The Opportunity And Challenge Of India’s Infrastructure
gridlinesInside1A passage to modernity3Narayana Murthy ofInfosys looks to thenation’s future “withconfidence and alacrity.”The opportunity andchallenge of India’sinfrastructure7M.J. Akbar of IndiaToday discusses the needto push ahead
summer, 2013A passage to modernityBy Manish AgarwalIndia’s extensive infrastructure needs arewell known. Decades of underinvestmenthave left the country with dire deficits insuch critical areas as railways, roads, ports,airports, telecommunications and electricity generation. In the World EconomicForum’s Global Competitiveness Report for2011-2012, India ranked 89th out of 142countries for its infrastructure. The reportcriticized its transport, ICT and energyinfrastructure as “largely insufficient and illadapted to the needs of business,” adding:“The Indian business community continuesto cite infrastructure as the single biggesthindrance to doing business in the country.”Indeed, the nation’s infrastructurechallenges are a major drag on economicgrowth. During the halcyon years of India’sboom, it was easier to overlook this threat.Lately, however, India’s GDP growth hasslipped to around 4.5%. The economy hasbeen hobbled by high interest rates,inflation and a lack of reform. Meanwhile,the government is mired in a slow-movingsystem of coalition politics, and it’s furtherconstrained by a hefty fiscal deficit and adeepening current account deficit. Giventhis environment of fading growth, politicalgridlock and the high cost of capital, it’snot surprising that infrastructure spendinghas slowed in the past year or so.Yet India’s vast infrastructure needs areexpanding all the time, and this presentsenormous opportunities. The populationhas already surpassed 1.2 billion, and itcontinues to grow at a heady rate. Globaltrade is placing acute pressure on India’sinefficient ports. Rapid industrialization isintensifying the strain on the nation’s unreliable networks for electricity and water.The railway system — already infamouslyovercrowded — faces rising demand forfreight capacity. And the government hasfallen far short of its plans to build 20 km ofroads each day — an urgent requirementin a nation where 65% of all freight istransported by road, and where traffic is sosevere that the maximum highway speed fortrucks and buses is only 30-40 km per hour.1The need to upgrade India’s infrastructureis especially acute in huge cities such asMumbai, New Delhi, Kolkata and Bangalore.India’s urban population of around 375million is projected to reach 500 million by2017.2 By 2030, the country is expectedto have 68 cities with over 1 millionresidents.3 This torrid rate of urbanizationmeans that massive investment will berequired in everything from metro systemsto clean water supplies, power generationto affordable housing.Recognizing these almost limitlessrequirements, the government has calledfor 1 trillion in infrastructure spendingin the five years through 2017. The prioritiesinclude three airports, two ports, anelevated rail-corridor in Mumbai, and1 Report by India’s Ministry of Road Transport & Highways,September 2011. y%20Issues-9224727324.pdf2 Milken Institute Report on “Urbanizing ns/slides/428230UrbanizingIndia.pdf3 “India’s urban awakening: Building inclusive cities, sustainingeconomic growth”, McKinsey Global Institute, September2010. http://www.iutindia.org/ntpdc811/Annexure17.pdfOn cover and above: Train in Mumbai 2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see http://www.pwc.com/structurefor further details.PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to deliveringquality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at http://www.pwc.com.This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.1 Gridlines PwC
Paving the way to progress has been slower than plannedTraffic is so severe that the maximum highway speed for trucks and buses is only30-40kmphalmost 6,000 miles of new roads.4 TheMinistry of Road Transport outlined plansfor 120 billion worth of road-wideningprojects, with 65% of this money targetedto come from the private sector. There arealso plans for 60 billion to be invested inIndia’s ports by 2020. The Indian PlanningCommission has estimated that the country will need 180 additional airports in thenext decade. And the government has setambitious goals for wind, solar and nuclearenergy, all of which will be needed tosupplement power from coal and gas.Given the scale of this infrastructuregap, it’s small wonder that India is oneof the world’s most attractive markets forcompanies in the infrastructure business.A recent report by Business MonitorInternational predicted that India’s infrastructure sector will grow by 7.9% in the2013 fiscal year — down from a previous estimate of 9.4%, but still a formidable rate ofgrowth.5 The opportunities are so extensivethat money has poured in from overseas,including investments in 2011 from leadingprivate equity firms such as Kohlberg KravisRoberts and the Blackstone Group.But India’s difficult business environmenthas sapped the enthusiasm of manyforeign investors. Among other things, theycomplain about unpredictable regulations;bureaucratic delays in approving projects;endless struggles to secure land rights; andthe government’s stalled attempts at reform.The country’s reputation for corruption isalso a major deterrent: in 2011, India ranked95th out of 182 countries in TransparencyInternational’s Corruption PerceptionsIndex, down from 87th in 2010. The telecomsector has been struggling with a scandalover licenses. And the government has rattled foreign investors by trying to claim over 2 billion in taxes from Vodafone Group,attempting to change the law retroactivelyafter India’s highest court ruled in thefirm’s favor.6Not surprisingly, some investors haveretreated. According to Reuters, privateequity investments in Indian infrastructuresank to 183 million in the first quarter of2012, down from 459 million in the sameperiod of 2011. There is also a rising tide ofdomestic disillusionment about the government’s unwillingness to tackle the nation’seconomic challenges. In late 2011, whileannouncing Wipro’s earnings, thetechnology firm’s renowned chairmanAzim Premji warned: “There is a completeabsence of decision-making among leadersin the government.”To shed further light on these issues,we interviewed two of India’s mostprominent thinkers, whose penetratinginsights we share in the pages that follow.Narayana Murthy, a legendary businessleader who transformed Infosys into aglobal powerhouse in the software industry,talks of the “huge pressure” on everythingfrom electricity to roads. To meet thesechallenges, he stresses the need for greaterinvolvement by the private sector, andcalls for entrepreneurs to be freed from“the tyranny of petty bureaucracy.”65%of all freighttravels by truck,with rail lackingM.J. Akbar, one of India’s most renownedjournalists, weighs in with a candiddiscussion of some of the biggest threats toIndia’s economic progress: political inertia,ominous water shortages, bureaucracy, andcorruption — which, he says, “creates spacefor the incompetent to buy their way into themost important sectors of India’s economy.”Murthy and Akbar are both deeplyconcerned about India’s future. Yet theyare also remarkably optimistic, given thecountry’s extraordinary dynamism. AsAkbar points out, India has already madeastonishing progress, and he sees no reasonwhy this should not continue. “There will beproblems along the way,” he concedes. “Buteven if we just equal over the next 20 yearswhat has happened over the last 20 years,you are going to see a country which is verydefinitely at the top edge of the second world.Not the first world, but definitely the second.”For India, it seems, both the challengesand the opportunities are immense.About the authorManish Agarwal leads PwC’s Indiainfrastructure practice. He is based in Mumbai(manish.b.agarwal@in.pwc.com, 91 996 757 4800).4 “India’s PM Unveils Infrastructure Investment Plan”, WallStreet Journal June 6, 2012. 65904577450692014546230.html5 “India Infrastructure Report Q2 2013”, Business MonitorInternational. astructure-report-q2-2013.html6 “Vodafone Gets Another 2 Billion Tax Bill From India”, WallStreet Journal, January 5, 2013. 74504578223001514954038.htmlPwC Gridlines 2
A few words with Narayana Murthy of InfosysConfronting India’s challenges with confidence and alacrityIn 1981, N.R. Narayana Murthy founded Infosys with six friends, each contributing 250. Over the next threedecades, he led the software consulting company as its CEO, Chairman and Chief Mentor, transforming it into aglobal colossus that now has over 145,000 employees. Today, Murthy is Chairman Emeritus of Infosys and serveson the boards of HSBC, the UN Foundation, the Ford Foundation, and the Wharton School. Renowned as avisionary entrepreneur and a champion of ethical leadership, he is also the author of A Better India, A Better World.In praising this book, Bill Gates hailed Murthy for demonstrating “that it is possible to create a world-class,values-driven company in India,” while India’s Prime Minister Manmohan Singh lauded Murthy as “an iconicfigure a role model for millions of Indians.” Here, Murthy discusses the challenges facing India — and how toovercome them with the help of government reform, private sector dynamism, and “huge foreign investment.”India’s economy is growing rapidly, its population is expandingat an extraordinary rate, andthere’s massive migration fromthe countryside to overcrowdedcities like Mumbai and NewDelhi. How concerned are youabout the stress all of this placeson urban infrastructure such asroads, the water supply, and theelectricity system?It’s a big challenge, there’s nodoubt at all. The country isprogressing very fast. We grewat 8.5% on average over thelast few years. Last year, whichended on March 31, 2012, wegrew around 7%. When theeconomy grows at this rate, it’sonly natural that there’s hugepressure on infrastructure. Eventhough we’ve been buildinginfrastructure, we’re not ableto keep pace with demand.That results in huge productivitylosses and delays, mainly inurban areas.Where do you see the most acutestrains on India’s infrastructure?Transportation from placeto place takes an enormousamount of time. You see it whenyou’re commuting from hometo office and office to home. Our3 Gridlines PwCroads have not been developedas quickly as our logisticaldemands require. Also, theaverage speed of our freighttrains today must be about 40mph, which is no speed at allthese days. We’re not adding alot more railway lines. We’re notexpanding roads or improvingthe quality of our roads. So themovement of goods takes a longtime. Similarly, our port infrastructure is not as developed aswe’d like. The average time forclearance at our ports is severaldays, whereas it’s several hoursin many other countries. ForIndia’s economy to make sustained progress,we have to build better roads sothat the transportation of goodsbecomes efficient; we have tobuild ports; we have to enhanceour power capacity; and wealso have to improve access tocoal and other raw materials.These are all very importantrequirements.
For India’s economy to make sustained progress, we have tobuild better roads so that the transportation of goods becomesefficient; we have to build ports; we have to enhance our powercapacity; and we have to improve access to coal and other rawmaterials. These are all very important requirements.How does the inadequacy ofIndia’s electricity system affectcompanies, many of whichcontend with frequent poweroutages?To give you an example, I knowseveral manufacturing companies in states like Karnataka andTamil Nadu that don’t get powerfor several hours a day. Therefore, they’ve installed their owngenerators. But that power isabout twice as expensive —or sometimes 2.5 times asexpensive — as the power thestate provides, since the statehas economies of scale. Whenyou have to pay 2.5 times thenormal rate for power, youbecome less and less competitive in the marketplace; you’renot able to sell your products,so your corporation becomesweaker, which means thatit pays lower taxes and can’temploy as many people.How economically disruptive isthe logjam on India’s roads?We’re adding about four millionvehicles every year and about11 million two-wheelers, butthe roads are not expanding.When I leave my home in southBangalore at 7 a.m., it takesme only 20 minutes to drive toElectronics City [the industrialpark in Bangalore where Infosysis headquartered]. At 8 a.m. ittakes me about 40 minutes. Butif I leave at 8.30 a.m., it takesme an hour. And this is one ofBangalore’s better roads. Beforeit was built, I would spend twoand a half hours waiting in traffic to come to the office or gethome, and this is still the normin many other parts of the cityand in other Indian cities. Thesetraffic conditions reduce yourproductivity and waste yourtime, and you’re not in a verygood mood when you get to theoffice or come home if you’vejust spent two and a half hoursin traffic.In Aravind Adiga’s recent novelLast Man in Tower, an exasperated resident of Mumbai complains:“Look at the trains in this city.Look at the roads. The law courts.Nothing works, nothing moves; ittakes ten years to build a bridge.”Why do such things function soinefficiently in India’s cities? Isthere a cultural reason why Indians accept these frustrations?Yes. Somehow, the staple dietof Indians is apathy. We see aproblem around us and don’tdo much about it. The government doesn’t act with a senseof alacrity; there’s so muchlegislation still pending withthe parliament. What manycountries take six months tocomplete, we most often takeseveral years to do. Our nature,our natural pastime, is apathy.My interpretation is that it’sbecause we were under foreignrule for 1,000 years — for thewhole of the last millennium,except for the years since we gotindependence from the Britishin 1947. We weren’t in controlof our destiny, so we weren’tresponsible for designing abetter strategy for our society.It’s natural for a nation like thatto take a little time to bring backa sense of urgency, to bring backa sense of self-created destinyand alacrity.Is that what entrepreneurs likeyou have injected into Indiansociety?I think so, yes. I have a fetishfor quick action because of theapathy I see around me. Mychildren make fun of me: theysay, “We shouldn’t discuss anything with dad because he’llgo ahead and do it immediately!” But there are manypeople in the country, particularly in the private sector,who have now realized theimportance of speed.After revisiting India in 2011,Thomas Friedman, the authorof The World is Flat, warned:“As much as I’m impressed bythe innovative prowess of India’syoung technologists, without agovernment to enable them withthe roads, ports, bandwidth,electricity, airports and smartregulations they need to thrive,they will never realize their fullpotential.” Is he right?Absolutely, he’s right. I do thinkthat India has done well to getto the current orbit. But for usto move to the next orbit, weneed good leadership. For usto bring prosperity to the vastmajority of Indians and to enjoyinclusive growth, we will haveto enhance our governancesystem, enhance our transparency and accountability, combatcorruption, and enhance ourinfrastructure.The government has called for 1 trillion in infrastructurespending. How can this enormousinvestment be funded, particularly at a time when India’s financesare already stretched?Developing nations like Indianeed to seek huge foreigninvestment and huge debt fromabroad to build our infrastructure, then make ourselves morePwC Gridlines 4
India has done well to get to the current orbit. But to move tothe next orbit, we need good leadership. To bring prosperity tothe vast majority of Indians, we need to enhance our governancesystem, enhance our transparency and accountability, combatcorruption, and enhance our infrastructure.productive and competitive ona global scale, sell more, thenpay back these loans. There’sno other model in the world.It’s happening in some areasalready: India’s IT industry isvery competitive, and some autocompanies are very competitive.But it has to happen in manyother industries.Some infrastructure sectorsin India have been privatizedor partly privatized. Howsuccessful is this proving to be?The airports and some portshave been privatized, andthey’re working pretty well.Power production is open tothe private sector, but powerdistribution is still in thegovernment’s hands in moststates, so it’s not working aswell. There are huge losses intransmission, and there’s a lotof theft of electricity. Severalstate governments give freepower to farmers, and that’scausing some strain. And thestate governments aren’t ableto pay power manufacturerson time. So, it’s a mixed bag.Unfortunately, we’ve looked atthis situation piecemeal, notholistically. The solution is to5 Gridlines PwClook at the entire supply chainand bring in the participation ofthe private sector.Does the success of technologycompanies like Infosys suggestthat private enterprise is themost effective driver of economicprogress in India, not thegovernment?The software industry is a goodexample of how the privatesector can add tremendousvalue to the economy if thegovernment takes a back seatand acts as a catalyst. In ourarea, the government did a goodjob of promoting the Indiansoftware industry abroad. Themoral of the story is that thegovernment should become acatalyst, listening to the peoplein the trenches who are producing goods and services, thencreating laws and rules that willmake them more competitive.What should the government doto foster more entrepreneurship?First, we have to enhance ourhigher education system bycreating greater interactionwith well-known universitiesin developed countries like theU.S., the U.K., Australia, France,Germany, and Japan. Second, we need regulations thatattract the best venture capitalfirms to India in even greaternumbers. Third, we have tocreate a business environmentfor entrepreneurs where there’svery little friction created bybureaucrats. Today, it takesseveral days to even register afirm. And smaller entrepreneurssuffer under the tyranny of pettybureaucracy in terms of factoryinspectors, tax inspectors andso on. We need to shield themfrom this bureaucratic tyrannyat the state and central level.What advice would you give toforeigners who are, nonetheless,looking to invest in India?One of the drawbacks of oursystem is that the rules andregulations are not verytransparent. They’re not veryexplicitly written in simpleEnglish that can be understoodby you and me in the same way.Therefore, there’s an opportunity for misinterpretationby the bureaucracy — and,when there’s an opportunityfor misinterpretation, there’sa possibility for rent-seeking.That’s something that foreign
investors don’t like becausethey’re used to open, clear rules.So, I’d advise them to use wellknown Indian lawyers and makesure these lawyers look verycarefully at whatever contractsthey’re writing, and also look atall the previous case studies.Some foreigners are alsoscared off by the perception thatcorruption is still too pervasivein India. How hard is it toavoid corruption?In fairness, at Infosys, wehave not paid a single cent inbribes in the last 30 odd yearsof our existence. Therefore, Ido believe it’s possible to dobusiness
Manish Agarwal leads PwC’s India infrastructure practice. He is based in Mumbai (manish.b.agarwal@in.pwc.com, 91 996 757 4800). almost 6,000 miles of new roads. The Ministry of Road Transport outlined plans for 120 billion worth of road-widening projects, with 65% of this money targeted to come from the private sector. There are
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