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India has initiated ambitious reform programmes, involving a shift from a controlled to an open market economy showing signs of overheating because of basic infrastructure constraints, both physical and human. So far, the bulk of infrastructure was in the public sector. Public sector in India operating in a protected set up has been largely subsidised by the Government.

Since the launching of reforms, Government is trying to reduce its borrowing which means that further subsidization will not be possible. There is one area where there is a need for private sector and foreign investment to come in. Because of the long gestation period, and many social implications, the infrastructure sector compares unfavorably with manufacturing and many other sectors. For this, specific policies in this area are need to make infrastructure attractive. Clearly, there is a wide gap between the potential demand for infrastructure for high growth and the available supply. This is the challenge placed before the economy, i.e. before the public and private sector and foreign investors. This can also be seen as an opportunity for a widening market and enhanced production.

Total Capital Needs For Investments

According to the India infrastructure Report (IIR), currently 5.5 percent of the GDP is invested in the infrastructure sector. This needs to be increased to 7 percent within the next three years and 8 per cent by 2005-06, by which time the annual level of investment in infrastructural facilities is projected to treble or rise even more, from the current level of Rs. 6000 billion (US$52 billion) by 2005-2006.

The total infrastructure investment requirements for the next five years again have been estimated in the report at about Rs. 4000-4500 billion (US$ 115-130 billion).

The task of finding such large amounts and thereafter deploying them productively calls for a close partnership between the public and private sectors, with a vital role reserved for foreign capital. To finance this large short fall, the domestic saving rate needs to be increased by a minimum of 26.7%. Besides this has to be supplemented at the margin by FDI. However, this "margin is indeed very important since the role of foreign investment has to be read not only as a gap filler between saving and investment but also as a means for bringing better technology and management

 

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