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Will Budget lay the road to prosperity?
February, 26th 2007
Sensible policy directives, if not financial incentives, in the Budget can be crucial for Rural India.

When the Finance Minister, Mr P. Chidambaram, rises to present the Budget for 2007-08, he has an onerous task before of him: To find a delicate balance between the growing needs of infrastructure and reining in the spectre of inflation. Economists are one in saying that sustained investment into infrastructure is not just a harbinger of accelerated economic growth, but a vital pre-condition. But where can the Finance Minister harness funds for the huge growth pangs of Indian infrastructure?

On the positive side are an array of fortuitous circumstances including the surge in direct tax mobilisation, the increased Foreign Direct Investment flows, and the more number of Public-Private-Partnerships in infrastructure. Considerable solace has come from the huge FDI flows into some crucial infrastructure sectors, allowing the government a measure of dexterity in the Budget allocation exercise.

FDI flows

To cite an example, FDI approvals into the telecom sector alone until end-2005 was as high as Rs 41,551 crore. The timely and crucial investments have resulted in a dramatic drop in telecom tariffs, opened up access to broadband and enabled telephone penetration to one in ten Indians.

The huge volume of FDI into telecom illustrates the massive appetite for infrastructure funds, and the formidable task ahead for the government. Much to the relief of the fund-strapped government, both private capital and FDI into infrastructure are no longer considered bad in policy or public perception.

There is relief along the Indian coastline as investments flow into ports from international majors such as DP World. Private participation is evident in the civil aviation sector, both in the airlines industry and in the development and upkeep of aviation infrastructure such as airports. The Indian Railways is also a success story today and is proving increasingly capable of mobilising its own resources.

Tax Collections

Robust direct tax collections are another side of the picture. Contrary to the past, as much as Rs 2,32,171 crore was collected during the first nine months of the current fiscal almost 71 per cent of the budgeted estimate. The government's cash register is expected to be ringing when the Finance Minister rises to present the Budget. With the huge inflow of FDI, the increased private participation and the successful resource mobilisation, what is the catch in infrastructure funding?

While there has been acceleration in every other sector, road development continues to be the weakest link in the infrastructure chain. Says the Economic Survey: "The Indian road network is the largest in the world, aggregating 3.32 million km consists of 65,569 km of National Highways, 1,28,000 km of State Highways, 4,70,000 km of major district roads and about 26,50,000 km of district and rural roads." However, some number crunching will create traffic jams along the crowded Indian road network.

The National Highways, which constitute just two per cent of Indian road network, account for over 40 per cent of the total traffic. This translates into a huge traffic density of 400 vehicles per km of NH. And of the total length of the NH, 35 per cent is still single-lane, 53 per cent double-lane and only 12 per cent is four-lane. The Golden Quadrilateral of 5,846 km linking the four metros of Delhi, Mumbai, Kolkata, and Chennai to be taken up in the First Phase of the National Highways Development Project (NHDP) still requires huge cash flows. Phase II of the NHDP project, which involves linking Srinagar to Kanyakumari and Silchar to Porbander, an extent of 7,300 km, would require more resources. Of equal importance is port connectivity. There is also pending conversion requirements from single to two- and four-lane. The capital requirements continue to be huge.


Among the biggest source of funds for road building in the country is the uniform cess of Rs 2 per litre of petrol and diesel. But there are limits beyond which this source cannot be tapped as fuel prices are extremely inflation-sensitive.

As resources have not proved sufficient, the Government has resorted to borrowing from multinational agencies: the World Bank extending $1,965 million, the Asian Development Bank $1,605 million and the Japan Bank of International Cooperation yen 32,060 million. Almost all these funds are exclusively targeted at the NH and more so NHDP projects.

But the country's road development cannot be left to building National Highways alone. Building and maintaining district and rural roads are often the prerogative of local bodies and district administration, which are most often starved of funds. Effective government intervention and national policy direction could pave the road to prosperity for Rural India.

Potholed and in disrepair the rural roads might be, but they constitute 80 per cent of the road network. Sensible policy directives, if not financial incentives in the Union Budget, would help in re-building rural roads.

And they are arteries of Rural India, bringing in the agricultural products to urban markets and providing market for manufactured goods.

These arteries can prove to be the principal inflation targeting tools for fighting demand-push and supply-pull inflation. Which, unlike other monetary measures, can prove far more resilient and useful in the Indian context.

C. J. Punnathara

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