Vinayak Chatterjee: Spring-fest infra takeaways

INFRATALK

End February to early March is festival-time for India's economists. Margaret Thatcher once commented, "You and I come by road or rail but economists travel on INFRASTRUCTURE !" So now that it is the third week of March and the Economic Spring-fest of Rail Budget, Economic Survey and Union Budget is over, let us see how economists have travelled.

The Rail Budget
No doubt a commendable job, marrying populism with sound economics. (Who says it can't be done ?) It has artfully woven the 3 'As' of infrastructure planning into a winning tapestry. The 3 'As' are Asset 'Creation', Asset 'Sweating' and Asset 'Partnering'.

On Asset 'Creation', Indian Railways have planned to spend Rs 32,165 crore, 19 per cent more than last year in an economy growing at 9 per cent. This is better than the first golden rule of infrastructure that investments should grow 1.8 times the rate of economic growth. Also remember that this 32,000 figure or $7 billion represents about 15 per cent of the total Gross Capital Formation in Infrastructure planned for 2007-08, and is therefore a very powerful growth driver.

On Asset 'Sweating', it envisages a variety of measures to move more goods and people by squeezing efficiencies out of existing assets. Axle load is passe ! Clever meshing of information and transportation technologies to rationalise and enhance movement patterns are part of the fresh 'management thinking'. Evidently, it is asset sweating that is expected to deliver the gravy-train again in '07-'08 as the benefits of fresh capital investments will only be felt in the medium term.

On Asset 'Partnering', fresh winds are blowing through the hitherto cloistered Rail Bhawan. It is now fashionable to consider investments from the private sector totaling over Rs 70,000 crore over the next five years. These 'asset partnering' options include freight corridors, port connectivity, container trains, modernisation of railway stations as well as PPP initiatives in warehouses, logistic parks, budget hotels and the like.

All this, within a context of commendable operating ratios and a continuing turnaround story. Lalunomics!

The Economic Survey
After the zest and energy of the Rail Budget, the infrastructure portions of the Economic Survey turned out to be quite disappointing. The Macroeconomic Overview restricts itself to the mandatory 'official- speak' about the $320 billion required and then jumps straight to the conclusion that 40 per cent of the resources would have to come from the private sector. There is no alluding to any base data, or any facts and figures about past investments, investment patterns or expected trends.

Unpardonably, there is no mention of the single most important statistic, the Gross Capital Formation in Infrastructure as a percentage of GDP that even the Planning Commission has started using from its Approach Paper to the 11th Plan.

There is no concern expressed at the critical lack of bankable projects. Nor does it have any insights on making PPP processes more robust other than a motherhood piece that reads, "India, while stepping up public investment in infrastructure, has been actively engaged in finding the appropriate policy framework, which gives the private sector adequate confidence and incentives to invest on a massive scale, but simultaneously preserves adequate checks and balances through transparency, competition and regulation". In the Review of Developments Section, it observes that ".......infrastructure, that constrained for years the growth performance of the economy, appears to be improving".

Maggie Thatcher could have added 'hot-air balloon' to her quote.

The Union Budget
The Union Budget was a little more mood-uplifting than the Economic Survey. Variously dubbed the 'aam-aadmi' budget, or 'social-sector' budget or 'non-corporate' budget, it did deliver some fresh thoughts on infrastructure. In fact, six fresh thoughts: (i) Mutual Funds being allowed to set up dedicated Infra Funds, (ii) Revolving Fund of Rs 100 crore to catalyse PPP projects, (iii) Outline of a scheme to facilitate the use of forex reserves for infrastructure, (iv) Tax-free Bonds for Municipal Pooled Finances, (v) Vision of Mumbai as an international financial hub, and (vi) Inclusion of gas pipelines and storage networks as well as port-related channel activities in the infrastructure arena.

Predictably, there were some disappointments in the infra-fraternity. Withdrawal of 'pass-through' benefits for venture capital and similarly structured vehicles appear to have been a googly for Realty Funds in particular, as well as for some multi-billion dollar infra funds currently being 'cooked'. Non-transference of tax breaks for merging/de-merging SPVs has also thrown a spanner in creative structuring possibilities in the journey ahead for many developers; not to mention the clear hit on some construction company bottom-lines hitherto booking tax-breaks as developers.

But now, Pardey Key Peechhay:

As the FM himself admitted, most of the new infra-initiatives were "off-budget". Other than continued financing of earlier schemes like Bharat Nirman, NHDP and so on, and a token Rs 100 crore for PPP, the coffers of the union treasury appear to have run out of steam to fund mega bucks in new infra schemes. Does this partly explain the Economic Survey's blase pronouncement that 40 per cent of the funding will be from the private sector?

There is no mention of any overall targets or deliverables in the infra space as a whole. It is indeed disheartening that the crucial bottleneck in the 'India Shining' story, viz, infrastructure, has not a single target that the government can be held accountable for, or gives the nation something to reach out for.

Is the attempt at using forex reserves a clever way of surrogate deficit financing? Watch this space.

The sheer plethora of schemes announced come with no clear accountability on deliverables or outcomes. There is great public scepticism about the statistics doled out to substantiate progress and implementation. The time has come to have independent evaluators taking stock of outcomes and deliverables.

And finally, what about the idea of splitting Budget Day into two clear parts "" a Revenue Budget and a Capital Budget? The latter is the only way to actually find out what is going on in Indian infra development and funding.

Talking about economists travelling, Robert Louis Stevenson's quote provides solace: "To travel hopefully is better than to arrive".

The writer is the Chairman of Feedback Ventures. He is also the Chairman of CII's National Council on Infrastructure. The views expressed are personal