A K Bhattacharya: The right priority, but wrong focus

NEW DELHI DIARY

Mobilising adequate resources for investment in the infrastructure sector seems to have become the government's top priority. No week passes without either Prime Minister Manmohan Singh or the deputy chairman of the Planning Commission, Montek Singh Ahluwalia, referring to this need at some forum or the other.

Addressing a meeting at the New York Stock Exchange, Dr Singh estimated India's infrastructure investment requirement at $150 billion. A few weeks later, he gave a detailed account of the sectors where $150 billion were needed over the next five or ten years.

The civil aviation sector would need $45 billion and the railways would require another $10 billion over the next ten years. And the investment need in the power and telecom sectors in the next five years would be $75 billion and $25 billion, respectively, he had said.

There is no denying that the Indian economy needs better infrastructure to sustain its growth. And better infrastructure needs more investment. Indeed, several governments in the past have recognised this. But the pity is that none of them has been able to put in place a system that facilitates the flow of more resources and creates better infrastructure. What has gone wrong?

In the nineties, the PV Narasimha Rao government identified infrastructure as the main area of constraint. Everybody in that government recognised that huge investments would be needed in the power, telecommunications, civil aviation, railways and roads.

But the mistake was that both PV Narasimha Rao and his finance minister, Manmohan Singh, had reposed great faith in the domestic private sector and the foreign investors, expecting them to commit their resources in the infrastructure sectors.

In this fond hope, the government also changed the policies to ease the flow of private investment into these sectors. One hundred per cent private and foreign investment in power, roads and petroleum sectors was allowed.

Limits on foreign direct investment (FDI) in civil aviation and telecommunication sectors were relaxed. But the response from the domestic private sector and the foreign investors continued to remain very poor.

You might argue that the relaxation in the policy on FDI was half-hearted and did not encourage them to commit their resources in India.

You might also argue that those were the early days of economic reforms in India and foreign investors were a little wary about the future course of policies.

But the fact is the policy did not work. The Narasimha Rao government even conceded at the fag end of its tenure that it had erred in relying too much on the domestic private sector and foreign investors to build India's infrastructure sector.

That lesson, however, was ignored by the HD Deve Gowda and IK Gujral governments in 1996-97, although they were equally concerned about the need for more investment in infrastructure.

A high-level experts committee was set up during this period to identify the volume of investment needed and the policy changes the government must introduce. But there was no correction to the policy of relying on the domestic private sector and FDI to bail the country out of its infrastructure crisis.

In its two successive tenures at the Centre, the BJP-led coalition government introduced new methods to tackle the problem. Curbs on FDI in the remaining infrastructure areas were sought to be removed. But these initiatives did not make much headway.

A proposal to allocate a token amount for infrastructure was also cleared by the government in the hope that this money would be used to mobilise more funds from the private sector to implement new infrastructure projects. Here also, the government failed to implement its own ideas.

The net outcome of the various government initiatives to attract more capital from the domestic private sector and foreign investors for infrastructure projects has been very poor.

Except in the telecommunications and civil aviation, there are very few large and successful cases of domestic private investment in the infrastructure sector.

Of the total $23 billion of FDI that has flowed into the country in the last 13 years, only $7.66 billion have come for infrastructure sectors like power, telecommunications and transportation.

It is clear that no government has learnt the obvious lessons from India's experience with infrastructure investment. Even the Manmohan Singh government is busy putting in place an innovative and controversial scheme to use a part of the Reserve Bank of India's foreign exchange reserves to finance new infrastructure projects.

But nobody seems to realise that it is the public sector which can be trusted to deliver on the infrastructure front. The Vajpayee government entrusted the National Highway Authority of India to embark on a massive highway-building project.

The state-owned company has so far done a satisfactory job. All its tolled roads are generating revenues that are not only adequate to meet the costs of maintaining them, but they are also generating surpluses.

Instead of examining various financing options, the Manmohan Singh government could try out the public sector route for increasing investment in the infrastructure sector.

Whatever be the incentives, the private sector cannot be relied on for investing in core infrastructure projects like roads, airports and even power plants.

That job can be entrusted with the public sector, which could be allowed to raise resources from the market. And of course the government could augment the resources raised by the public sector with its own budgetary grant.

The need of the hour is better infrastructure. Instead of squabbling with the private sector and the foreign investor over what incentives would attract them to commit their resources, asking the public sector to invest in infrastructure is a safer and surer way.

akb@business-standard.com