Inflation, Delays and Cost Overruns Threaten India's Infrastructure Targets

---

Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The Indian government has a $1 trillion investment target for infrastructure projects in the 12th Five-Year Plan (2007-12), with more than 50% of project investment coming from the private sector. But the Ministry of Statistics and Program Implementation, which monitors project progress, has highlighted some problems along the way.

The original implementation cost of 565 projects was about $134 billion. Now, the anticipated completion cost is likely to be more than $160 billion. A report from the ministry said that 61 of the projects have been sanctioned to move forward without a scheduled commissioning date. For 87 of the projects, the ministries that are implementing the projects have not reported progress or completion scheduling.

In the case of 285 projects that had been delayed as of the end of February this year, up to 37 projects are delayed more than 67 months. A further 112 projects are delayed between 25 and 60 months, and 67 projects are delayed between 13 and 24 months.

Railways are highlighted as the worst sector performer, with 57 out of the 145 monitored projects by the ministry having no fixed commissioning date. In the rail sector, 35 projects were sanctioned without any commissioning date. The total cost of the projects when first sanctioned was $15.2 billion, which was later revised to $27.2 billion. The railways projects have a cost overrun of 78.4%.

Parallel to this backdrop of delays and cost overruns, the country's Associated Chambers of Commerce and Industry (ASSOCHAM) maintains that a high level of investment is needed to build sound infrastructure in India to enable the economy to grow at a rate of 8% to 9% in fiscal year 2011-2012.

Dilip Modi, president of ASSOCHAM, said that tightening of the money supply to control inflation leads to high interest rates and consequently restricts fresh investments in the infrastructure sector.

"We must learn to live with acceptable levels of inflation. Raising interest rates is not the best way to address inflation. What we need is good infrastructure for the industry to grow fast," said Modi.

High inflation, rising interest rates and high crude oil prices are matters of concern for India. The manufacturing sector has not performed well due to a low level of new investments. But, said Modi, the agriculture and services sectors have done fairly well. Since tightening the monetary supply has a limited role to play in controlling inflation, the government should cut expenditure and boost revenues to maintain the GDP growth rate at close to 9%, he said.

For related news item see June 6, 2011, article - Indian Core Industrial Sectors Grow 5.2% in April 2011.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.