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India's Third Giant Leap

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India's $ 1.5 trillion problem
Fri, 28 Jan Pre-Open

The Indian growth story has been the centre of attraction for people around the globe. While the entire world has been burdened with one of the worst known recessions, India's GDP has grown at spectacular rates. But will this continue?

It certainly can but the hurdles to this are many. One of the biggest hurdles that India faces is its poor state of infrastructure. Even if our policy administrators wake up and start working towards it, the task is still difficult to achieve. The reason for this is lack of finances.

As pointed out by a leading daily India would need to invest around US$ 1.5 trillion towards infrastructure if it wants to achieve a growth rate of 10%. The bigger worry is how India would get the funding for this huge investment.

The government has planned to invest around US$ 500 bn towards infrastructure in its ongoing five year plan. However, with the burgeoning fiscal deficit, it is doubtful that the country would be able to spend the budgeted amount. Moreover, with its debt levels touching 60% of total GDP, it is doubtful that the government would turn to the debt markets to find an answer. The Foreign Direct Investment (FDI) which is another good source of funds has also been slowing down in the recent past.

The next possible source of funding would be the country's banks. But herein lies another problem. The country's banks are financially constrained. They would need to raise huge amounts of capital to meet the regulatory requirements, if they were to fund the infrastructure investments. This would mean that they would have to access the equity markets and raise cash through public offerings. But this would lead to a dilution of the promoter's stake. But most of the banks in India are owned by the government, who is perpetually reluctant about diluting its stake in its golden hen - the banks. The regulatory requirements for foreign banks are so strict that they are hesitant about raising their stake in the Indian markets.

So, the puzzle deepens for the Indian government. The investment towards infrastructure is essential. Poor logistics and infrastructure causes waste that result in losses for the Indian economy. Unless these holes are plugged, India's dreams of attaining the magical 10% growth number, seems to be a distant dream.

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