Considering the vital role of infrastructure the ministry of finance had constituted an expert group to consider issues related to the commercialisation of infrastructure projects. The committee made estimates on the investments required in the sector. Dr. Pranab Sen, economic adviser, Planning Commission, who was one of the members of the committee spoke to Vidya Viswanathan about what could be done to locate and raise resources for the massive investments required.
Q.There are two estimates of investments required in the infrastructure committee report...
A. Yes. There are two ways of looking at infrastructure, one as an intermediate and another as an end itself. In the first case we have a looked at infrastructure as an intermediate for a certain rate of economic growth and worked backwards. This estimate works out to Rs 4,300 billion to achieve desired targets till 2001 and Rs 7,400 billion till 2006.
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In the second case it is from a point of view of consumption,. that is the standard of living that would be desirable. In the next decade the investment requirements for different sectors would be - Rs 5,000 billion in the power sector , an investment 6 times that in the 8th plan - Rs 1,700 billion in the telecom for 52 million lines as against a total of 12.2 million lines now - Rs 946 billion for roads and Rs 250 billion for ports.
Q. An imperative to raising this kind of amount is to increase domestic savings. This budget did make some efforts to increase savings like increasing the contribution to the Provident fund from 8.33 per cent to 10 per cent, impose a dividend with-holding tax ...
A. Yes. But not much.Very little was done on the insurance front. For an average saver, with his level of income, his current consumption needs are too high to save for future consumption. But insurance is a special case where potential return is very high without it being actualised.
So it is one of the most attractive ways of saving. From the institution's point of view, it is the cheapest source of funds because of a collective payout. It is also a source of long term funds available for deployment in projects with long gestation periods. But, today it is so difficult to get what is legitimately due from LIC or GIC that insurance becomes unattractive for the common man.
Q. Is the fact that the overseas insurance companies have very sophisticated information systems a point for resistance for opening up domestic insurance sector ?
A. The Indian companies have good information systems too. But they have not bothered to maintain it. GIC has not updated its actuarial tables since 1994. Elsewhere in the world it is real time. They have rendered themselves non-competitive and non-profitable.
Q. What could have been other measures to increase savings?
A. Mandating insurance works only up to a point. We have to depend on contractual savings like provident funds. India is the only country in the world where we have achieved a rapid growth in savings with only voluntary savings. Most other developing countries depend on contractual savings.
In this budget PF rates were hiked from 8.33 per cent to 10. This is a step in the right directions. But the increase is too little because this will just create a portfolio shift and may not affect aggregate savings.
If the rate were pushed closer to the savings rate, then since PF savings are illiquid, the saver would be forced to save an additional amount. Contractual savings should also be expanded to the entire organised sector. Public provident funds are an attractive means of saving because the income at the time when you receive it is not taxed.
Q. How much will the foreign direct investment contribute to infrastructure ?
A. Very little. Probably about 10 per cent and in the form of equity. These projects which are heavily leveraged with debt equity ratios between 3.5 to 5 times.
Bringing in external borrowed funds would mean incurring exchange rate risks. One would have to be extremely bullish on the economy on a long term basis to want to take on this risk. Alternatively, the Government will have to cover the risk and this is a recipe for disaster.
Thus this debt component will have to be raised from the domestic market. Debt may, however, be attractive if we have an active domestic market. The exchange rate expectations would then be reflected in the interest rates.
Q. What would have to be done to develop the debt market?
A. Currently we don't have a debt market worth the mention. There are only inter-institutional transfer of debts. One has to create a debt market similar to the stock market. Honk Kong created a debt market in public debt.
They built a yield curve and that was used as a benchmark. The Government has to make the gilt market a more open market and build a unified yield curve on short and long term market for gilts.
Q. With the FIIs being allowed to invest in gilt markets, will it help improve the situation?
A. We have a few primary dealers in gilts who are effectively windows of the RBI. In the absence of a bond market it does not matter whether a foreigner comes here and buys or whether the Government borrows overseas. In the absence of market forces operating transparently, adding FIIs to this market would just be like adding on a couple of more banks to the existing system. There is also a cap on their investments.
What we need is an active secondary market in gilts. Let individuals and private companies be allowed to buy gilts and let there be an extensive network of retail brokers. An active bond market will open up avenues for several entities waiting to invest in the infrastructure sector.
Q. Like muncipal bonds?
A. Yes, currently they borrow from higher tiers and there is mis-utilisation of funds and lack of accountability. They resort to rolling over of loans if they are not in a position to repay.
Q. Do all the municipalities have enough revenues to service bonds?
A. Yes. They have revenue sources like property tax, motor vehicle tax, octroi and water charges. They could issue bonds against revenue flows.
Take the Tirupur model for instance. Their water rates are inclusive of sewerage costs and more. After a period they would have enough money to re-invest or create an investible corpus.
In the ninth plan we are thinking about lower levels of bodies like municipal and panchayats planning for their own taxation and borrowing. The states will have to get their act together for this. There is a learning curve involved here and it peaks but once the hump is crossed, it is possible.
Ideally, the local level has the greatest benefit to tap local savings. Because the returns are of two kinds - interest income at the individual level and infrastructure at the community level.
Thus, a saver may subscribe despite getting a relatively lower level of interest and the local body may be able to raise cheaper funds. If I knew that my chidren's schooling is dependent on the municipal body, I would certainly subscribe to its bonds.
Q. Are investments of this magnitude really likely to happen?
A. They are maybe just indicative figures or an ideal. But this gap has to be crossed if we are to grow at 8 to 9 per cent. It atleast sets people thinking and thinking big instead of incremental changes.
But in the next few years industrial production is not going be held back because there is going to be an addition of 7000 to 10,000 MW a year in the next few years from both Independent power projects and public sector projects together. These projects have commenced and have advanced. There also need not be a tight link between growth and power availablility. For instance house-holds consume 40 per cent of the power. They could be squeezed.