Paying for infrastructure

SMARTSHARE

A while ago, Manmohan Singh estimated that India would need $150 billion equivalent over the next five years to upgrade its infrastructure. That works out to roughly Rs 6,75,000 crore at current exchange rates. That's a huge sum of money. But it may actually be an underestimate!

On the anvil is another 1,00,000 MW of generating capacity plus the creation of a more efficient nationwide transmission/distribution system. Then there's 60,000-plus km of roads to be improved or simply built from scratch. There's a massive port upgradation and port-connectivity plan and the Sethusamudram mega-project as well.

There are dozens of airports on the agenda for improvement and several greenfield airport projects to be tendered out as well. If teledensity targets are to be maintained, network rollouts will also have to accelerate over the next five years.

Plus there are literally dozens of urban infrastructure projects required to improve water-supply and waste disposal systems. If we examine tertiary areas such as Special Economic Zones and Software Technology Parks and ancillary infrastructure, the need for investment expands even further.

If all this, or a reasonable proportion comes through, India can reasonably hope to raise its trend GDP growth rate to 10 per cent. China has maintained double-digit GDP growth over two-decades, precisely because it's pumped massive amounts into infrastructure.

Japan did it much earlier through the 1960-1990 period. The other Asian tigers managed this as well. The money can be found. But it cannot be found through diktat.

The best thing the GoI and various state governments can do is to create enlightened, enabling policy, which attracts investment. Such policies also have to be implemented on the ground where there may be a problem with political will.

Every time a state government changes, the new incumbents review infrastructure projects cleared by the previous administration. We've seen how damaging that can be in the case of Bangalore where the road system has been driven to wrack and ruin and the airport project held up for more than a decade.

This lack of political will could stymie projected growth in IT and ITES services very easily. The latest McKinsey-Nasscom report validates the findings of the earlier report and looks optimistically at 2010. But the industry has already grown to a point where it cannot manage its own infrastructure.

According to some estimates, it is 30-40 per cent cheaper to start up a BPO operation in Singapore rather than Bangalore. An Indian BPO needs to create its own backup power systems, put in expensive lease lines etc. In Singapore, even UPS-es are unnecessary; you can stick a voltmeter into a plug point and the needle holds rock-steady.

The availability of cheap, skilled labour, which has driven Indian BPO and IT, is also becoming scarce. There will be a shortage of capable IT engineers very soon. That's when the Indian companies will have to look abroad to maintain their characteristic of low-overhead, high-quality operations.

The silver lining is that the rupee is weakening again. But to overcome these odds, the IT industry will have to cross its fingers and hope that the political establishment delivers on the infrastructure front. This is a moot point.

If I stick my neck out, I would say that IT and ITES will have a good year in 2006-07 and it has enough momentum to maintain growth through 2007-08. Beyond that, there's a general election.