India’s Infrastructure Plans: Dreams or Reality?

(Export Development Canada – Peter G. Hall)

Explosive growth became the norm for India in the global economy’s boom years, and few pundits disagree that long run growth potential is better here than anywhere else. India’s prowess was tested in the global recession, but the subcontinent has rebounded handily. Its sights are now trained on longer term growth in an ambitious new 5-year plan. Will India achieve its high-growth objectives?

Worries escalated as India’s growth slowed substantially in late 2008, but they were short-lived. By the third quarter of 2009, growth was back to the 8% level. Growth slowed again in the dying months of 2009, but details show that strong underlying growth was hampered by temporary contractions in agricultural production and government spending. Why the resilience? India has below-average export exposure, and monetary policy was very responsive to the downturn. But the key reason is likely India’s pre-recession stimulus plan: its heavy ongoing investment in public infrastructure.

Policymakers in India are keenly aware that poor infrastructure is a key growth inhibitor, and as a result, attention has been paid to infrastructure spending in most of the more recent 5-year plans. The current plan earmarked US $500 billion for various projects, from telecommunications to energy and transportation systems. India has been increasingly looking for private sector participation, with the targeted private component moving from 25% in the 10th plan to 36% in the current plan. Read more here.