More than any other economic sector, sarkar is the mai-baap for the infrastructure sector. It determines priorities for public expenditure, chooses private participation options and structures, and makes changes in operating and enabling environments. Meanwhile, it continues to be the biggest player. It is, therefore, crucial to read the tea leaves of political and bureaucratic thinking to discern trends, shifts and direction.
Three government documents provide insights in this regard. They are the Union Budget, the Economic Survey and, believe it or not, the Report of the 13th Finance Commission (2010-15).
Union Budget 2011-12
The “infrastructure intensity” of the Budget continues to increase, once again reaching the high of 48.5 per cent that was reached in the Plan allocation of 2005-06. Clearly, the political establishment is convinced of the need for – and the vote-gathering impact of – bijli-sadak-pani, distinct from the earlier roti-kapda-makaan. Infrastructure continues to be the nation’s number one priority.
The flow of debt funds to the infrastructure sector is finally getting the attention it deserves. The foreign institutional investment limit for investment in corporate bonds issued by companies in the infrastructure sector has been raised by an additional $20 billion, taking the limit to $25 billion. Tax-free bonds of Rs 30,000 crore have been allowed to be raised by Railway Finance Corporation, National Highways Authority of India, Housing and Urban Development Corporation and ports. It has been announced that special vehicles in the form of notified infra debt funds (NIDFs) will be created. Interest payments on the borrowings of these funds will have a reduced withholding tax rate of 5 per cent instead of the current 20 per cent. Also, the income of NIDFs will be exempt from tax.
There is a clear shift from a generic “rural infra” to a more focused “agri-infrastructure”. This is clearly a reaction to onion crises and food inflation. Fertiliser investment (wrongly, according to the author!) and cold storages and cold chains have been declared an infrastructure sub-sector. Special allocations have been made towards the creation of warehousing facilities and mega food parks.
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The issue of a clear “definition of infrastructure” is also being worked on, with the finance minister clarifying at the post-Budget meetings with industry associations that an output in this area is soon expected. Subsequently, health care and education have also been announced as “infrastructure” by the finance minister.(Click here for table)
Economic Survey
The Economic Survey, already lauded for its forthright and crisp style, takes power sectors reforms head-on. It forcefully argues for immediate and essential reforms on three fronts:
(i) Regulation: “Worldwide evidence suggests that electricity reform works only in the presence of strong, independent regulators, insulated from political and commercial pressures. For example, regulators will need to ensure adequate competition and act on uncompetitive behaviour in wholesale trade, including capping wholesale tariffs and investigating competition.”
(ii) Bulk open access: “The next step is to introduce competition and open access at [the] bulk level. Most power distribution is still the monopoly of SEBs, with mounting losses and poor services.”
(iii) Tariffs: “The previous two steps will not be enough without a strong political economy decision by all States to revise electricity tariffs to economic levels and reduce subsidies and cross-subsidies.”
The other bold suggestion made by Chief Economic Advisor Dr Kaushik Basu is the auction of public private partnership (PPP) projects for national highways development. He argues: “The heart of an efficient, cost-effective and transparent system of PPP ... whereby the Government gives out the task of developing new highways to the private sector is the system of auction.”
The Economic Survey takes up the cudgels on behalf of the aviation industry and warns of dire consequences if nothing is done about the pricing of aviation turbine fuel (ATF). It notes: “[ATF] accounts for 40 per cent of the operating cost of Indian carriers, as against a figure of only 20 per cent for international carriers. ATF in India is priced, on an average, almost 60 per cent higher than internationally. The widening differential in ATF prices and its huge negative impact on airline balance sheets are eroding its competitiveness. In the backdrop of higher oil-crude prices, there is severe risk of dampening of passenger market growth by quickly making air travel out of reach for a significant portion of the market, which was fuelling its growth. The losses being registered by Indian carriers may result in reduced connectivity thereby affecting growth in this sector.”
The Economic Survey asks for better management of land markets. It notes that land prices are climbing across India, which is a reason for the cost-push inflation. This is because the conversion from agricultural to urban use often results in a 20-fold jump in value. The survey wisely argues for a counter-intuitive approach, in which the answer does not lie in tightening land conversion regulations but in: (i) improving land conversion processes; (ii) selling publicly acquired lands in auctions; and (iii) leaning with markets and improving the supply of accessible land through better transport. It wryly notes that land is actually abundant with urban land area being only 2 per cent of total arable land and that it is “accessible” land that is scarce. This is a polite way of saying that vested interests over time have completely distorted this market. It has a stark message: “If we do not do anything about it, failure will lead to chaotic cities, unfulfilled aspirations and slower growth.”
Report of the 13th Finance
Commission (2010-15):
It is quite revealing that it is this report, under the chairmanship of the redoubtable Dr Vijay L Kelkar, that does a deep dive on infrastructure, with specific reference (as expected) to Centre-state linkages. Dr Kelkar’s surgical knife cuts deep into the twin cancers of state power finances and the governance of urban local bodies, and suggests clear remedial action.
So what have we learnt about the mind of the sovereign? Faced with a multiplicity of issues to be resolved and addressed in the infrastructure sector, the priority agenda seems to be:
- defining the infrastructure space;
- developing agricultural infrastructure;
- channelling long-term debts;
- focusing on electricity reform;
- improving urban governance, including land-market management
It is not a selection that anybody can argue with just now.
The author is the Chairman of
Feedback Ventures
The views expressed are personal