On Tuesday, Finance Minister Nirmala Sitharaman unveiled an ambitious infrastructure agenda, announcing projects worth Rs 102 lakh crore, to be implemented by 2024-25. As infrastructure investments (as a proportion of GDP) have fallen sharply over the twelfth five year plan period (2013-17), attempts to revive the investment cycle are welcome. However, considering that infrastructure investment over the past six years adds up to Rs 51.2 lakh crore, doubling this over the next six years is a tall order. These are not normal times. The economy has slowed down considerably.
The financial system remains choked. And a broad-based pick up in growth is unlikely in the near term. Reviving the investment cycle requires more than just ambitious targets. What is needed is a carefully thought through road-map. It is envisaged that the central and state governments will account for 39 per cent each of the projected investment, with the private sector expected to make up the balance. While this does indicate that the investment cycle will continue to be driven by the public sector, there is little clarity over how both the public and private sector will finance this massive push. A slowing economy has put government finances under pressure. It is now increasingly likely that both the Centre and the states will miss their fiscal deficit targets this year. A sustained fiscal push, as this plan envisions, therefore, seems unlikely. Add to that an overleveraged corporate sector that is in no mood to invest, and achieving these targets looks increasingly difficult. There are also questions over the nature of projects. Roughly a fourth of investments are estimated in the power sector. However, as existing plants are operating well below their peak capacity, whether the corporate sector will invest in new plants whose financial viability is unclear is debatable. Then, of the total projects, 31 per cent are still at the conceptual stage, while another 8 per cent are unclassified, suggesting little clarity over almost 40 per cent of the pipeline.
Given the state of government (Centre and state) finances, creating the necessary fiscal space for this kind of investment push requires rationalising subsidies such as food and fertiliser, as well as an aggressive push towards asset monetisation. The latter would entail selling off assets such as toll-generating highways to long-term investors such as global pension funds. And with bank lending slowing down considerably, banks will be wary of such long gestation projects which will expose them to risks of asset liability mismatches, the need for long-term financing options such as development finance institutions and a well-functioning bond market has never been greater. These need to be supplemented with measures to address the weaknesses in the current public private partnership models to encourage private sector participation.
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