Infrastructure: a quick road to reward?

And there has to be, for what offers perhaps the greatest opportunity for investors is also one of the most-often-cited risks to India's economy. The level of growth sustained over the past decade has put a heavy strain on already stretched facilities. The nation's roads, power, drains, telecommunications and airports are all desperately in need of major improvement and expansion following years of neglect. While frequent power-cuts require businesses to maintain backup generators, the generally poor state of roads severely hampers efficient and cost-effective distribution and movement of both goods and people. When people talk about Mumbai's future as an imminent global financial hub, one is forced to take a massive leap of faith in the city's ambitions for construction.

As a response, India's Planning Commission has put infrastructure improvement right at the heart of its strategy for sustaining faster and more broad-based economic growth across the country. A plan of investment of about $500bn in infrastructure before the end of the eleventh five-year plan in March 2012 has been allocated for this purpose. Yet, over the past three years, India has invested an average of 4.5% of GDP each year in infrastructure in attempting to meet the Planning Commission's target, which is estimated to reach the equivalent of 9% of GDP in 2011-12. This will require infrastructure investment to increase by nearly 1% of GDP each year over the next four years. The $500bn question is, therefore, where will the additional levels of investment come from? While mutual funds have launched a plethora of infrastructure focused funds, few believe that the target will be met without a significant infusion of foreign capital. The government has approached the challenge by reforming infrastructure funding rules, easing investment limits and exploring public-private partnerships. But if the reforms fail and the necessary investment does not materialise, weak infrastructure is likely to become a serious impediment to future economic growth.

Furthermore, even if foreign investors do rise to what is undoubtedly a massive opportunity, the level of comfort that they should expect with their investments is still uncertain. "Execution is going to really be a challenge," says Milind Patel, executive director of IL&FS Financial Services, one of India's leading infrastructure and finance companies. "Three months ago capital wasn't a problem, but today it is and with every sector announcing expansion plans, we face severe constraints in terms of manpower and supplies. Yes, we will see things transform on the ground but going forward, for every 100 people that announce plans, only 10-15 of them can deliver what they actually dreamt about." But importantly, things are improving. The sense of progression and of the necessity for a dedicated effort is tangible and easily visible in the shiny office blocks that are sprouting from the dusty and often unpaved roads. And for a country that does software so well - as well as rule of law and competent institutions - can the hardware really be so hard to achieve?