A Nehruvian ambition for infrastructure
It is true that infrastructure projects can be carved out for the private sector to have a role in financing with profit. For instance, much of the telecom growth was due to private sector funding. But abrupt changes in regulation as also a cutthroat price war has put the entire sector in great jeopardy.
In last year’s Independence Day speech, Prime Minister Narendra Modi had spoken about investing 100 lakh crore rupees (or Rs 100 trillion) into infrastructure in the next five years. At current values, this is roughly fifty per cent of India’s nominal GDP. So to be able to achieve this ambition is to spend about 10 per cent of GDP every year on infrastructure.
India has struggled to reach this ambitious target for more than a decade now. Even the former Prime Minister Manmohan Singh had spoken about investing a trillion dollars (which is roughly the same number as now), in five years. This past week, the Finance Minister Ms Sitharaman unveiled the National Infrastructure Pipeline (NIP) report with details of 102 trillion rupees of investment projects spread over 18 States and Union Territories, and over five years.
The NIP report has details on breakup of the investments into various sectors and sub-sectors, and also milestones to be reached. What it does not mention nor analyse is how will the financing work, and what would the financing do to the rest of the macro-economy. Former member of the Prime Minister’s Economic Advisory Council, Rathin Roy, in a column in the Business Standard wrote that the NIP is a standalone and is not “nested” within a macro-economic or fiscal framework.
Since we are talking about a significant portion of GDP to be committed to infrastructure, it is surely imperative to take into account the inter-linkages and a holistic picture of how the NIP will affect, and be affected by the economy as a whole. More importantly, Roy observes that NIP envisages that 78 per cent of the NIP will be financed by the public sector.
He calls this a Nehruvian aspiration, perhaps referring to the first three five-year plans, and the heyday of the now dead Planning Commission. One of the key and close confidants of Prime Minister Nehru was Mahalanobis, the great scientist and statistician, member of the Planning Commission, and a key architect of the Second five-year plan. That plan aimed at rapid industrialisation of India, using the famous Mahalanobis two-sector model, which was to optimise investments into industry so as to maximize growth.
But if you wanted, say, 10 per cent growth, you had to have huge savings, and cut down on current consumption. The country faced not only constraints of domestic savings but also foreign savings as there was acute shortage of foreign exchange. There was also shortage of food, since the country had not attained self-sufficiency in food production.
So this was a case of constrained optimisation, i.e. do the best within the constraints. Apparently Nehru was very dissatisfied. He had a disdain for thinking in terms of constraints. Why can’t India have high growth, high savings, high investments and high food production? Some of this may be apocryphal but captures the spirit of “Nehruvian aspiration”.
The current ambition of achieving 10 per cent investment in infrastructure every year for the next five years, ignoring the constraints posed by the rest of the economy or even the fiscal situation is similar to the Nehru’s approach. You can fault it for not being realistic, but not for lack of ambition. Rathin Roy’s comment was perhaps more about the mode of financing, and not the realistic nature of the goal itself.
The fact that nearly four-fifths of all expenditure of Rs. 100 trillion has to come from the public sector is not surprising. Infrastructure, be it roadways, electricity, housing or drinking water, or even social infrastructure like health and education, has a public good element. Which means that returns cannot be exclusive to the investor. Also the gestation period of the projects can be much longer than what a private investor is willing to accept. So expecting the private sector to finance much of infrastructure is problematic.
It is true that infrastructure projects can be carved out for the private sector to have a role in financing with profit. For instance, much of the telecom growth was due to private sector funding. But abrupt changes in regulation as also a cutthroat price war has put that entire sector in great jeopardy. Private investors can be attracted in projects like toll roads where the fund flow is ring fenced and escrowed. But the experience of ILFS crisis and some related infra projects is making private investors wary again. In solar projects, which become viable only if backed by long-term Power Purchase Agreements (PPAs), private investors did rush in. But developments in Andhra Pradesh and at the apparent reneging on long term PPAs is again causing great concern. So for various reasons, like spill over benefits to non-investors, shorter time horizons preferred by investors, and the uncertainty of preserving long term contract obligations, the role of private sector in infrastructure is limited.
Even then, the earlier governments tried out the Public Private Partnership (PPP) model, which was also supported greatly by the World Bank. Looking back, it is clear that the overall the success rate of PPP was limited. When the project stalled due to regulatory delays, and it went into dispute resolution, the private investor cum equity risk holder usually had a bad experience. Many of the bad loans in infrastructure resulted from the disputes and delays. The ultimate price was paid by banks, which had to take haircuts on the loans given.
So in the true Nehruvian spirit, we should shy away from neither the mega ambition of the NIP nor the intent of financing it mostly from the public sector. The infra assets created will last multiple generations, so can be legitimately funded by those future, unborn generations. Funding today’s infra by borrowing and expanding the fiscal deficit is tantamount to passing the burden to the future unborn generation of taxpayers.
Given that they too are beneficiaries in the future, and also that India’s young demography means the taxpayer net will keep widening, this seems eminently achievable fiscally. The extra burden of infra spending in per capita terms on future Indians will not be excessive. The main challenge is not in financing, but in rapid implementation, which includes land acquisition, environmental clearance and high quality design.