This is an archived blog post from The Acorn.
Here’s a conundrum: it is amply clear that given the abysmal state of India’s roads, railways, ports, irrigation and electricity grids, and given the rapid growth of the Indian economy over the past several years, good infrastructure is in great demand in India. Yet the central government’s infrastructure financing vehicles have been unable to disburse the allocated funds for the lack of financially viable projects. Understanding this unusual state of affairs is important, even critical, to be able to solve one of the Indian economy’s most pressing problems. Unfortunately though, the UPA government’s latest proposal to address this problem shows every sign of poor diagnosis and equally unimaginative solutioning.
Infrastructure projects are not taking off in India in a big way not because there are inadequate sources of capital, but because government policies make it impossible for many projects to be financially viable. First there are regulations that firmly put several industries out of the private sector. The state runs the railways, almost all of the India’s power industry and dominates the aviation sector. Road projects are hampered by overlapping local, state and central government regulations. If the state were to roll back its choke-hold even a little — as in the case of telecommunications and to a lesser extent in civil aviation — it is clear that market forces can provide quick and competitive solutions.
And then there is that admixture of socialism and populism that destroys the price-mechanism. Electricity pricing is not based on costs of production or on market demand. Instead it is based on electoral necessities. Railway ticket prices do not even account for inflation. Air tickets are the government’s way to rob the rich and pay airline employees. While there is hardly a party in India’s political spectrum that dares to challenge these perceptions and point out that good infrastructure cannot be free, the UPA and the Left are the worst of the lot.
The solution to India’s infrastructure shortfall, therefore, lies in deregulation and movement towards a market-based infrastructure industry. As the Economic Times suggests, the government could well have developed greater sophistication in bond markets to aid the flow of capital into the infrastructure sector. Instead, the UPA government has created yet another ‘special purpose vehicle’ to fund infrastructure. The India Infrastructure Finance Company (IIFC) will borrow from international financial institutions and lend to ‘deserving’ infrastructure projects. This is a doubly dangerous. The government, and not the market, will choose which projects are funded. And governments have a poor record on this front. And since the central government is underwriting the international borrowings of the IIFC, it will have to repay lenders from its own revenues in case the projects it picked run into difficulties.
Despite throwing about fashionable terms like ‘public private partnerships’, it is clear that the UPA government has thrown up a lazy and very likely an ineffective solution due to its fundamentally mistaken belief that India can solve its infrastructure problems without further freeing up its economy. No wonder then, that among India’s leading newspapers, it is only the leftist Hindu that is cheering the move.
This post also appears on The Indian Economy Blog
If you would like to share or comment on this, please discuss it on my GitHub
Previous © Copyright 2003-2024. Nitin Pai. All Rights Reserved.