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Slow infrastructure development impeding Indian economy

TOKYO -- This past April in Mumbai, a new 6.5-km arterial road crossing the center of the metropolis from east to west opened to traffic with a showy ceremony by the Maharashtra state government. The Santa Cruz-Chembur Link Road was initially scheduled to open in 2004, but construction took about 10 years longer due to delays in land acquisition and sluggish bureaucracy within the state government. It was ridiculed as the "world's most delayed road project."

     During that time, the cost of the project swelled from 1.15 billion rupees ($20.5 million) in the initial plan to 4.35 billion rupees due to rising land and materials prices. Critics also complained that the Indian National Congress, the ruling party in the state, intentionally shifted the opening ceremony to just ahead of the recent general election to take political advantage of the occasion.

Delays double cost

Infrastructure projects for building roads, railways, ports, power plants and other public facilities are crucial for economic growth in India. However, there have been long delays in many projects across the country, which have seriously eroded the confidence of foreign investors as well as that of the domestic business community.

     As of March 2013, 285 of the central government's 569 ongoing infrastructure projects -- including 90 road projects and 51 electric power-related projects -- suffered delays, and the total construction cost for these projects had doubled from 475 billion rupees in the initial plans to 948 billion rupees, according to the Ministry of Statistics and Program Implementation.

     The National Highways Authority of India was able to construct only 1,425km, or about 15%, of the planned 9,500km of highways in fiscal year through March 2013, and worked on just under 2,000km of the planned 9,000km in fiscal year through March 2014.

     The biggest cause of delayed infrastructure projects is the difficulty of acquiring land. Landowners, including farmers, used to sell land whenever the government or local politicians asked, but in recent years, they have become more aware of their rights and have often refused to sell or demanded additional compensation. Their protest actions have sometimes developed into large-scale opposition movements with participation by left-wing parties and labor union activists.

     In addition, project costs have been raised even more by the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act of 2013, a law that provides for very handsome compensation for landowners. The land acquisition law, which was enacted under the strong leadership of Sonia Gandhi, president of the Indian National Congress, who led the previous administration, stipulates mandatory consent from 70% of affected residents for land acquisition for public-private partnership projects and 80% for private projects.

     Some analysts estimate that the law will increase land acquisition prices twofold in urban areas and fourfold in rural areas. Of course, project operators' financial burdens for the relocation and rehabilitation of the residents will also increase and project periods will be further prolonged.

     There are also many opinions in the business community that call for active intervention by state governments. B. Muthuraman, vice chairman of Tata Steel, said to a local business magazine, "Often the villagers are not against land acquisition, it is middlemen. The process of consent should be devoid of unruly elements."

     Furthermore, red tape is also hindering the smooth implementation of projects. For some public works projects, more than 50 permits from multiple government offices are required each. Also, if the state government is ruled by a different party from the central government, cooperation between the governments may be lacking, slowing the speed of projects even more.

Environmental impediments

Approval on environmental grounds, which is required for the construction of large factories, such as steel plants, also takes a long time. There have been opaque cases regarding this in recent years. It is said that after Jayanthi Natarajan resigned as minister of environment and forests in the previous government, as many as 350 unapproved documents were found in her office. "This is a big scandal that could develop into large-scale bribery cases," said a consultant well-informed about the local situation. "It is said that Rahul Gandhi, then vice president of the Indian National Congress, fired Natarajan in haste, frightened by what she might have done."

     The construction project for a special economic zone started in the northern state of Haryana by the major conglomerate Reliance group has effectively been suspended mainly due to delays in land acquisition. A 400-billion-rupee steel plant project in the eastern state of Odisha by ArcelorMittal, led by Lakshmi Mittal, an Indian steel magnate, has been dropped. Nuclear Power Corp. of India has also suspended construction of the Kovada nuclear power plant partly due to movements against nuclear power generation.

     The Navi Mumbai international airport project in a suburb of Mumbai, which aimed to open at the end of 2014, is certain to suffer a substantial delay because only about 10% of the project site has been secured so far.

     These delays in infrastructure projects and growing costs for them will not only put brakes on domestic and foreign companies' investment in India. C. Rangarajan, former chairman of the Prime Minister's Economic Advisory Council, warned that stagnant infrastructure development had become a major factor in slowing down gross fixed capital formation and impeding economic growth.

Quicker licensing

The government led by the Bharatiya Janata Party, which has regained power after an interval of 10 years, has been quick to place priority on restarting the infrastructure projects. Nitin Gadkari, minister of road transport and highways, who served as president of the BJP, declared in late June that the government would construct highways at a rate of 30km per day. This is a highly ambitious goal, given that the previous government was able to achieve only less than half of its goal of 20km per day.

     Road construction work worth a total of about 600 billion rupees has stopped chiefly due to delays in land acquisition and environmental clearance, and most of the amount has become bad loans for banks, according to Gadkari. Prakash Javadekar, current minister of environment and forests, stressed the need to quicken clearance procedures. He said he had taken several thousand unapproved documents from the previous administration, noting that environmental approvals have become a brake on the economy.

     The BJP government is also trying to revise the land acquisition law. The Ministry of Rural Development has proposed to the Prime Minister's Office that for public-private partnership projects, residents' consent to acquiring land be rendered unnecessary or the proportion of residents whose consent is needed to be reduced, according to news agency Press Trust of India. However, since the revision of the mandatory consent provisions would reduce landowners' interests, which were previously expanded, it could ignite a new storm of opposition.

     Some 65.7 trillion rupees will be invested in infrastructure projects in India over the five years from fiscal 2012 to fiscal 2016, according to the Planning Commission, which draws up the nation's five-year plans. It is true that there are great business opportunities in the infrastructure sector, but a drastic policy change is needed for rapid progress in projects.

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