Wednesday, November 28, 2007

Solution to India's Infrastructure Problem

India's infrastructure deficit is centered around three problems:

1. Funding

2. Regulatory Framework

3. Land Acquisition

Instead of looking at the problems, let us try to look at the possible solutions.

For funding, it is obvious that the Indian government does not have the required funds to meet the infrastructure needs of the nation. One theory doing the rounds is to utilize a part of the ever-burgeoning foreign exchange reserves to fund infrastructure spends. Another way is for the government to float infrastructure bonds and provide tax breaks for people who invest in them. Also, dedicated companies can be floated (on the lines of Power Finance Corporation) that will be vehicles for long term capital for companies building/operating infrastructure projects.

Another aspect which is not focussed on much, is maintenance of infrastructure projects. Annual maintenance contracts should be awarded to companies with very strict performance criteria. The performance should be monitored by an independent nodal agency created just for this purpose and payment should be based on relative performance.

The regulatory framework also needs to be looked at. Private companies need a stable and non-interfering regulatory regime. For example, the Indian government allowed private participation in petroleum retail saying that the administered price mechanism of petrol & diesel pricing would be done away with. With a new government and rising global petroleum prices, the government buckled under popular pressure and brought back price ceiling through the back door by selling at less-than-market rates through the public sector companies. This meant the private players were left high and dry in trying to sell a commodity at a higher price than their public sector counterparts. This practically destroyed the private petroleum retail market in India and their corresponding infrastructure development efforts.

The latest problem to have hit the nation is the violent protests related to land acquisition for development projects. This is a very sensitive issue and needs a lot of care while handling. Proper rehabilitation packages, financial incentives and integrated transparent communication to enable people to understand the gains they can make by participating in the development of the nation.

If we can get some of these things in place India should be looking at great infrastructure development in the years to come.

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