Sunday, 18 May 2008

India, Infrastructure, Inflation - Impending Doom?

The entire city of Mumbai is dug up. Same is the case with New Delhi, Chennai and Bangalore. All the cities that I have visited in India are seeing a construction boom. Ranging from residential buildings to malls to flyovers there is construction and more construction all around. This is good, really good. India needs to improve or rather install infrastructure.

However, where are we going to fund this infrastructure growth from? Currently, the domestic economy is in a very vulnerable position. A net oil importer, India needs to buy oil at the current prices of USD 128 per barrel to keep moving. The fuel subsidy is digging a hole in the government coffers (most oil companies and refiners are state owned). In a desperate attempt to control losses, the oil companies have stopped issuing new connections for cooking fuel and are even rationing LPG supplied to existing customers.

Foreign exchange reserves are limited and only depleting. Rupee is fast depreciating and becoming less valuable. FII coming into the country is minimal and with the stock markets and rupee being shaky there is little hope of FII flow increasing. FDI is the only source from where we can get some relief. However, why will someone put in money as FDI given the state of the capital account, inflation and the lack of initiative to increase interest rates?

With financial regulators being inflexible and not willing to listen to reason, policies made are stifling SMEs. There is no corporate debt market in India. Whatever little exists, exists as a private placement market. There is no efficient price finding mechanism for borrowers. Local interest rates are very high and offshore borrowing is no longer permitted. Funding via equity can only be limited. Local bank syndications are probably the only borrowing source or the infrastructure funds being raised by the varied financial institutions. But can these institutions put together fund c. USD 350bn (70% of the total USD 500m required in the next 4.5 years)?

These are critical problems facing the economy and the country. With the current prime minister being the leader of economic reform in India, one would have expected better management of the situation. However, it seems that political ambitions and party dictate seem to have superseded the general welfare of the nation. Can India come out of this impending crisis? Is the India shining story still true? Will we lead the world as we believe we are on the way to? Only time will tell, and let us hope that time is kind to the future of India, to our future and to our dreams.

1 comment:

Pankaj Singh said...

Your love and passion for India is amazing, keep it alive :)