India invests in Infrastructure: Building Sustainable Economic Growth

With plans to develop India’s physical and digital infrastructure, Indian Prime Minister Narendra Modi is looking to build sustainable economic growth. 

Infrastructure development is essential to sustainable economic growth in developing countries

A 2010 paper examining factors promoting economic growth in China between 1975 and 2007 revealed that infrastructure development had significant positive contribution to growth, bigger than that of private and public investment.

Expanding and globalising trade, reducing costs of production, increasing access to materials and resources, and creating short-term jobs, infrastructure – roads, ports, railways, communications, power, sanitation, and water – is central to achieving sustainable economic growth. It is also central to social progress, enabling a country to cope with the numbers of people emerging from poverty, a growing middle class, a rapidly rising demand for energy and food, and the impact of urbanisation and industrialisation.

But infrastructure requirements in developing countries are vast; demand for investment is expected to reach $19.2 trillion over the next 15 years. The IFC (International Finance Corporation) forecasts the need for an additional trillion dollars in financing per year.

Prime Minister Narendra Modi pushing investment in India’s Infrastructure

Eyes are particularly on India, long-tipped as the next big economic power, but where, of its 1.3 billion population, more than 300 million live without electricity and twice as many don’t have access to toilets. Its urban population is also projected to reach 500 million by 2017.

But where Prime Minister Narendra Modi may not have yet provided the radical economic thinking that many were hoping for (and indeed there is little sign of short term progress), he has made a significant commitment to infrastructure. Injecting a positive momentum into the economy, Modi – who is now twice as popular in his country as he was when elected in 2014 – has both promised government funds and is busy pitching for foreign investment.

Adding to a long running pledge to invest $1 trillion in infrastructure between 2012-2017 (for three new airports, two ports, and almost 6,000 miles of new roads), a project by the Indian Ministry of Roads and Transport for $120 billion worth of road-widening projects, and $60 billion for ports by 2020, Modi’s 2015-2016 budget allocated a further $2.25 billion to roads and $1.6 billion to railways. It also offered $11 billion in increased commitments through Private Sector Enterprises for infrastructure investment, and proposed the creation of a National Investment in Infrastructure Fund with an initial annual allocation of $3.25 billion.

Modi has also set ambitious goals for wind, solar, and nuclear energy, with a goal to give every household uninterrupted 24-hour power by 2022, he has announced a $10 billion urbanisation scheme, the “One Hundred Smart Cities” initiative, to develop 100 smart cities and rejuvenate another 500 over the next five years, and a $75 billion infrastructure fund has been announced between the UAE and India.

Connecting digital infrastructure with the physical

Alongside physical infrastructure, Modi is also committed to developing the country’s digital infrastructure. During a trip to Silicon Valley where he took part in a talk with Marc Zuckerberg at Facebook headquarters – which began with chants of “Modi, Modi” from the company’s Indian-born employees – he said: “Connectivity isn’t about choosing between physical and digital infrastructure. Instead, it’s about working on these two simultaneously.”

The comments coincide with the launch of Digital India, a government initiative to give the public (and 250 local governments) direct access to information by extending fibre-optic internet networks throughout India, including rural areas, by 2019.

Just some of those investing in India’s digital infrastructure: Qualcomm has committed $150 million to Indian startups, Microsoft is to begin offering cloud services from Indian servers, and Google will be investing in providing Wi-Fi access in 500 railway stations.

Returns for investors in infrastructure in emerging markets

This type of foreign investment in infrastructure will be essential. Gavin Wilson, chief executive of IFC Asset Management Company told the Financial Times: “This year will be a critical year of bold ambition for global development. It must also be the year we bring private investors into the equation to attract the capital required to make it all happen”.

Offering encouragement, he reports the IFC has delivered returns above 20% per year on average on investments in emerging market infrastructure over the past 15 years. “Projects that do well financially tend to be those that also successfully deliver benefits to local economies”.

No-one is saying that investing in India and its infrastructure is a safe bet, but certainly there is a mood of excitement about India’s potential for growth. And if Modi can realise his commitment to infrastructure (and loosen some of India’s off-putting foreign business policies) the country has a good chance of finally fulfilling expectations.