestion, it’s management leaves much to be desired. Indeed, the Indian judiciary “suspended toll collection during rush hour for a few weeks in September” due to a conflict between New Delhi, the management company, commuters, and residents and, because of traffic jams at tollbooths. Since then, tollbooth operators have been forced to stop cars manually, and get cursed, and in some instances, shot at.

Even the overtly successful Sea Link, which opened in 2009, is not yet complete and symbolizes the government’s inability to ever finish projects of similar scope. One could argue, however, that New Delhi is not the only culprit in these cases as there are a multitude of other reasons for these failures including villagers who will not give up their land and corruption.

Some issues though can be easily resolved. For example, poor landowners are no longer content to simply sign a piece of paper and move away. They now demand just – in some cases more-than-just – compensation and if the company is unable to move them from the land in a suitable time, renege on the agreement. This places development companies in a bind because the time frames generally get shifted because of government bureaucracy over which they have little control. Decreasing the amount of red tape, therefore, could solve this problem.

On a positive note, New Delhi has announced that it intends to spend up to a trillion dollars between 2012-17 on development projects. On the other hand, it has not said where this money will come from. The government clearly does not have such resources – hence the reason for public-private partnered development projects – and given its poor record, the private sector will be very hesitant to lend the funds. In addition, corruption dissuades legitimate firms from even entering this sector. This means that if/when these projects are completed, their quality is far from advertised.

India is one of the two Asian superpowers – the other being China – and it’s very difficult to imagine Beijing going through such hassles. The question for India is whether it can overcome these problems fast enough to reach its economic potential and remain competitive with China.