Chidambaram - London Business School

Following is the text of the address made by the Finance Minister, Shri P. Chidambaram at the London Business School today:

"I thank you for the invitation to address the faculty and students of the London Business School. Nestled amidst colleges and universities that date back many centuries, you are one of the younger schools in Britain. You were founded only in 1965, yet your school has carved out a special position for itself. No frequent business traveler would consider his itinerary or his education complete until he pays a visit to your school. I suppose it helps that you are a business school in a world that is increasingly driven by the desire to create wealth. I suppose it also helps that you are situated in London, the undisputed financial capital of the world.

I can say with confidence that if each one of you does a diligent search you will find that you have an India connection - a great grandfather who was in His or Her Majesty's service in India or an aunt who had taught in a mission school or worked in a mission hospital in a remote Indian town or a family member who had adorned the bench of a High Court in India or a cricketer cousin who has just returned after waging battle with Rahul Dravid & Co.

Those connections are memorable and we value them. However, the new connections that are being forged between the United Kingdom and India are more significant and will have an enduring impact on the lives a billion Indians.

I am not a remarkable storyteller, but I have a remarkable story to tell. I accepted your invitation in order to share with you the India growth story, especially the story of the challenge of building infrastructure for the future. As long as the Indian economy was growing at a miserable rate of 3.5 per cent or a sedate pace of 5.5 per cent, the infrastructure in India was not regarded as a major problem. We could live with low speed trains and two lane roads; we could rely, grudgingly, on land telephone lines; we could do with a single airline, a single telephone service provider and a single automobile company making a single model of a car. The infrastructure was inefficient but not inadequate; it was creaking but not cracking.

A high growth rate has changed all that. Since India embarked upon economic reforms and liberalization in 1991, we have witnessed a secular rise in the annual rate of growth. The average rate of growth in the four years beginning 2003-04 has been 8.6 percent; in the last two financial years the growth rates have been 9.0 per cent and 9.4 per cent. The robust growth rate has exposed the grave inadequacies in the infrastructure sectors. It is now widely acknowledged that the state of the infrastructure is a drag on the economy, perhaps by as much as 1 to 2 per cent a year.

The growth rate of GDP that we have recorded is not an accident. It is the result of well-designed and well-articulated policies. We remain firmly committed to fiscal prudence. Our tax rates are moderate and stable. We actively promote investment in the private and public sectors. We encourage both domestic and foreign investment. And above all, we value our engagement with the countries of the world and we are determined to reap the benefits of an open and competitive economy. We take pride in the fact that we are the fastest growing free market democracy. According to a report by Goldman Sachs, among Brazil, Russia, India and China, India will record the fastest rate of growth over the next 30 to 50 years.

The challenge before India is how to sustain the high rate of growth.

If there is one economic factor that will determine success or failure in this behalf, it is infrastructure.

It is now widely acknowledged that there exist strong linkages between infrastructure on the one hand and economic growth and poverty alleviation on the other. Not only will good quality infrastructure give a fillip to economic growth, robust economic growth will, in turn, make investment in infrastructure projects more attractive and rewarding.

According to some perceptive commentators, India is strong on institutional infrastructure but weak on physical infrastructure. In my view, this is indeed the position and, I may add, India fares poorly on social infrastructure as well. To illustrate, we have done a splendid job of putting in place constitutional and legal institutions such as an elected Parliament, an independent judiciary, a strong supreme audit organization, regulatory authorities with vast powers for various sectors, a free and vocal media, and many other bodies that characterize a vibrant civil society. Where we have not succeeded to the same extent is in building world class roads and railways, airports and seaports, and power and telecommunication systems. We have also not succeeded in ensuring adequate and good quality services in education, health care, water supply and sanitation.

Rural infrastructure is poor and requires to be built. The need is more investment. Urban infrastructure was built many years ago, but it is crumbling. The need here is more investment and better governance.

The challenge of infrastructure is huge; the requirement of funds is humungous. It has been estimated that during the Eleventh five year plan period (2007 to 2012), we would need to invest over US$320 billion in the infrastructure alone. This number includes US$130 billion for power, US$ 66 billion for railways, US$49 billion for national highways, US$11 billion for seaports and US$ 9 billion for civil aviation. The Committee on Infrastructure Financing that submitted its report in May 2007 has already advised that the target for infrastructure investment should be revised from US$ 320 billion to US$384 billion at 2005-06 prices, which is equivalent to US$ 475 billion at current prices. I can say with confidence that no country than India needs and no country than India can absorb so much funds for the infrastructure sector.

The Approach Paper to the Eleventh Five Year plan states that: "....the total resources required to correct the infrastructure deficit exceed the capacity of the public sector. The strategy for infrastructure development must therefore encourage public private partnerships wherever possible. However the PPP strategy must be based on principles which ensure that PPPs are seen to be in the public interest in the sense of achieving additional supply at reasonable cost. PPPs must serve to put private resources into public projects and not the other way around."

We have identified the key issues in infrastructure development. They are: (i) the legal and regulatory framework; (ii) affordability of service; (iii) quality of service; and (iv) the financing mechanism.

The last issue - financing - is perhaps the one that interests you most and, therefore, let me dwell on that for a minute.

How does India hope to obtain this level of investment? As I said earlier, we intend to find the resources through public investment, private investment and public private partnerships. Savings and investment, as proportions of GDP, have been on the rise during the last five years. In 2005-06, the savings ratio estimated at 32.4 per cent and the investment ratio was estimated at 33.8 per cent. While we do not yet have the ratios for 2006-07, we have an estimate of Gross Domestic Capital Formation (GDCF) in that year. The number stands at 35.1 per cent, which is an increase of 1.3 percentage points over the previous year. By inference, therefore, it is possible to conclude that the savings and investment ratios for 2006-07 ought to have increased by about 1.3 percentage points. We believe that at the end of 2006-07 the investment to GDP ratio stood at 35 per cent. By any measure, that is an impressive number. Our endeavour will be to channelize a significant proportion of that investment into the infrastructure sector.

Gross Capital Formation in Infrastructure (GCFI) in 2006-07 was estimated at 4.6 per cent of GDP. Our endeavour will be to raise that proportion to at least 8 per cent. Given an economy of the size of US$1 trillion - and which is growing -- an 8 per cent GCFI will yield a minimum of US$80 billion a year and, over a five year period, it would be possible to find a minimum of US$400 billion for the infrastructure sector.

Within India, a large part of the resources will be found through the budgets of the Central and State governments. Tax revenues are buoyant and it is possible to make larger allocations. Governments can also borrow within the limits imposed by the fiscal responsibility laws. We have taken measures to broaden and deepen the debt market, and this will result in greater diversification of risk and would ensure that the quantum of finances increases substantially. Large amounts of money are parked in insurance and pension funds, and these could be used for infrastructure financing of long tenor.

There is help from other sources too. Multilateral institutions continue to support our efforts. Between 1986 and 2006, the Asian Development Bank has funded the transport sector to the tune of US$4.96 billion, the energy sector to the extent of US$4.25 billion and the urban infrastructure sector in a sum of US$1.76 billion. Over the last five years, the World Bank has committed US$4.7 billion to the transport sector, US$1.38 to the urban water sector and US$0.5 billion to the energy sector.

Recently, Citigroup and Blackstone have joined hands with two Indian companies, IDFC and IIFCL, to launch jointly a US$5 billion India Infrastructure Initiative. US$2 billion will be made available for equity investment and US$3 billion in the form of long term debt to fund infrastructure projects in India.

Bilateral support is also forthcoming. The Delhi-Mumbai and Delhi-Kolkata dedicated freight corridors that will be built by the Indian railways has received strong technological and financial support from the Government of Japan.

Arithmetic, however, will not automatically translate into achievement. My purpose in giving these numbers is to demonstrate that finding the finances for the infrastructure sector is well within the realm of possibility.

The real challenge lies beyond the resources: we need to look for innovative mechanisms and instruments to channelise the funds into the infrastructure projects. We have taken several initiatives in this behalf. We offer viability gap funding for projects that would otherwise be considered not commercially viable and hence not bankable. It will be in the nature of a capital subsidy. In order to promote public private partnerships, we have an exclusive mechanism to appraise the proposals, invite bids from prospective developers, make the public contribution in the form of grant or loan or tax incentives, and assist in taking the project to financial closure. We have established the India Infrastructure Finance Company to raise low cost resources and lend or co-lend to infrastructure projects, especially projects that have a long gestation period and need long term financing. We have also persuaded the Reserve Bank of India to lend US$5 billion from the foreign exchange reserves to the IIFCL to enable IIFCL to on-lend to infrastructure projects for their capital expenditure. These and other innovative measures under consideration will ensure the flow of funds to the infrastructure sector.

I believe I have given you a flavour of our ambitious plans. Success will depend upon the ability to clear the roadblocks and implement the projects without time or cost overruns. Large projects face issues concerning land acquisition and rehabilitation and resettlement of displaced families. Some projects may have an adverse impact on the environment and their design may need to be modified. Above all, we need to build capacity in the implementing agencies to be able to resolve the problems that they may encounter and push towards successful completion of the projects. I marvel at what China has accomplished in the last two decades in the infrastructure sector and wonder if there are any lessons that India can learn from China!

Ladies and Gentlemen! A country that aspires to have an economy that will be the third or the second largest in the world must have world class infrastructure. The drumbeats of infrastructure are getting louder in India and the rumble is felt and heard all over the country. The desire for world class infrastructure is not driven by government alone; increasingly it is demand-driven and community-driven. I am confident that within the next ten years we will succeed in putting in place infrastructure in India that is equal to the best in the world."