India’s Infrastructure Development and Japan’s Cooperation

For India to achieve steady economic growth, infrastructure development is a major challenge.

By Katsuo Matsumoto

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For India to achieve steady economic growth, infrastructure development is a major challenge. Despite increased investment in infrastructure development in recent years, India’s competitiveness is still low compared to other BRICS countries. To promote infrastructure development on a full scale, the government of India announced the National Infrastructure Pipeline (NIP) in 2019, which will use private funds in addition to public budget.

Japan continues to support infrastructure projects through its Official Development Assistance (ODA) and is the India’s largest cooperative partner. Japan has provided ODA loans for various public works projects, including Dedicated Freight Corridor, the flagship project of the Delhi-Mumbai Industrial Corridor Initiative, a high-speed railway project using Japan’s Shinkansen system, and a national highway network project in the underdeveloped North Eastern Region.

Such cooperation on infrastructure development will contribute to further strengthen bilateral relations and India’s SDGs achievement. In promoting future cooperation, Japan needs to pay attention to coherence with the Make in India initiative, careful selection of eligible projects, and capacity building of the implementing agencies.

Introduction

For India to reach the 5 trillion USD economy while also achieving the SDGs, promoting infrastructure development is essential. Besides transport, electricity, and other core projects that support the industry, expanding social infrastructure such as water supply and hospitals that have a direct impact on improving people’s lives is an urgent task.

The Modi administration announced the NIP in 2019 to promote the implementation of infrastructure projects. To back up its implementation financially, the National Monetization Pipeline (NMP) was also announced to establish an infrastructure development bank and attract private investments.

As if to support enhanced infrastructure investment, the capital expenditure, including public investment, rose 35.4% from the previous fiscal year to 7.5 trillion rupees (about 11.5 trillion yen by February 2022 exchange rate) in the government’s FY2022 budget bill. The spending in the transport and electricity sectors increased over 50% from the previous fiscal year, clearly indicating the government’s policy of supporting economic growth through infrastructure development.

For infrastructure development, Japan has provided financial and technical cooperation to India as its greatest partner. On the backdrop of friendly bilateral relations and a vast appetite for development, India has been a major partner country of Japan’s ODA.

Currently, there are about 70 ODA loan projects underway, boasting the largest number of cases among partner countries. Besides the large-scale projects in the transport area, including a high-speed railway project with Japan’s Shinkansen bullet train as the model, there are also many water-supply and hospital projects that support the livelihood of rural areas.

This article will give an overview of the recent infrastructure development by the government of India and explain the current situation of Japan’s ODA loans. It will also describe the state of Japan-India flagship projects and support in the North Eastern Region, and discuss the prospects for future development cooperation.

Ⅰ.Infrastructure Competitiveness of India

The government of India has been focusing on infrastructure development as the foundation for supporting the rapid growth in recent years. As shown in Graph 1, between FY2013 and FY2019, the total infrastructure investment by the center and state governments and the private sector has almost doubled.

To give a specific example, in the area of national roads that support domestic logistics, about 52,000 kilometers (32,300 miles) were newly built in the five years from FY2016 to FY2020. The total length built in a single fiscal year increased significantly from 8,200 kilometers (5,100 miles) in FY2016 to 13,000 kilometers (8,080 miles) in FY2020.

Facilities in the area of renewable energy are also showing remarkable expansion. In particular, the installed capacity of solar power generation has increased over five-fold, from 6.7 GW to 40 GW over the past five years. The total installed capacity of renewable energy, including wind power, has grown from 46 GW to 98 GW over the same period (Graph 2), and the government of India plans to increase this capacity to 175 GW by 2022.

Besides the large-scale core infrastructure to support industrial activities, the Modi administration has been promoting measures to expand social infrastructure in rural areas, such as the Jal Jeevan (water for life) Mission to provide water services to all households, the Saubhagya (prosperity) scheme to provide electricity to villages, and Clean India Mission to provide access to toilets. The ministries in charge of each of these projects provide transparency by disclosing the progress on their websites.

Despite such active expansion of infrastructure development, an enormous demand remains. Table 1 illustrates the infrastructure competitiveness rankings of the BRICS nations. India’s competitiveness gap with China is particularly significant. In overall infrastructure ranking, China is 36th while India is 70th. For road connectivity and electricity access, China is 10th and 2nd while India lags at 72nd and 105th, respectively.

Although there is already a five-fold difference in GDP per capita between the two countries (approximately 2,000 USD in India vs. 10,000 USD in China), and the difference in industrial structure needs to be considered, including the growth of the manufacturing sector, there is plenty of growth potential in India’s infrastructure development. For the Modi administration aiming for a 5 trillion USD economy by 2025, it is no exaggeration to say the top priority is infrastructure development, to boost industrial activities and improve the livelihood of rural areas.

Ⅱ.Overview of the National Infrastructure Pipeline (NIP)

Under the circumstance, the government of India announced the NIP in 2019. It is a policy for strategic infrastructure development. According to the report (May 2020) released by the NIP Task Force established in the Ministry of Finance, approximately 111 trillion rupees will be invested in infrastructure projects between 2020 and 2025.

The report stressed that the NIP was initiated because the lack of infrastructure is the primary growth constraint, and in implementation, the NIP will focus on active use of private-sector funds, the adoption of advanced technologies using information and communication technologies, and measures to address climate change.

The report also states the sector-wise expenditure. Energy, including renewable energy, receives the largest allocation, followed by roads and urban infrastructure (Graph 3). The source of the funds is expected to be 39% from the central government, 40% from the state governments, and 21% from the private sector.

The number of NIP projects reaches 7,400, of which about 40% are already under implementation. As measures for effective infrastructure development, the report stresses improving project planning processes and enhancing the execution capacity of implementing institutions and describes specific action plans. Key Performance Indicators (KPI) required for project management have also been established for each sector.

To expand funding for infrastructure projects, the government of India established the National Bank for Financing Infrastructure and Development (NaBFID) to provide financial support for NIP projects. The NaBFID Bill passed in March 2021, and the initial capital is expected to be 200 billion rupees, in addition to private-sector funds.

The formulation of the organization is underway, with operations scheduled to begin in the first half of 2022. Based on funds from the government and private sectors, the bank will provide 3 trillion rupees over the next three years.

According to the NaBFID Bill, the bank can also receive funding from Multilateral Development Banks (MDBs), and in such cases, the government will provide guarantees at concessionary rates. Regardless of borrowing from MDBs, building relationships with these organizations is expected to help strengthen the bank’s capacity for loan decisions and project management. In this regard, collaboration with Japan International Cooperation Agency (JICA) and others should also be considered.

The NMP, which aims to monetize national assets, was announced in August 2021 as a measure to promote NIP implementation. Between FY2022-2025, it plans to monetize state-owned infrastructure assets worth 6 trillion rupees. The NMP is designed to secure financial resources for the NIP by utilizing private capital for infrastructure projects, including long-term leasing of existing infrastructure projects such as roads, railways, and electricity to private companies.

Ⅲ.Japan’s Cooperation on Infrastructure Development

Japan is India’s largest partner in terms of financial cooperation for infrastructure development and is expected to contribute significantly in promoting the NIP. In particular, ODA loans, with a track record of over 60 years, are positioned as an effective financial tool to support the NIP projects promoted by the central and state governments. The current status of ODA loans to India is summarized below.

Japan’s ODA loans to India are the largest among those targeted towards developing countries, totaling 356.3 billion yen in FY2020 (Graph 4). In addition, the amount of loans disbursed according to the project’s progress (solid line in graph) shows a steady increase. Besides transport, which has the largest share, the ODA loans cover a wide range of areas, including electricity, water and sewage, agriculture and forestry, and education (Graph 5), with about 70 projects under implementation.

In FY2020, nine loan agreements were signed, including a water supply project in Rajasthan to expand water supply facilities in rural areas and a national hospital project in Tamil Nadu, besides continued support (phased projects) for urban railways in Kolkata and Bengaluru (Table 2).

One of the distinct features of the FY2020 projects was the inclusion of emergency assistance to counter COVID-19 and the national hospital project, which will serve as a platform for the health sector between Japan and India. The COVID pandemic has prompted the government of India to renew its efforts to strengthen public medical care system, and the expansion of hospitals and other medical facilities will continue to be in high demand.

The features of the ODA loans provided over the past few years include: (1) utilization of clean energy (e.g., Project for Renovation and Modernization of Umiam-Umtru Stage-3 Hydroelectric Power Station, Project for the Construction of Turga Pumped Storage); (2) countermeasures for urbanization (Project for Construction of Chennai Seawater Desalination Plant, subway projects in major cities); (3) support for the North Eastern Region (North East Road Network Connectivity Improvement Project [Phase 1-5], Project for Sustainable Catchment Forest Management in Tripura); (4) rural development (Rajasthan Rural Water Supply & Fluorosis Project [Phase 2], Himachal Pradesh Crop Diversification Promotion Project [Phase 2]); (5) flagship project for Japan-India cooperation (Project for Construction of Mumbai – Ahmedabad High Speed Rail); and (6) support for system building to realize the SDGs (Program for Japan-India Cooperative Actions towards SDGs in India). Based on the requests of the government of India, the ODA loan projects address a wide range of development issues.

The reasons for the increased size of ODA loans to India include: (1) the continuation of large-scale projects such as Japan-India flagship projects and urban railway projects; (2) enormous demand for funds in various sectors, including social infrastructure; (3) the high capacity of project implementing agencies; (4) no delays in loan repayment helped by proper management of debt repayment; and (5) government of India’s strong intent to use ODA loans.

In addition to ODA loans, technical cooperation, including the dispatch of Japanese experts and capacity development of implementing agencies in India, is also on-going to enhance project effectiveness. One characteristic of the cooperation is that it targets areas where Japan has accumulated its expertise (e.g., strengthening the capacity of high-speed rail authority, capacity development on highways in mountainous regions, natural disaster management in forest areas, and capacity building for safety operation of railway).

Ⅳ.Current Status and Outlook of Major Projects

1.Dedicated Freight Corridor Project (Delhi-Mumbai)

This is the backbone of the Delhi-Mumbai Industrial Corridor for promoting inter-city logistics and intra-regional investment in the six-state region between Delhi and Mumbai, and a Japan-India flagship project.

The western coastal area around Mumbai has several deep-water ports and is actively engaged in logistics with Delhi and other metropolitan areas, and container traffic between these ports and inland demand areas is expected to surge in the future. In addition, the Western Corridor that connects major cities such as Delhi and Mumbai, has over 250 branches of Japanese companies. So, the improvement of cargo transportation infrastructure is expected to benefit the Japanese companies.

The project will construct a freight railway between Delhi and Mumbai (about 1,500 kilometers, 932 miles). The Phase 1 section is the 922 kilometers (572 miles) segment between the cities of Rewari and Vadodara, connecting the states of Haryana, Rajasthan, and Gujarat. Phase 2 section includes the 127 kilometers (78 miles) Rewari-Dadri segment connecting the states of Haryana and Uttar Pradesh, and the 427 kilometers (265 miles) Vadodara-Mumbai segment connecting the states of Gujarat and Maharashtra (Figure 1).

Currently, procurement and consulting services related to civil engineering and construction works (roadbed maintenance, construction of bridges, freight stations and other structures), track works, electrical and mechanical works (maintenance of overhead lines and substations), signal and communication works (maintenance of signal and communication systems, construction of automatic crossing systems), and maintenance and inspection vehicles are in progress under the ODA scheme. With the completion of the project, the freight transportation time between Delhi and Mumbai is expected to be reduced from a maximum of 72 hours to 20 hours.

As of December 2021, the construction progression rate is 81% for the Phase 1 section and 63% for the Phase 2 section, and the completed section (about 630 kilometers/391 miles from Rewari in Haryana to Palampur in Gujarat) is partially open to traffic. Although there are pending issues on site between the contractor and the implementing agency, such as the speed of design approval and payment method, the construction work itself is nearing the end, and partial operation is expected to start from the completed sections.

While this project covers the Western Corridor, the Eastern Corridor between Delhi and Kolkata is supported by the World Bank, and both corridors are expected to be completed at about the same time, helping to improve logistics across a wide region.

2.High Speed Rail (Mumbai–Ahmedabad)

This project will construct the first high-speed railway system in India. Following a joint feasibility study, Japan and India agreed on the project at the 2015 summit meeting, on the condition of adopting Japan’s Shinkansen system. Since then, design work has been implemented with JICA funds, and through the provision of ODA loans, civil engineering works have begun in the main line section.

The project involves the construction of a high-speed railway using Japan’s Shinkansen system on a 500 kilometers (310 miles) segment between Ahmedabad in Gujarat and Mumbai in Maharashtra. The aim is to provide better passenger transportation, reduce traffic pollution, strengthen regional connectivity, and contribute to the economic development of the target area by establishing a high frequency mass transit system.

For the main line section, ODA loans will be used for civil engineering (including station construction and undersea tunnels), bridge construction, rail yard construction, track work, rolling stock procurement, electrical and mechanical work (including signal and communication systems, overhead wires, substations, and general command centers), maintenance and inspection vehicle procurement, and consulting services.

Civil engineering work is already underway, and the 237 kilometers Vadodara-Vapi segment was awarded to an Indian construction company with a contract worth approximately 400 billion yen, the largest public works contract in the country. Procurement of the operation system and rolling stock in which Japanese companies are expected to participate will start soon.

While considering the progress of this project, the government of India plans to build a network of high-speed railway in the country. With the Japanese system introduced as the first case, it is expected to become the de facto model for future high-speed railway projects.

3.Cooperation in the North Eastern Region

India is a major partner of the Japanese government’s “Free and Open Indo-Pacific” initiative, and efforts to strengthen regional connectivity, including the neighboring countries, have begun under the Japan-India cooperation. In line with this context, JICA has been expanding its financial cooperation in development projects in the North Eastern Region.

In this region, far from the center of the Indian peninsula, political instability such as independence movements and underdevelopment have been issues for a long time. The democratization of Myanmar brought attention to the region as a point of contact with neighboring countries such as Nepal and Bhutan, as well as Southeast Asia, and Japan began full-fledged support.

In 2017, the Japan-India Act East Forum was established by the agreement between the governments of the two countries to promote development cooperation in the North Eastern Region.

The Forum aims to further expand cooperation between Japan and India in the North Eastern Region, discuss development plans in various fields in the region, and promote cooperation projects. Meetings are held semi-annually, with the Embassy of Japan in India and other government agencies participating from the Japanese side, and the Ministry of External Affairs and government officials from the central and North Eastern states attending from the Indian side.

As priority areas for cooperation, the Forum discusses not only infrastructure development, such as road network connectivity within the region, electricity, and water supply/sewage, but also hospitals, countermeasures against natural disasters, Japanese language education, and afforestation. There are currently 12 ODA loan projects (approved amount approximately 246.4 billion yen, see Figure 2) in the North Eastern Region, all under implementation.

In addition to ODA loans, technical cooperation in agriculture for irrigation development is ongoing in Mizoram. Based on these achievements and high expectations for Japanese cooperation by the North Eastern states, further enhancement of cooperation is expected, including a packaging program of small-scale projects.

Ⅴ.Future Direction

The current Modi administration aims to achieve 5 trillion USD economy by 2025. Despite recent slowing of economic growth, there is no doubt India will become one of world’s largest economies. As its middle class grows, India will become increasingly attractive as a market. With further developed infrastructure and improved business environment, foreign investment is expected to surge.

Also, as a major driving force under the Japanese government’s “Free and Open Indo-Pacific” initiative, India, along with Japan, is in a position to play an important role in the region’s stability. Thus, strengthening the Japan-India relationship is essential from both economic and diplomatic perspectives. From the view of promoting closer bilateral ties, the expansion of the ODA to boost India’s development will continue to be an effective diplomatic tool.

As described in this article, the NIP has an enormous financial demand. Effective utilization of Japan’s ODA loans and private-sector funds will help India realize its targets and contribute broadly to improving people’s lives. To achieve the international aim of the SDGs on a global scale, the implementation efforts by India, with its large population, are indispensable, and Japan’s support will also contribute to the achievement of the SDGs in India.

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Japan’s financial assistance is expected to continue in the future, but at this stage, we must keep the following points in mind:

First is dealing with the Make in India initiative. The government of India has been promoting several measures including financial subsidies and human resource development to boost the domestic manufacturing industry. In this context, there is a policy for mandate goods procurement from Indian companies for public works projects, which is partly inconsistent with the ODA loan system based on international competitive bidding.

Although ODA loan projects currently receive exceptional status, it is necessary to seek consistency between the policy of awarding contracts to domestic companies and the ODA rule based on procurement in line with international standards.

Second is further clarification of the criteria for selecting eligible projects. Domestic demand for development is large and the central and state governments are requesting Japanese cooperation for various candidate projects. In many cases, when considering the necessity and maturity, procedures in India and coordination between the two countries take a long time.

Besides discussions on priority areas by the two governments, it is necessary to improve the quality of feasibility studies conducted by the government of India to select highly effective infrastructure projects.

Third is strengthening the capacity of project implementing agencies. As the NIP also presents a concrete action plan, it is an urgent issue to clarify the responsibility of the agencies, streamline the decision-making process, and develop human resources. In particular, capacity building of relevant government departments and implementing agencies is essential.

Related to the third point are the challenges in the composition and operation of industrial parks. According to a 2014 JICA survey on industrial parks in India, in which I was also involved, out of approximately 200 eligible industrial parks, only a few had sufficient infrastructure facilities and management services required for factory operations. These ones were all developed with private capital.

The main reasons for the lack of progress in state-controlled projects were the limited authority of the state development corporation that oversees the projects and its inability to coordinate with relevant departments. In this regard, Japanese cooperation in strengthening the capacity of the state government will continue to be effective.

To strengthen Japan-India relations, cooperation on infrastructure development to support India’s growth strategy will undoubtedly be an important pillar. As the largest cooperating partner, Japan’s commitment to boost India’s development will help regional growth and stability and will also contribute to the formation of a new international order.

* The opinions expressed are my own, and do not represent the views of the organization.

Translated from the Japanese article originally published in the May/June 2022 issue of the “World Economic Review” magazine.

Katsuo Matsumoto
Visiting professor at Graduate School of Social Sciences, Hitotsubashi University. After graduating from Hitotsubasih University, worked in development cooperation in Southeast Asia and South Asia. Served as Chief Representative of Japan International Cooperation Agency (JICA) India Office from 2018 to 2021. Earned M.A. in international and public affairs from Columbia University, and Ph.D. in advanced interdisciplinary studies from the Graduate School of Engineering, the University of Tokyo. Recent publication: “India Business: The Last Mile Strategy” (in Japanese, from Nihon Keizai Shimbun Shuppan).

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