Saturday, January 15, 2011

Indian Infrastructure

WSJ: World Bank Pledges Nearly $2 Billion to India
Business Standard: World Bank Grants $1.5 bn Loan to Build 24,000 km Rural Roads
The Economic Times: World Bank Approves $2 bn Loan for Road, Other Projects
The Hindu: Way Paved for India's Enhanced Partnership with World Bank
Arab News: World Bank Vows $1.73 bn Loan to India

The World Bank announced on Friday that it will lend $ 1.73 billion to fund several projects in India, with $1.5 billion going to building roads in rural areas and the rest to fund a cyclone warning system. The loans are part of a trend of increasing cooperating between India and the World Bank. India has the world’s second fastest growing major economy, so the World Bank, and the rest of the world, have an interest in India’s continued development. India is projected to overtake China’s growth rate in 2012 in purchaser power parity basis as China’s growth rate is projected to be 8.4% and India’s to be 8.7%. Purchasing power parity measurements looks at actual production between countries, imposing an equal exchange of goods, not money. This means inflation and pricing differences will not distract from measuring production.

Roughly 24,000km of new roads will be created using the World Bank funds, which compose the largest road loan in World Bank history. This new loan is part of India’s project to build new motorways. India is imposing a program to build 375,000 km of new roads and improve another 372,000 km. The total cost of the project is $40 billion, and that includes the World Bank loan.

This latest loan follows $45 million in technical assistance from the World Bank last month to boost India’s national highway infrastructure. The highways, which carry 40% of the country’s road traffic, are still underdeveloped as only 53% have more than one lane.

India’s poor roads are a threat to its economic growth. The immediate concern arising from poor roads is inflation in the cost of food. Most of the dilapidated roads are in a rural area, where most of India’s food is produced. Thus, the food rots on its way to market, decreasing the supply of food, and that causes the price of food to rise. Perishable food items pushed overall wholesale price inflation to 8.43 percent in December from 7.48 percent in November. In response to the growing threat of inflation, the Reserve Bank of India (India’s central bank) raised short term interest rates six times last year, and will likely do so again if inflation keeps rising.

Also included in the $1.73 billion loan is $225 million to strengthen an existing early response system for cyclones around India’s 7,000 km coastline. It is estimated that the damage from natural disasters equates to 2% of India’s gross domestic product. Additionally, 40% of India’s population lives within 100km of the coast, making cyclones a particularly dangerous threat.

1. India and China are the two major powers in Asia. Is the United States likely to befriend India to mitigate Chinese influence in the region and the world?
2. How confident can the rest of the world be that the Reserve Bank of India will control inflation?

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