The Union budget presented was hailed by the markets and policy makers and the like. The centre stage of the budget was massive thrust on infrastructure projects.
An economy just on the road to recovery can be kick started through huge investments in infrastructure. An infrastructure led budget coupled with corporate tax reductions is good in many ways. It creates backward integrations as it stimulates investments in basic industry such as cement iron and steel. The multiplier effect of investments in roads, ports and infrastructure are huge , For instance as per a study in US every dollar spent on public infrastructure translates into GDP growth anywhere between 1.5 $to2 $. By adding Rs 70000 crores to infrastructure projects, the government has taken the onus to revive and complete the stalled infrastructure projects This would stimulate aggregate demand and spur economic growth .A slew of measures like bringing the corporate tax down to 25% cheered the India Inc . Such a promise should prompt corporate sector to start making investments.
This fillip to infrastructure would be facilitated by mobilising resources through three broad sources. The first one being moving of the fiscal goal post from the earlier 3.6% to 3.9% of GDP. The second one by increasing the indirect tax base in a move to harmonise towards GST along with higher allocation for road cess. And lastly through the national infrastructure fund, tax-free bonds.
However note that by such decision of the government to infuse funds in ailing infrastructure projects we have come a full circle. Infrastructure deficits have long been recognised as a malady ailing the economic growth. Prior to the reforms, public investments financed infrastructure. The fiscal deterioration in early nineties led government to take recourse to newer modes of financing infrastructure. After the economic reforms of nineties , it was envisaged that the private sector would play an increasingly important & larger role in the economy. Private sector bond financing created global infrastructure assets . The Public Private partnership model were very popular(PPP). India too embarked in this direction by moving away from a pure public sector financing route to launching the PPP model.
The world bank ADB encouraged asset creation in infrastructure through The PPP route. BOLT, BOOT, BOT became the by words. However in the last five years this model has floundered. Success of this model required these three essential components vibrant corporate debt market, transparent and verifiable property rights, and practical end-user charges.
Each of the components mentioned above was beset with problems. India lacks a vibrant corporate bond market. The market depth and liquidity of corporate bonds lags far behind its counterparts even in comparison with the developing markets. Instead of using the bond market route, India used the bank loan financing to execute infrastructure projects. Institutional financing enabled those.
The economic slowdown and problems in execution resulted in banks ending up with huge NPA. So financing such projects became increasingly difficult. Similarly lack of recovery and predictability at the end-user charges level made these infrastructure projects unviable as the internal rate of return from these projects became very fuzzy, in many cases. Agitations against transfer of land for industrial and infrastructure projects held mainly by large number of small and marginalised disadvantaged stakeholders culminated into land acquisition bill which made it infeasible to acquire land and stalled such infrastructure projects.
To develop a vibrant private infrastructure model and to cater to the burgeoning needs of our economic growth, revamping the above three areas is the need of the hour.
To address the lack of investments which in turn stalls the economic growth, one needs to kick-start those stalled projects. Hence the government has stepped in and taken the onus on itself to finance and complete these projects. As result of devolution , these measures by the central government is not sustainable year after year. Hence reforms and activities for each of these components needs to be carried out to crowd in private sector investments.
Sarika Rachuri is a faculty in Economics with IBS Mumbai . She has 16 years of varied experience in academics, research, training and consultancy ...
