Wednesday, Feb 08, 2023

No road to the $5 trillion economy

The entire contractual structure and regulatory framework in India needs to be revamped.

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The NDA government has announced its intention to invest Rs 100 lakh crore in infrastructure over the next five years. If we grow at 12 per cent in current prices, as has been assumed in the Union Budget, the cumulative GDP over the five-year period would be about Rs 1,350 lakh crore. So, we are talking about investing 7.5 per cent of GDP in infrastructure — about the same as in the last five-year plan. And, they did not have a nine, maybe 10-rupee infrastructure cess on fuel. One can thus expect this target to be easily met.

Finance is not always the problem, as in power, where the budget promises to “work with state governments to remove barriers. for industrial and other bulk power consumers”. It recognises “considerable reforms are needed in tariff policy”. It’s music to hear about.”retirement of old and inefficient plants. addressing low utilisation of gas plant capacity”. If tariff reform is addressed — reducing industrial and commercial tariffs, and raising agricultural and residential tariffs, while redirecting the subsidy savings from discoms to directly target consumers through cash transfers to insulate them from the tariff increase — it will revive the cash generating end of the sector.

Other actions, for example addressing the carbon-intensity of our electricity, can be taken subsequently, enabling a true transformation. Despite a seven-fold growth in renewable capacity in the last 10 years, the share of thermal sources, primarily coal, remains at nearly 80 per cent — now operating at inefficient plant load factors. Renewables have stepped in to compensate for the stagnant supply from large hydro sources. Finally, can a gas plant perhaps buy spot cargo, land LNG at a convenient terminal, transport it to its plant by paying an access charge to a network operator, and sell it to an industrial consumer? Hopefully.

The good part of the story ends here. Elsewhere, finance obscures problems – such as the large commitments for Indian railways, which is organisationally and financially unprepared and unwilling to be a competitive logistics company. To add to its woes, as if highways weren’t bad enough, this budget is promising (sensibly) to invest in another competing mode for bulk cargo — inland waterways. Soon, like BSNL and Air India, Indian railways, without reform, will become another black hole for investment. Instead of megabucks, it is better to begin with smaller high-return investments in signaling to enhance capacity and to make the network high-speed ready, while simultaneously re-organising it to compete in the logistics market.

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This institutional story is missing in other sectors too; critically in rural roads, where the budget still seeks to invest, but where the real need is for maintenance, executed through appropriate state-level institutions. Similarly, “har ghar jal” is unachievable if state institutions, including parastatal agencies and local government, are absent. Will institutions such as NHAI, which has delivered an extensive, if flawed, national highway system, be established in other sectors?

Perhaps the BJP, as a party, expects to exercise more oversight and discipline over its state units and governments to align them with Narendra Modi’s vision, much like the Communist Party of China — a country extolled in the Economic Survey — marches to Xi Jinping’s thought.

There are other critical omissions too. Waste-water finds mention only in the context of “management of household waste-water for reuse in agriculture”. It is not that the capacity for sewers and sewerage treatment plants anyway lies unused in the absence of institutional reform. It is that it obliviates the damage caused by the run-off of overused chemicals in agriculture (here, zero-budget farming may help) and industrial injury that continues unchecked by incapacitated pollution control boards. Some of our industrial corridors, for instance from Vatva to Vapi, rival China’s worst polluted areas. This is not how we will ensure water security.


Telecom and 5G were missing too, in a two-hour long budget speech which mentioned “digital” 19 times. Emulating Sisyphus, Bharat-Net is still targeting internet connectivity in local bodies. Frankly, our telecom sector is broke, a result of “mispricing” by operators, and spectrum pricing by the government. Without serious attention to spectrum management, including making licenced service areas much smaller, and preventing anti-competitive behaviour, our digital future will not be bright, but bleak.

Port connectivity is mentioned once, but the speech is silent on the regulatory reforms needed to enable public and private ports to compete fairly. Even as Adani’s Mundra remains the only serious port SEZ, talk of port-linked industrialisation sits uneasily with plans to turn Mumbai port into a real estate project. Agriculture, instead of cold chains, gets a cold shoulder, rural roads aside.

And, where is the finance that will underpin this effort? A headless IIFCL aside, other infrastructure financiers like IDBI and IDFC have long morphed into banks. Apart from the odd transaction, the bond market is moribund. Public-private partnerships are anathema to banks, and investors have been burnt many times over for reasons described in the Kelkar Committee report. Is there a solution?


The entire contractual structure and regulatory framework needs revamping. We need a wholesale change in approach — from maximising revenue extraction to minimising the cost of provision. Compared to our promise of $1.5 trillion over five years, China invested about $2.5 trillion on infrastructure in 2017 alone (and they are growing slower than we are). Some of their investments may be temporarily underutilised, but infrastructure is not allowed to constrain growth. We could do that cheaper and better. But that will require government to sit up and take notice. Will it?

The writer is senior fellow, Centre for Policy Research

First published on: 13-07-2019 at 00:15 IST
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