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Monday, February 11, 2008

Some key new infrastructure projects are inadequate

From 1997 till 2002, India had a business cycle downturn. In addition, there was considerable uncertainty about the political / regulatory risk that infrastructure projects would involve. As a consequence, many of the projects which were conceived at the time involved very conservative assumptions about traffic growth. The projects of that vintage are now approaching completion, and in many cases, it looks like the traffic today already exceeds capacity. In addition, many of these older projects involved inexperienced teams on the part of both government and the infrastructure vendor. So there are quite a few blunders coming to light as these things come out the front door.

  • Here's a story by K. P. Narayana Kumar and Rahul Chandran on the difficulties of the Delhi-Gurgaon expressway, and here's Sunil Jain looking under the hood. Also see this edit in Business Standard.
  • Ramesh Ramanathan on the shiny new airport for Bangalore... which won't deliver the goods.
  • The new airport for Hyderabad will also be commissioned this year... but the road that links it to the city will immediately choke, and a new elevated road which will solve this is over a year away. See this story by Anjuli Bhargava in Business Standard, and this piece by Sunil Jain there.

It is easy to criticise all involved. But when we look back at the 1997-2002 period, when a lot of these projects were put together, there was genuine skepticism about Indian GDP growth, and fears that traffic growth would be weak (along with unspoken fears about the extent to which politicians would exempt certain classes of traffic from paying user charges). Today, it seems easy to criticise the thought process that went in there, but how many people were buying Nifty at 930 in April 2003?

This same story will be played in reverse also, when optimistic traffic projections made around 2005-2008 will prove to be over-estimates of traffic in the next business cycle downturn.

In thinking about this, it's important to see that the whiplash of GDP growth is a problem of macro policy and not infrastructure policy. India is a third world country where neither fiscal policy nor monetary policy are working to stabilise the business cycle. As a consequence, it is entirely to be expected that there will be a sharp boom-and-bust of GDP growth, such as the recent experience where we went from 3.84% in 2002-03 to 9.62% in 2006-07.

While it is frustrating looking at the blunders underlying shiny new infrastructure that's coming online, in my opinion, an excessive focus on this trickle of old projects that are now coming to fruition would be misplaced. In my opinion, the really important thing is: How quickly and effectively are lessons drawn from these blunders, and fed back into better contracting for the massive scale of infrastructure contracting and construction that is presently underway?


  1. Surprising you're giving a business cycle explanation for poor planning with regards to infrastructure. Traffic doesn't increase or decrease due to business cycle (at best may be marginal air traffic reduction in a down-cycle).

    Infrastructure planning has to be based on 30-40 year cycle (life time of a structure). One doesn't bulldoze an airport and rebuilt every business cycle. I surely hope planners are not planning infrastructure capacity based on 4-5 year business cycles...

  2. You are right that it's awkward. I think that India is at a stage of life where there is not much intuition into the business cycle. In the olden days, there were only monsoon shocks, there was no business cycle. It's only post-1993 that we are seeing the fluctuations of investment and inventory that are recognisable as business cycles in the textbook sense of the term.

    But that's not how most people see fluctuations in GDP growth. In the 1997-2002 period, everyone was convinced that Indian trend GDP growth was roughly 5.5%. Today, everyone is convinced that India's trend GDP growth is roughly 9.5%. There is inadequate appreciation that both the low and the high reflect an unstable macroeconomy - lacking the soothing influence of a properly structured monetary policy and fiscal policy - layered on top of a long-term trend.

  3. I recently posted an article on the impact of serious infrastructure projects on job growth and GDP.

    It is of possible interest to you.

  4. While people may have different views still good things should always be appreciated. Yours is a nice blog. Liked it!!!


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