The India Infrastructure Report 2002 has recommended an expansionary fiscal policy to create the necessary environment for the infrastructure sector to grow. The report released by the Chief Economic Advisor in finance ministry, Rakesh Mohan says the government including RBI has refused to "recognise that the limits to reducing the fiscal deficit has long been reached". It says an expansionary policy is necessary to inflate away part of the government's borrowings without which the benefits of reforms will be lost.
It says the opportunity now is to use the food mountain to create "direct subsidisation" to decouple the reforms in electricity, water, fertiliser and other sectors. The subsidised consumers will pay in coupons that will not affect economic pricing of the utilities for all other consumers. This will also replace the vested interests which are holding up reforms, it says. This will also pave the way for institutional reforms in governance like passage of electricity bill and professionalise the regulatory bodies.
Culling examples from different sectors of infrastructure failure in recent years like US-64, Enron and the controversy over WLL in telecom sector, the report says the problem of UTI's US-64 scheme was because of inadequate supervision. It has warned that announcing a low net asset value of the scheme early next year would most certainly knock the bottom out of the equity markets. It says there is an urgent need to harmonize the regulations for different segments of the financial sector to reflect the basic inter-connected nature of their operations and move towards a single regulator. Meanwhile it has asked for separating the two regulatory functions of supervision and regulation and development of the financial infrastructure.
On power sector the report has said that independent power producers in India face similar problems to those faced by Enron terming it as "broad failure of governance". It has also criticised the World Bank prescriptions like privatisation and independent regulations were not adequately designed to address the root cause of the crisis. It identifies the "unholy alliances between politicians, bureaucrats, contractors, suppliers, employees and some consumers" as responsible for the mess. It has also criticised the CERC oder on availability based tariff saying the order looks more like a balancing act and we will have to await the net review for a sound tariff.
The report makes the point that the problems of infrastructure include excessive or premature regulation. It has criticised the trend to create too many such bodies including for water and gas saying it would "dwarf the 5000 active regulators who existed in the USA prior to deregulation."
