1. Conference on Sustainable Growth and Enhancing Integration in Asia ADBI and RIS New Delhi November 15, 2010 Alok Sheel Joint Secretary, Department of Economic Affairs Ministry of Finance, India Session II: Infrastructure for Enhancing Asia’s Economic Integration

2. The Big Picture: ADBI Study Large but uneven investment in infrastructure in Asian countries: big gap with advanced countries that needs to be quickly bridged. Infrastructure Investment gap of over $ 8 trillion in 2010-2020. Investment on this scale will increase aggregate Asian national income by $ 13 trillion. This would accelerate the process of per capital income convergence with the West. Historical experience and current trends indicate that cross-border infrastructure the most challenging. 2Alok Sheel

3. Cross Border Asian Infrastructure Broadly defined to include wholly nationally owned infrastructure with cross border connectivity to contiguous countries Since intra-Asian trade is growing faster than trans-continental trade, the need for greater cross border connectivity is manifest. Problem particularly acute in South Asia: least integrated region in the world. Post global financial crisis, this need is even more manifest on account of the imperative of global demand rebalancing: domestic demand set to grow faster. 3Alok Sheel

4. Asia’s strategic advantages Extensive waterways, that connected Asian markets with the west right through history, can be leveraged: the old trade route from the Chinese coast to Europe and Africa now extends to the American coast. Domestic savings surplus that can be re-directed to infrastructure investment. Infrastructure investment has a public investment bias, and fiscal position of Asia is much better than in advanced countries. Such investment would automatically rebalance global demand and raise global trend growth. 4Alok Sheel

5. The Financing Problem Advanced economies are bust: so foreign aid likely to shrink in real terms. Most of accumulated savings with Asian Central Banks rather than with governments. Bulk of the investment would have to be publicly funded/guaranteed in the best of circumstances IFIs scale of financing pales in relation to Asia’s investment needs: no global appetite to scale up this financing: the G 20 experience. Private investment likely to be limited, and even then may need to be guaranteed by governments and underwritten by IFIs or RFIs to address political risks in cross-border projects. 5Alok Sheel

6. What is the solution? If private investment is an issue, ‘sterilized funds’ could be used for investment in infrastructure: constraint is absorptive capacity and political will (for cross border infrastructure) rather than funds. Basically means redirecting private savings to government debt. What level of debt is sustainable? Depends on potential growth and interest rates. (Domar Debt Sustainability equation*) If borrowing is invested it will pay for itself through higher growth and revenues. Asian Investment Fund is another possibility. This would entail (a) foreign public debt for domestic expenditure and revenue streams, and/or (b) Sovereign guarantees. Akin to World Bank and ADB financing. 6Alok Sheel *Interest paid on debt should be less than aggregate GDP growth provided primary balance is nominal.