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Can India's infrastructure rival China's?

By Manjeet Kripalani, BusinessWeek
May 08, 2006 09:46 IST
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The commotion over the building of a dam over the Narmada River in the western Indian state of Gujarat hogged the headlines in India over the past few weeks. Medha Patkar, activist and leader of the Narmada Bachao Andolan (Save Narmada movement), went on a 20-day fast to protest the government's failure to come to the aid of an estimated 500,000 villagers who have lost their livelihood as a consequence of the Sardar Sarovar dam, which will supply electricity to Gujarat state.

The issue has become a classic one of haves vs. have-nots: On one side are the farmers who need the dam to irrigate their fields, and on the other are those who have lost access to their land because of it. And true to type, the ruling Congress administration in New Delhi, afraid of alienating any bloc of potential voters, didn't make a decision. Instead the government left it to the Supreme Court to direct the state to speed up its program for compensating and relocating the area's inhabitants.

Power struggle

It all generates a rather depressing sense of deja vu. Patkar has staged several hunger strikes in the 20 years the dispute has been running, in support of the rights of the local tribespeople. The Supreme Court has handed down several decisions and directions on the building of the dam and compensation and relocation efforts -- and reaffirmed them last month.

The federal, state and local governments have been lax in implementing either their promises, the law or the Supreme Court directives. In short, it's been business as usual in the world's 10th largest economy.

It's a grim scenario for a country that aims to be a world super power. India is at a critical juncture in its development. Its private companies have performed so well that the Bombay Stock Exchange attracts $1 billion a month in foreign investment. India's software, telecom, pharma and auto industries are globally competitive, and the country's vibrant culture produces movies and music that are popular in Asia and gradually gaining an audience in the West.

Endless delays

But concerns about India's ability to sustain the boom are cropping up. There's the overheated stock market and the real-estate gold rush -- both indications that there's too much money chasing a limited supply of a good thing. For India to keep up its momentum, it must make a giant leap into China-style 10% annual growth. And that growth will only come when policymakers begin a serious campaign to tackle the country's gaping infrastructure deficit.

Sadly, as the Narmada dam shows, this is not regarded as a pressing issue in New Delhi. For the last two years, during his visits to foreign capitals, Indian Prime Minister Manmohan Singh has invited investors to participate in India's $150 billion infrastructure buildout -- large projects for power, water, mines, roads, ports, rail, airports, townships, and more recently, special economic zones. All these, of course, require the acquisition of land and the relocation and proper compensation of locals with money, training, and social services.

India's Narmada dam, with all its issues of federal and state permissions, environmental approvals, and equitable rehabilitation of the inhabitants, could have been a showpiece for foreign investors. Instead, it's a disgrace: a sorry tale of a 20-year delay, cost overruns, state negligence, and bitter local resistance -- and a reason why foreign direct investment bypasses India and heads for China, whose infrastructure is first rate.

Riled residents

Narmada-style failures are happening across the country, especially in the resource-rich but cash-poor eastern states of Orissa, Jharkhand, and Chattisgarh. Foreign investors such as Korea's Posco have committed $13 billion to mine iron ore and build a steel facility in Orissa, and billions more have been pledged by Indian heavyweights like Tata Steel, aluminum major Hindalco, and London-based Indian expats Lakshmi Mittal and Vedanta Resources' Anil Aggarwal.

But the portents are gloomy: None of those projects has really gotten off the ground, and the one that has ran into inevitable trouble.

In January, violent protests erupted when Tata Steel, widely regarded as a benevolent employer, began construction of a steel mill on land it had acquired in Kalinganagar in Orissa. The locals, however, claimed the land was still in their possession. The state police were called in and 12 tribespeople were shot dead.

Tata executives say they paid the government full price for the land. But the locals felt they had not been adequately compensated by the government. Officials in Orissa could not be reached for comment. "The fruits of development must be shared, and until these issues are resolved, India's development will be stymied," says Tata director Ishaat Hussain.

Invisible institutions

Such clashes are a sure deterrent for foreign investors. India has ample supplies of iron ore, bauxite and coal. But though the government has allowed private players to bid for mining rights, not many have actually taken the bait. Roddy Sale, a British consultant in Bombay who represents Anglo-Australian giant BHP Billiton, says the company is interested in mining bauxite in Orissa and Andhra Pradesh, and perhaps building a refinery and smelter there at some future time.

But BHP is daunted by the prospect of poor implementation of the law by the state governments on issues like properly compensating and relocating inhabitants affected by big projects. "There aren't really institutions which can manage these processes," Sale says.

Many development experts think the government can do better. Even in India's road-widening efforts or its attempts to acquire land to build airports or develop stunted cities, the state "expropriates the land for paltry compensation," says Nasser Munjee, an infrastructure expert and chairman of the Development Credit Bank. If this keeps up, India can bid farewell to its dreams of becoming an Asian power and successfully rivaling China.

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Manjeet Kripalani, BusinessWeek

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