Infrastructure Creation in India – The Next Generation of Reforms

Infrastructure is the centre piece of India’s growth-story. The total outlay for infrastructure in the FY 2018-19 stands at ₹5.97 lakh crore, as compared to the ₹4.94 lakh crore for FY 2017-18, thereby making an increase of more than ₹1 lakh crore. This indicate the continuing trend, with the Government of India having initiated several big infrastructure projects and schemes in recent years. These projects and schemes will contribute to the growth in the infrastructure sector but are also expected to be driven by an uptick in public expenditure.

• Under the Rashtriya Rajmarg Zila Sanjoyokta Pariyojna, roads will be developed to connect 100 of the 676 district-headquarters across the country at an estimated cost of about ₹60,000 crore.
• Under the Bharatmala Pariyojana, about 35,000 km road construction in Phase-I, at an estimated cost of ₹5,35,000 crore, has been approved. It is currently anticipated that 60% of the projects will be taken up on the hybrid annuity model, 10% on BOT (Toll) mode, and the remaining on the Engineering, Procurement, Construction model.
• The Union Budget 2018 includes allocation for commissioning 4000 km of electrified railway during 2017-18. Over 3,600 km of track renewal is also targeted for the current fiscal.
• To complete Phases I and II of PM Gram Sadak Yojana, Government of India, along with the States, proposes to spend ₹88,185 crore over 3 years, starting in 2017-18.
• Under the Regional Connectivity Scheme, the Central government has approved 24 airports and helipads across the country, out of which 22 airports are for the North-East region.
• Under the Sagarmala Programme, 415 projects (for port modernization, new port development, port connectivity, port-linked industrialization and coastal community development) will be taken up during 2015 to 2035, with an investment of over $120 bn. Of these, 199 projects are to be taken up by 2019.
• Under the Smart Cities Mission, 3000 projects worth ₹1,40,000 crore are at various stages of implementation. Tenders for projects worth ₹16,000 crore have been floated, and more than 1 lakh crore worth of projects are being readied for floating tenders.
• The Government is devising a plan to provide WiFi facility to 550,000 villages by March 2019, at an estimated ₹3,700 crore.

However, despite the increase in public expenditure, it is expected (as per various reports) that India will nevertheless fall far short of meeting infrastructure financing requirements, which are estimated to be $1.5 trillion over the next ten years.

Impact on the Fiscal Deficit

Under the current government, fiscal deficit has been brought down from 4.1% in 2014-15 to 3.9% in 2015-16, and further to 3.5% in 2016-17. While this unlocks more funds to allocate to the infrastructure sector, the irony is that, increasing the share of the public sector in the infrastructure pie carries the risk of adding pressure on the fiscal deficit and taking India on a path of fiscal imprudence.

Notably, the Indian economy is susceptible to fluctuations in crude oil prices (and has, indeed, benefitted from the downturn in global oil prices). Any hike in oil prices will: (a) lead to inflationary pressure and force the RBI to hike interest rates – this will impact logistical and raw material costs, which will, in turn, affect the infrastructure industry, and (b) increase the Government’s subsidy burden, thereby, further widening the fiscal deficit.

Thus, while there is little doubt that the Government has a critical role in addressing growing infrastructure needs, the degree of intervention is important. An infrastructure sector dependent on government intervention is unsustainable in the long-term, since such intervention accumulates financial covenants that threaten long-term solvency. Indeed, at a time when the government’s room for political, social, and financial manoeuvre is shrinking, it continues to take on a whole range of tasks beyond the scope of traditional policy and public services.

The Road Ahead

Now more than ever, the Government should discharge its functions efficiently and effectively. With the risk of increasing the fiscal deficit, it is imprudent to continue with public spending for asset creation without implementing necessary reforms (both in terms of procurement and management) to encourage private sector investments and manage/streamline public expenditure. Some of these reforms are set out below:

• There is substantial scope to increase public infrastructure investment through means of creating newer sources of revenue. State governments can increase funding streams by raising user charges, capturing property value, or selling existing assets and recycling the proceeds for new infrastructure.
• While improving the pipeline of bankable projects, it is imperative to break down any impediments to the flow of financing (from regulatory rulings on investment in infrastructure assets to the absence of an efficient market).
• Unlocking (and keeping unlocked) the potential for investment by the private sectors, requires regulatory certainty and the ability to charge prices that produce an acceptable risk-adjusted return. A lack of medium and long-term visibility constricts private spending, and leads to more restrained economic behaviour.
• Public sector management reforms have to be initiated with a view to bring about outcome focussed approaches, better talent management, as well as increased and more effective use of technology and information systems (including use of direct benefit transfer for subsidy and cross subsidy models).
• Improving public procurement models by moving away from L1 (has been criticised for its focus on cost, and apparent disregard for quality-checks and complex technical aspects) to alternative methods of procurement such as quality-based selection and quality-and-cost-based selection.

Infrastructure is a mantra that has been bandied about with considerable aplomb. However, infrastructure is an end. The means to this end must be carefully thought out, with the approach evolving and adapting to address both the growing body of experience as well as the new circumstances that emerge to define the market. The reforms process is a continuum and not a one-time affair. With the Indian economy and population both set to grow at impressive rates in the coming decades, it is imperative to ensure effective and timely roll out of infrastructure and the reforms that go with it.

Written by Vishnu Sudarsan, Partner, & Kartikeya G.S., Senior Associate, at J. Sagar Associates. Views expressed are his personal.