Intent on infrastructure is evident, performance is unclear

13 April, 2016

The Economic Survey, as a precursor to the Union budget, demonstrates a mixed bag. On the growth front, it indicates a reasonably strong outlook with a forecast of 7-7.75 per cent, but well below the potential of 8-10%. It records the progress made in terms of improvements in infrastructure, especially on aspects such as power capacity, where massive capacity additions have been recorded in the last financial year.

It does, however, raise several concerns. At a broad level, it makes a very important structural comment on India having evolved to “marketism without exit”, which clearly raises a point on whether the current version on India’s market economy is appropriate and sustainable. It also makes important observations on various sectors where there is apparent gap between needs and achievements.

Infrastructure has been and continues to be the focus for successive governments and the present dispensation is no exception. In certain segments, there have indeed been admirable improvements despite inherent challenges around, land, environment and financing. Within the applicable frameworks, the government has attempted to address many of them transparently and expeditiously. That said, the infrastructure agenda for India is large and complex and this remains very much a work in progress, almost across the board and requires collaborative action among stakeholders at large.

In the context of power, the Economic Survey notes the potential of a single nationwide power market that is possible today and how the power sector not only stands out as a microcosm of India’s cooperative-competitive federalism, but also how this is just a start and much of the potential remains to be achieved. The survey comments on the implementation of the open access to energize Make in India, ensure supply reliability for consumers, and reduce the tariff distortions and subsidy leakages. The growth promise on the back of the achievements recorded merits appreciation just as the deficits require attention.

It is in the context of the potential and the experiences till date that methods to scale up and sustain the growth need critical assessment. Application of rational economic principles in creation of public or social infrastructure is important and so is alignment of specific policies to the wider economic goals.  In this respect, some of the actions of the government have been suspect. For example, while the state-owned Coal India Ltd has been working admirably on scaling up production, the auction process for allocation of captive mines for other users has been mired in controversies, litigation and general misgivings about the alignment of the process to policy goals. Arguably, the intense scarcity under which these auctions were carried out made the bidders bid irrationally, and this has come to haunt both the government in terms of actual realization of the auction proceeds and also the bidders who are now rendered uncompetitive.

In the backdrop of the policy aspiration of making India a key manufacturing economy, uncompetitive core sectors do not bode well at all. Thus, even as the Economic Survey appropriately lauds the record capacity addition and the need to energize Make in India through open access, it would have done well to place greater emphasis on the costs of distortions that have crept in and could potentially frustrate the prospects.

The structural deficits in energy, infrastructure, taxation and financing would need more concerted action without which the growth potential will remain unmet. As the Economic Survey notes, demand pick-up is not uniform and several core sectors are experiencing slower-than-expected growth and significant policy actions are needed in most of them. The survey lists out a detailed set of required interventions for most of the sectors, much of which remains valid prescription but needs implementation action.

The investment needs in infrastructure remain very large. Inability to pull in private sector investments in these vital sectors has serious consequences. As the Economic Survey notes, the fiscal space of the central and state governments are limited, particularly considering the implications of the Ujjwal Discom Assurance Yojna (UDAY) scheme in the power sector. UDAY will also limit the scope for raising further bank finance through bonds. Clearly the government cannot expect on its own beyond a point without breaching fiscal prudence limits. Private investments and public private partnerships need to be scaled up in core infrastructure sectors. The investment capacity of the private sector stands seriously impaired at this time.

Somewhere this logjam needs to be broken and government policies have to work for fair and reasonable returns for investments and limit the fear of policy risks that private investors carry today. This could require some fresh thinking and viewing of the goals, issues and the methods, given that some of the issues are deep-seated and structural. For example, in the oil and gas sector the falling commodity prices and the continued soft outlook requires a complete revisit of the exploration and production regime and the associated pricing parameters. Like the fuels sector, it is perhaps time to revisit the overall exploration and production regime bottom up, particularly on the market interface and reduction of exposure to recurring policy interventions. The Economic Survey makes a clear recommendation in this regard, as is does on the need for including oil and gas sector in the ambit of good and services tax. It also rightly advocates investments in advance in setting up pipeline infrastructure backbone through a specific cess.  However, it fails to visit critical aspect on the current cess on domestically produced petroleum.  At present, it is charged a specific cess at Rs4,500 per tonne, which was perhaps appropriate when crude prices were above $100. With Brent price index sliding below $35, the same quantum of cess translates to about 25-30% of the realized value of crude. This places further stress on the limited domestic production, which is inadequate at the first place for meeting the burgeoning needs.

The Union budget 2016, that will follow the survey, would do well to take cognizance of some of these issues. While the budget is at one level an exercise to balance the books, the government ought to seize the occasion to make incisive structural interventions aimed at the core of the problems to make the energy and infrastructure sectors more competitive. Failure to act at this would possibly let go of on important window at this time when the elections are not on the horizon. Conversely, if the government demonstrates leadership and carries the flock along, this budget could well be a turning point. 

Anish De is partner, infrastructure and government services, KPMG in India.

Note: This story has been republished with corrected data.


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Intent on infrastructure is evident, performance is unclear

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