Bouncing back after Covid-19

There is now little doubt that the coronavirus pandemic has had, and will continue to have, deep and long-term effects on the economy. Even if, in a couple of months from now, the all-clear is given, it will take a much longer time after that for the Indian economy to get back on its feet. The crisis has come when growth in the economy was already weak. What will be needed, when the time comes, are massive investments, across the economy, but especially in infrastructure, to provide the kick-start that the economy needs. It is in this context that the National Infrastructure Pipeline (NIP), announced by the government towards the end of last year, becomes much more urgent.

The plan, as announced, involves a roadmap toward Rs 102 trillion of investment across infrastructure sectors be­tween 2020 and 2025. Roads, urban development and housing, and railways are expected to receive close to 50 per cent of the investment. Governments (central and state, and including state and central Public Sector Units), will account for close to 80 per cent of the total capex in the project, leading to criticism that this is a step back from the earlier “big-push” projects where the private sector was offered a much greater role. But this is a pragmatic decision, given the current financial weaknesses in the private sector in the past few years. Currently, the private sector simply does not have the capacity to play a substantial role in such a large-scale project, at least initially.

 

 
Another concern was around the size of the plan itself, and whether governments (especially state governments), could afford such large investments given the weak tax revenue growth and the overall state of the economy. The heavy involvement of central and state government undertakings in the financing plan, mean that such concerns will be mitigated to some extent. But this criticism misses the bigger picture here: The crisis caused by the coronavirus pandemic. It is in this context that the NIP should be seen — as part of a giant stimulus package for the overall economy.

The world over, it is now acknowledged that the economic effects of the coronavirus crisis are beginning to rival, and in many cases exceed, that caused by the 2008 credit crisis. Last week, the United States announced the biggest ever jump in unemployment benefit claims as millions of Americans were laid off. Chinese industrial production fell by 13.5 per cent in the first two months of this year. The Organisation for Economic Cooperation and Development has already forecast that the world economy could grow at its slowest rate since 2009.

At this time of crisis, governments around the world, irrespective of ideology, have lost no time in announcing substantial stimulus packages. The US Senate for example, has already announced a giant $2 trillion stimulus for the US economy. In the American political context where opinions on "big government" are fiercely divisive and split along party lines, it is remarkable that the package was passed unanimously.

Such huge stimulus packages are needed. In the wake of the 2008 crisis for example, China announced a massive $586 billion stimulus package for its economy to be implemented over a period of two years – this amount was equivalent to about 16 per cent of China’s pre-crisis GDP. It is widely acknowledged that the massive scale of the stimulus package meant that Chinese industry was able to bounce back relatively quickly.

And while the size and scale of China’s stimulus did cause problems later — a massive debt pile for local governments across that country -- it ensured that China recovered much faster than many other countries. In contrast, the European Union, with its tight fiscal rules, saw years of weak growth and persistent crises in some countries, well into the last decade.

Given this context, the NIP isn’t in fact, wildly ambitious -- it amounts to about 7-10 per cent of GDP annually. Further, around 42 per cent of the total amount of Rs 102 trillion covers projects already under implementation. In fact, it is fair to say that the government could scale up the NIP’s ambitions even further, given the potential size of the impact on the economy from the current crisis.

But the real key to any successful in­frastructure investment plan lies not in the absolute size of capital expenditure but the reforms that go along with it. Sector-level reforms will ensure the biggest “bang for the buck”, while at the sa­me time maximising the chances that the private sector will participate in the pipeline in a big way in the years to come.

What’s encouraging is that the NIP understands this and supports a range of reforms which private sector infrastructure players have been talking about for a long time — optimal risk sharing, with the private sector taking on only those risks it is able to bear, adoption of international contract standards, and effective systems of dispute resolution. It further talks about revitalising the infrastructure finance landscape, as well as re-enabling the sale of existing and operating infra assets currently owned by government agencies, thus freeing up resources for further investment.

The reforms promised, along with the size of investments, will ensure that the NIP plays a key role in kick-starting the economy and seeing it through the crisis.
The author is chairman of Feedback Infra


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