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Whatever be the compulsions of coalition politics, Mr. Chidambaram, the Minister of Finance, must in his budget do what is manifestly obvious-address the key challenges facing the economy. The first of these challenges is financing of infrastructure. There is widespread agreement that to sustain growth at over 9 per cent, India must make enormous investments in its physical and social infrastructure. Power networks, roads, transportation systems and ports are facing huge demands from India’s rapidly growing economy. Infrastructural bottlenecks are eroding the country’s competitiveness and hurting the growth of labor - intensive enterprises, particularly export - oriented manufacturing which has the potential to absorb India’s fast - growing working population.
India, therefore, needs to increase its investment in infrastructure from 4.5% to 8% of GDP on infrastructure to sustain its current levels of growth and to spread the benefits of growth more widely. Although this will clearly require a government role, the relative roles of the government and private sector need to be defined. The Committee on Infrastructure (COI), chaired by the Prime Minister has estimated that, during the Eleventh Five Year Plan (2007-12), India needs an investment of $ 492 billion in physical infrastructure like power, roads, ports, airports, railways and telecommunications. Clearly, such large amounts of investment will require mobilization of resources from public, private, domestic, and international sources. The center has to provide 40% of the funds while the state and the private sector have to contribute 30% each.
Funding for long term infrastructure projects requires debt funding. The total debt requirement during the eleventh plan period has been estimated at $240 billion. All the sources of debt funds-domestic bank credit, credit from non-banking financial companies, pension and insurance funds and external commercial borrowings-will have to be tapped. Bankers bemoan the near absence of a secondary debt market in India. The budget for 2008-09 must ensure that private and foreign direct investment flows into infrastructure and make all forms of financing of infrastructure flexible. The budget must take steps to help catalyze the development of a long term debt market.
The budget must also widen the definition of infrastructure so that activities such as renewable energy, distribution of gas, urban infrastructure and watershed development are eligible for tax concessions. Vinayak Chaterjee, Chairman of the CII’s National Council of Infrastructure has pointed out that, at present, there is no uniformity in the definition of infrastructure: the Ministry of Finance which provides viability gap funding, the Income Tax Department which provides tax concessions, the Reserve Bank of India which defines conditions for external commercial borrowings by infrastructure companies, the Insurance Regulatory Development Agency which seeks to deploy long term funds of insurance companies all have their own definitions.
Emphasis on education
India’s scorching growth can also be undermined by the growing skills shortage in several industries which are just taking off. India's outsourcing industry is expected to face a shortage of 262,000 professionals by 2012 according to a recent report commissioned by India's National Association of Software and Service Companies (Nasscom). With only one in four graduates of the sub-continent's engineering graduates are employable- the remaining three quarters are either linguistically or technically below the requirements of the country's booming technology sector-the costs of recruitment is rising. According to the National Manufacturing Competitiveness Council India needs 2.5 million skilled workers each year if it has to sustain its growth momentum. Of the 10 million students that pass out of school, only a few million can be trained by the government at its Industrial Training Institutes (ITIs). It is imperative, therefore, that the government invite greater private participation in higher education and technical training and free the education system from the stifling control of governments and other regulating bodies, so that institutions have flexibility on fees, salaries and curriculum, among other things.
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