Why India needs a robust infrastructure plan to fuel its $5 trillion economy dream

In the aftermath of the outbreak of the Covid-19 pandemic and the resultant lockdowns, the Indian government stepped up capital expenditure, especially on infrastructure. This was not just prompted by the immediate need to shore up the domestic economy, cushioning it against the inevitable crash in economic activity, but the government also spotted an opportunity to address gaps in the country’s infrastructure.

This increase in government spending is apparent in the gross domestic product (GDP) data for the second quarter of FY24 (Q2FY24). Growth in the bellwether of investments, gross fixed capital formation (GFCF), was at a five-quarter high of 11% year-on-year. Meanwhile, government spending rose by a 10-quarter high of 12.4%, thanks to the focus on capital expenditure. Besides, the investment rate, measured as the nominal GFCF-to-GDP, rose to 30% in Q2 from 29.1% a year ago.

The central government is estimated to spend about `23.3 lakh crore as capital expenditure between FY22 and FY24, including the outlay of Rs 10 lakh crore this fiscal. Thanks to this increase in outlay, India rose by six places to rank 38 out of 139 countries in the seventh edition of the World Bank’s Logistics Performance Index 2023. The index takes into account factors like physical infrastructure, customs clearance, tracking, and timeliness. The government aims to move to rank 25 by 2030.

As India aims to become a $5-trillion economy in the next few years and a $30-trillion economy by 2047, such spending on infrastructure will play a key role. What’s more, with countries looking at a China+1 diversification strategy, it becomes even more imperative for India to expand and modernise its physical infrastructure over the next few years to become a viable alternative to foreign investors.

A recent report by consulting services firm RSM India highlighted many of these concerns. “When we compare India’s logistics footprint against the world’s three other large economies, the US, China, and Japan, it is evident that India has far more distance to cover in terms of logistics infrastructure, equipment, processes, and mindset. Road transportation constitutes a whopping 60% in India, in comparison to Japan (10%), China (30%) and the US (37%),” it pointed out in its report ‘The Logistics Navigator’.

Suresh Surana, Founder of RSM India, and Samir Kolte, Executive Director–Operations Consulting at RSM India, point out that the National Logistics Policy unveiled in September 2022 targets bringing down the logistics cost from about 14% of GDP to 10% of GDP in the next five years.

“This would require significant infrastructural investment in the development of ports, multi-modal logistics parks, rail terminals, dedicated freight corridors, inland waterways, and continued development of the highway network,” they say, adding that enhancing logistics and mobility through investments in rural infrastructure, green initiatives, renewable energy integration, electric vehicle (EV) charging infrastructure, and smart city development are also important.

Current capacity

Investing, expanding, and modernising infrastructure has been a key focus area for some time. India has about 6.67 million km of road network, which is the second largest in the world at present. The country currently has the fourth-largest railway network in the world, with about 127,000 km of track length. But with a burgeoning population and a growing economy, these are clearly not enough. (See chart Current Capacity)

According to estimates, India invested about $1.1 trillion or Rs 57 lakh crore on infrastructure between fiscals 2013 and 2017.

The government set up the National Infrastructure Pipeline in 2019 for the five years from 2020 to 2025, with an estimated outlay of Rs 102 lakh crore. The initiative aims to help build world-class infrastructure across the country.

“The National Infrastructure Pipeline is implementing various projects to improve surface connectivity to ports, which account for 95% of international trade by volume,” says Kiran Chonkar, Partner-Corporate Finance and Investment Banking at BDO India.

Way Forward

Leading the way in this endeavour are the nodal ministries. For instance, the railways is looking to launch at least 3,000 trains over the next five years and add 50,000 km of new tracks in the next decade as it tries to decongest the rail network and improve transport for both passenger and freight traffic.

Highway construction, too, is expected to gather more pace, and the focus will be on the high-speed movement of goods. The National Highways Authority of India is looking to increase the total length of high-speed corridors to 50,000 km by 2047 from about 3,913 km in 2023. Meanwhile, total port capacity is expected to increase from the existing 2,600 million tonnes per annum (MTPA) to over 10,000 MTPA by 2047. The government also plans to increase the number of airports in the country to about 220 from the current 149 in the next five to seven years.

Manish Sharma, Infrastructure and Logistics Leader at PwC India, notes that since 2014, the government has made infrastructure a priority and the speed of construction and implementation has been improving every year. “A clear focus of the government has been infrastructure creation ahead of demand such as Dholera and Shendra-Bidkin in DMIC,” he notes, adding that the delays remain in legacy projects where either the business case has been weak or in some cases environmental issues have held up progress. Going forward, we need to focus on three areas—reliability, convenience and comfort, he says.

According to CRISIL’s Infrastructure Yearbook 2023, India will spend nearly Rs 143 lakh crore on infrastructure in seven fiscals through 2030, more than twice the near `67 lakh crore spent in the previous seven. While a chunk of it would come from the central and state governments, the private sector will also have to chip in.

Chonkar of BDO notes that more financing is required. “Considering the infrastructure needs of a fast-paced and developing country like India and the vision for a $5-trillion economy, there exists a sizeable infrastructure financing gap. Other than the traditional financing routes and public-private partnership models, tapping global financiers and long funds such as sovereign wealth funds, pensions, and insurance funds is the key to bridging the gap,” he says.

Besides, funds will also be required for the energy transition as the country looks to reduce its carbon footprint in line with its global commitments. “Prominent sectors such as roads and power are expected to remain major contributors, while relatively nascent ones such as EVs, solar, wind, and hydrogen will pick up pace,” CRISIL had said.

There is much still left to do. And the next government will have to work out a clear road map.

@surabhi_prasad