In early October, Indian Prime Minister Manmohan Singh acknowledged that the country has been growing at 8 percent per year, but that annual growth of 10 percent or more is possible if the country’s infrastructure improves. “Our growth potential will be realized only if we can ensure that our infrastructure does not become a severe handicap,” Singh said. “The quality and capacity of our infrastructure is certainly a matter of concern to one and all.”

Singh estimates that India needs about $320 billion in infrastructure investment over the next five years to meet the demands of its booming economy, including the power sector. Over the next decade, India’s electricity sector will require about $200 billion of new investment, half of which will need to be spent on the creation of new generation capacity.

Singh singled out the country’s power sector as one of the biggest economic trouble spots, and asked India’s states to take immediate steps to make the sector financially viable. He said high transmission and distribution losses account for almost 40 percent of the total electricity produced. “No civilized society, nor a functional commercial entity, can sustain losses on such a scale,” he said.

About 44 percent of Indian citizens – about 500 million people – do not have regular access to electricity. Per capita electricity use in India is about 606 kilowatt-hours per year, or about 20 percent of the world average. The country needs at least another 100,000 megawatts (MW) of new electricity generation capacity by 2012 to keep economic growth on track. Half of that will be needed by 2008.

However, with the economy growing at over 8 percent, the staggering financial outlay that the energy sector needs in order to maintain such a growth pattern has prompted significant reforms, such as the Electricity Act of 2003 (aimed at sectoral reforms), and the toleration of 100 percent foreign direct investment (FDI). Singh and Finance Minister P. Chidambaram have called for private funding, especially from abroad, to meet the infrastructure needs, which have until now been funded solely by the government. The problem is that although India has opened up its economy considerably since switching from socialist-style policies in the early 1990s, foreign capital inflows have been slow. The country attracted just $8.5 billion in FDI last year, a tenth of what China gets annually.

Chidambaram says that liberalizing the rules that govern investments, in both pension funds and insurance businesses, will be key in the effort to raise the resources that are needed for infrastructure projects, where investments are typically locked up for years. “There are no long-term [debt] instruments...we need to push ahead with pension and insurance bills [reforms],” he said.

The Federation of Indian Chambers of Commerce and Industry recently rejected the idea of developing the corporate bond market in order to finance infrastructure growth. But other options could work, including limited recourse financing, through which creditors would be repaid entirely (or primarily) from the revenues that are generated by the power project. Whatever the means, there is no question that large-scale investment into India’s infrastructure will be needed in order to sustain economic growth. But at present, it is not yet clear whether those investments will be made.