India’s annual budget for the FY2019-20 was presented on the 5th of July by the first woman Finance Minister of India, Nirmala Sitharaman. She aimed to make a sweeping change across a range of sectors, and introduced several measures and methods to contain India’s deficits and maximize growth and output. Amidst a host of other ventures that she (and the government) envisages over the course of the next decade, the numero uno spot is occupied by the dream to scale up India’s physical and social infrastructure. While the latter has had considerable success in the form of an affirmative social sector framework, the former has been found lagging.
The FM introduced a brand of new schemes that will pump in fresh life to India’s wailing infrastructure development story, to the tune of approximately $300 billion dollars a year. A great amount of work needed to be done to bridge the rural-urban gap, and physical connectivity was an essential cogwheel attainment of the objective. The Pradhan Mantri Gram Sadak Yojana (PMGSY), with an ambitious target set to cover 125,000 kms worth of rural roads in the country, has had a budgetary allocation worth Rs ₹80,250 crores and is presently in its third phase. In earlier phases, 30,000 kilometres of new roads in rural areas were constructed, and the construction in all such phases were through applications of green technology. The Highways department was infused with a remarkable ₹83,016 crores for the present fiscal year, its highest ever. The increased spending however, is not misdirected. The Railways, which serves as the lifeline of the nation, was also accorded the limelight, with FM Sitharaman promising to ramp up investment in the Railways to ₹50 lakh crores before 2030. State investment in infrastructure in the long run is almost always beneficial to the economy. Several studies over the course of decades have corroborated the fact.
In India, with private investments falling and several economic indicators in the red, an impetus to the otherwise neglected infra sector will help bring about a transform in the economy. The development of this sector will have an instantaneous cascading effect on other ancillary sectors, and help propel a bullish trend to look out for. Projects such as the UDAN scheme, or the dedicated freight corridor, industrial corridors, Bharatmala and Sagarmala were touted as key highlights with respect to the renewed thrust on such a spending. The government also intends to exploit the riverine advantage unique to India; cargo transporation through the Ganga is set to expand four-fold in volume. The creation of transport hubs will be initiated at Varanasi, Sahibganj and Haldia. This will amplify inter-State trade volumes and help de-congest the arterial highway networks that are overly burdened.
FISCAL INTERPRETATION:
While budgetary announcements are easier said on paper, implementation makes the real difference. The fiscal interpretation to deliver on such high power promises rests on how and when the projects are to be financed. The Economic Survey estimates that an investment of the order of $4.5 trillion over the course of the next twenty-five years would put India in a phase of robust growth and development.
The government is in urgent need of heavy private investments in the infra sector if it is to achieve its agenda. Yet, with structural difficulties embedded in every nook and corner of the legal corridor, and with a generally negative investor sentiment, getting such a high quantum of investments is an uncertainty in itself. The IL&FS’s ₹91,000 crore debt botch-up, an ongoing liquidity crisis in the NBFC sector, and the bank’s NPA woes have only marched ahead to compound the problem.
Sitharaman’s primary thrust was to ease the liquidity crisis that the NBFCs find themselves embroiled in, which would consequently go a long way to provide relief to the strained banking system. While bank credit had increased in the past fiscal year, the credit obtained from banks fell considerably from ₹9.64 lakh crore in March 2016 to ₹8.90 lakh crore in March 2018. The government has devised a panorama of ways to come up with the numbers required for the behemoth capital funding that the infrastructure sector urgently requires. One of the key takeaways from the budget speech was the proposed establishment of the Credit Guarantee Enhancement Corporation (CGER), which would act as an interface for borrowers with assurances and guarantees of repayment to the lenders, and at the same time provide the borrowers with lowered interest rates. The vision to deepen the market for long term bonds, including that for corporate bond repos, credit default swaps, and the like, were extensively discussed. In a watershed moment, the government also permitted investments made by the Foreign Institutional Investors (FII) and the Foreign Portfolio Investments (FPIs) in debt securities, that has to be sold or transferred to domestic investors within a fixed lock-in period.
ON THE ROAD TOWARDS PPP:
In consonance with PM Modi’s dream to turn India into a $5 trillion economy, FM Nirmala Sitharaman divulged investment figures required to take India up the ladder. That is when she highlighted that India’s investments would have to scale up to ₹20 lakh crores a year ($300 billion). The Railway Budget alone would have the lion’s share, clawing into a sizeable ₹50 lakh crores for infrastructural upgrades and system designs between 2018 and 2030.
The FM put forward the idea of modelling the investments on a Public-Private Parnership (PPP) structure. This would, in the eyes of the government, reduce bureaucratic delays, maximize profit, and turn ailing ventures into lively setups that focused on long run benefits and outputs. She proposed to unveil a blueprint for completion and fast-tracking of several projects under the PPP model for works under the NHAI, gas grids, waterways, regional airports and more.
Despite such bullish trends, all that glitters is not gold. Several analysts feel that if the government does not take concrete steps to implement changes in the PPP model on the lines of the Kelkar Committee, the dream to attract investments worth ₹20 lakh crore would only be a dream. Arun Jaitley, a lawyer by profession and the former Finance Minister of India, lamented the fact that despite India being the largest market for PPPs with almost 900 projects, PPP contracts were riddled with “rigidities”, and the failure to develop quick grievance redressal systems plagued their effectiveness. For 2019-20, the PPP component of the extra budgetary resources (EBR) is projected to be 33%. The share of PPP in railways’ EBR in 2016-17 was 51%. Clearly, share of private investors in India’s infra sector is on the decline. A report by rating agency Icra Ltd paints the dismal picture of NHAI, whose debt has risen from ₹25,000 crores in 2014-15 to ₹1.7 lakh crores in 2018-19. The primary cause of the unbelievable rise in debt can be attributed to the linear focus on entirely publicly funded engineering, procurement and construction (EPC) projects.
THE WAY FORWARD:
The Kelkar Committee made a smorgasbord of recommendations that were aimed at simplifying the PPP model, and actually encouraged private players to take interest in State-sponsored projects. Certain recommendations were striking. Model PPP agreements need to be re-drafted to ensure an optimal share of risk-taking among all stakeholders and full disclosure of associated benefits and revised costs must be prominently included. It also proposed to set up independent regulators that are going in for PPPs. It also established four mechanisms to combat operational losses suffered by private players when the project timespan extends for around 20-30 years. In a nutshell, the Kelkar Committee Report on PPP was pro-private investment, and its timely acceptance and implementation can help smoothen out the rough edges of policy-making in this regard.
All in all, unless the government hits the right note and builds an air of confidence in the infrastructure sector, India’s $5 trillion dream would be very difficult to take off. The drive to open the floodgates for increased expenditure on infra investments will pay off in the long run, when the benefits become quantifiable and more visible. It is important that stress is laid on reforming the PPP model, and direct hordes of investments to the infra sector. This would also have parallel benefits, as it would push employment statistics up and support ancillary industries in the process. Tentative benefits are all around, but when do we catch the train to sustainable long run growth?