Part V: Is offshoring in India worth the political risk?

Will infrastructure be a problem?

For years, the government neglected India's crumbling infrastructure, and the costs of that neglect are now obvious. The World Bank indicates that a lack of reliable, reasonably priced power is the single largest constraint on the country's businesses. In 2003, the Bank reports, 61 percent of them owned their own power generators to compensate for frequent service interruptions (about 17 a month, compared with fewer than 5 in China).

Dangerously overloaded passenger trains, gridlocked city roads, and aging airports all show that something is wrong.

Only recently has the government recognised that resolving these problems will be essential for growth. Plans are now afoot to improve broad swaths of the infrastructure. Over the next three years, the central and state governments plan to raise their annual investment in it to $35 billion, from $20 billion.

To augment these funds, they plan to attract private investment. (The Posco steel mill, for example, included a $900 million project to build a seaport in Orissa). 'Special-purpose vehicles' -� public-private partnerships to attract foreign money -� have been created to finance specific projects.

Improving India's power system alone will require $45 billion in public and private investment during the next three years. Any delay could hurt the entire economy, so the government is working to liberalise the market, though it is proving difficult to devise payment systems in concert with local electricity boards and to create an open market for selling power over the national grid.

What's more, coal to fuel power plants is in short supply. In one indication of the national government's commitment, however, it has worked hard to restart a 2184-megawatt power plant closed in 2001 by the Maharashtra state authorities over a debt dispute. A four-year stalemate involving the US investors, Bechtel and GE Capital, has now been broken, and the $2.9 billion plant is expected to be back on line in 2006.

Even in the rosiest scenario, India's infrastructure problems will take several years to resolve. Inadequate power, ports, and roads are especially troublesome because they raise energy- and logistics-related costs -� for example, by forcing businesses to keep higher-than-optimal inventories and to buy stand-alone power generators. As the situation improves, these costs will slowly fall.

Next: Will India protect intellectual property?

Adil S Zainulbhai is a director in McKinsey's Mumbai office. This commentary first appeared in India Abroad, the newspaper owned by rediff.com