Reviving investment. But how?

The engines of growth are sputtering: consumption is sharply down, investment lies dormant, and exports have flatlined. The Economic Survey and Budget rightly emphasise the need to revive investment. Capital formation has dropped from the heady days of 2009-10. Small wonder that growth has decelerated and growth prospects appear dismal. 

The Budget identifies infrastructure as providing the lead to the revival of overall investment. The reason: complementarity of public and private investment, public expenditure on infrastructure will create jobs fuelling consumption, and, growth in consumption will spur investment. Ergo, the virtuous cycle. The Budget also mentioned PPP as a major instrumentality to significantly increase infrastructure investment.

The questions then are: Do we have the resources to finance large public investment in infrastructure? Can PPP do the trick? Does the private sector have the will and the inclination to invest in infrastructure? What does the government need to do to induce private investment in infrastructure?

Budgetary resources are going to be tight. Revenue targets for 2019-20 are widely accepted as overambitious. There seems little possibility of cutbacks in the largest subsidies — on food and fertilisers. Revenue expenditures on security, defence, administration and interest on public debt are committed spends with limited funds available for several claimants for large capital outlays — broke banks, railways, ports, roads, power, to mention but a few. There is little room for fiscal manoeuvre. In short, do not expect a huge hike in publicly funded infrastructure expenditure. 

Past experience with PPP investment in infrastructure has not been encouraging. First, the PPP mode does not have all infrastructure in its ambit; most PPP projects were in the transport sector — highways and airports. Second, many PPP projects encountered implementation problems: delays in obtaining consents (land acquisition, forest/environmental clearances, licences), unresolved structural issues impacting commercial viability compounded by counter-intuitive policy, regulatory and judicial decisions. The outcome: stranded or abandoned projects, twin balance-sheet problems and the private sector’s burnt fingers. Third, over the past five years PPP projects have been all but shelved. Roads and highways have been mostly built using EPC contracts; there has been no partnership as envisaged in PPP. No major airport modernisation has been undertaken even though this was a fairly successful venture in some metros (dating to 2005-06). Fourth, a Committee on Revisiting and Revitalising the PPP model was set up in 2015 to address the problems identified. Its report has languished in the Department of Economic Affairs for four years, key PPP problems remaining unaddressed. Now, the Budget announces the formation of another Committee whose recommendations are expected to clear the undergrowth. 

To sum up: budgetary resources are severely constrained, balance sheets for banks and the private sector are stressed, the risk-reward allocation in the extant PPP model has no takers, commercial viability is the major concern, and many infrastructure sectors remain outside the ambit of the PPP model.

It is possible to attract private investment in infrastructure outside the PPP model. But, all private investment is profit-driven. In many sectors such investment has all but dried up because of stranded assets and large commercial losses. 

In such sectors, major reforms are necessary to induce private capital. For example, the power sector continues to be in a mess. UDAY did not work. State procurers are routinely dragging their feet on paying their dues in a timely manner including contractually agreed compensation for impact of changes in law. Some states are reneging on their contractual commitments — cancelling signed contracts, refusing to award contracts to successful bidders and seeking to renegotiate of contracts under the Damocles’ sword of threat of termination. Until the distribution end of the system is fixed, there can be no economically viable investment in generation and transmission. Consider this: why should regulatory bodies routinely create “regulatory assets” instead of making the consumer pay what is a reasonable charge? True, the deferred dues have to be paid later, but in the interim all these “assets” do is stress the sector in the present and kick the can down the road. And this when regulators are instructed by a binding policy framework to not defer dues of an ordinary nature. Regulators are expected to look after consumers; but they are also expected to ensure that the industry remains financially sound. Take another sector: coal. Why should coal remain nationalised 46 years later? India has huge coal resources and yet imports more than 200 million tonnes annually. Unless such issues are tackled frontally it is plain unrealistic to expect flows of private capital into such sectors.

In the face of the economic slowdown and slack aggregate demand, there is an unprecedented urgency to introduce structural reforms to revive consumption, investment and exports. The government does not have the resources to fund a huge public investment drive. The private sector sees no incentive to invest — neither in infrastructure nor elsewhere (because of excess capacity). The only way out of this economic thicket is major reform. Further, those reforms have to be front-loaded when political capital is available (at the start of the term of a government). Most importantly, those reforms must be evolved as a bi-partisan national plan. In the past, governments with smaller electoral mandate have brought about major reforms —  in 1991, 1996-97 and 2001. Time to take a leaf out of Atal Bihari Vajpayee-led Chief Ministers’ conferences to develop a national consensus for structural reforms. Sans large-scale reforms it is difficult to be optimistic about the hopes expressed in the Budget for investment becoming the key pivot of economic revival.
Khullar was an IAS officer of the AGMUT (Delhi) cadre for close to 40 years and Kapur is joint managing partner, J Sagar Associates. Views are personal



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