Ashima Goyal

Explaining the infrastructure slowdown

ASHIMA GOYAL | Updated on October 11, 2012

The proposed National Investment Board is an excellent suggestion, butground-level improvements are needed. — K. Murali Kumar


The real cause for the slowdown is the failure of the official apparatus to gear up to provide various clearances for infrastructure proposals that came up during the boom phase.

As in the best of murder mysteries, there are many suspects at large to blame for the current mess in India’s infrastructure projects, with fresh investments not forthcoming and even existing projects facing implementation challenges.

Do we hold overall demand growth slowdown responsible for the situation? Or does it have to do with financial constraints resulting from fragile global markets, risk-averse banks and high interest rates? And, of course, the Government: Aren’t its failures in policy-making, granting clearances, and coordinating between its own various departments to blame?

A careful analysis of the event timeline gives interesting clues.


Recent Five-Year Plans, while setting higher targets for infrastructure investment, have simultaneously placed increased reliance on private investment and financing to meet these goals. This has come amidst the Government’s high borrowings and deficits, putting limits on its own ability to raise resources.

Given the past poor record at achieving, leave alone exceeding, targets, it was a heartening departure from this trend over the last two Plans.

During the 10th Plan period of 2002-2007, actual private investment, at 24 per cent of the total investment, exceeded the target level by 4 percentage points. So the target for the 11th Plan was raised to 30 per cent.

Again, it was exceeded for the first two years of the Plan, when private investment amounted to about 36 per cent of the total. But starting from 2009-10, a drastic fall took place, due to which the aggregate private investment in the 11th Plan fell short of the target.

Now coming to the reasons, demand cannot be a constraint, since India has obvious shortages in infrastructure. Moreover, growth rates during 2009 and 2010 were high, following a ‘V-shaped’ recovery from the global financial crisis.

Even with regard to finance, interest rates were very low: The Reserve Bank of India started raising nominal interest rates only in 2010, that too after cutting them steeply starting late 2008. The same goes for foreign portfolio investment (FPI) inflows, which revived strongly in 2009, as India’s robust growth rates contrasted with the anaemic levels elsewhere.

From the accompanying graph, it can be seen that FPI outflows started taking place only from November 2010, when the fragilities in the Euro Zone became really manifest.

Either way, neither demand nor financing constraints were the trigger for a slowdown in infrastructure investments.

That brings up the next explanation, having to do with policy paralysis.

This has been largely blamed on the anti-corruption agitations by civil society, followed by the Comptroller and Auditor General of India’s report on the 2G spectrum allocations, the Supreme Court’s order quashing the licences and the Commonwealth Games scam. Cumulatively, they led to civil servants stopping clearance of files, for fear of subsequent investigations.

But the fact is, all these events happened in 2010, whereas the slowdown in infrastructure investment preceded them. The slowdown, in this case, actually started in 2009.

The real cause for the slowdown had more to do with the failure of the official apparatus to gear up to provide the various clearances required for the infrastructure proposals that came up during the boom phase of investments. The scale of new investment proposals simply overwhelmed the Government’s capacity to process them.


If 2009-10 is made the starting point — a year where demand or financial constraints were no issues and yet infrastructure investments slowed down — it becomes easier to establish causality.

Once a slowdown began, other negative factors, including corruption and scams, also kicked in.

As it became clear to banks that regulatory hurdles were holding up the infrastructure projects they had initially financed, they became wary of lending to fresh projects. That is how finance, too, appeared as a block. Had the projects gone well, finance possibly wouldn’t have become a constraint.

In fact, a strong infrastructure cycle was one of the key factors based on which India was expected to avoid the global slowdown that hit other economies. But instead we ended up with regulatory hold-ups, stalling project take-offs.

This also explains why despite an overall GDP growth recovery in 2009-10 and 2010-11, investment or capital formation levels in the Indian economy never rose to the earlier pre-Crisis peaks.

As output growth, too, slowed, the next stage was rising investor risk aversion. External financing shocks followed still later.

The graph shows that after the FPI outflows over November 2010-February 2011, these resumed over May 2011-October 2011, as the European crisis intensified. The retrospective tax amendments and general anti-avoidance proposals in the Budget provoked further outflows over March 2012-June 2012.

But while external factors created risk-on risk-off flows, domestic issues also contributed. Most infrastructure companies could not raise much equity, which led to their debt-equity ratios more than doubling between 2007 and 2012. Investors, too, began to look for exiting from a sector where assets were blocked.

The 12th Plan (2012-17) has targeted a 50 per cent private investment share in the total planned $1 trillion of infrastructure investments. This will be difficult to meet without a drastic improvement in procedures; the private sector simply cannot absorb the kind of delays taxpayers are forced to bear in public sector projects.


Government spokesmen tend to blame external shocks, but we could possibly have absorbed these had the government resolved emerging procedural bottlenecks.

Businessmen emphasise the policy paralysis. The timeline shows them to be right — but the critical paralysis was in reforming procedures just at the time they were required to handle proposals at the peak growth phase.

There is need to simplify administrative procedures to make them more responsive, yet robust. Although the administrative reforms commissions have made many suggestions, they have been accepted without getting implemented.

The now-proposed National Investment Board is an excellent suggestion, but ground-level improvements are what are really needed. There is a lot of policy room for a revitalised government to act on. But it must first recognise the real constraints.

Countries that sustained high catch-up growth were those that flexibly responded to constraints as they appeared. And unlike external shocks, internal factors are potentially within our control.

(The author is Professor of Economics, Indira Gandhi Institute of Development Research, Mumbai.

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Published on October 11, 2012
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