The latest official data makes for grim reading. The index of industrial production for October shows that industrial output has shrunk by 0.4%. Capital go-ods output growth has come down to 3.1%.
To counter this slowdown, RBI and the government have announced several measures, mostly aimed at promoting private sector demand and investment. But the present circumstances require more of direct spending on infrastructure by the government.
The emphasis on the private sector is perhaps due to a common perception about official machinery. The government is assumed to be incapable of executing investment fast enough to stimulate growth. This view seems to have influenced the policymakers as well. Apart from the proposed additional outlay of Rs 20,000 crore, all measures aspire to increase private spending and investment. The government hopes that this will increase private investment. It expects to attract Rs 100,000 crore in infrastructure through public-private-partnerships (PPPs).
However, a reality check suggests that the perception is unfounded and the hope unrealistic. During the last three fiscals, growth has been unprecedented and investors bullish. Yet, private investment has been much below the expectations. Since January 2006, only 87 PPPs worth Rs 89,891 crore have been approved. The actual investment is much less. Similar is the case with the commerce ministry?s flagship investment magnets, the SEZs. Total investment in SEZs is Rs 89,471 crore against the Rs 1,25,000 crore target.
The adopted measures will not be effective when project costs have escalated and pessimism prevails. There is a huge difference between interest rates reduction sought by investors and that induced by recent measures. The National Highways Builder?s Association says that infra-projects are commercially viable at 8-9% interest rates. In contrast, the rates are hovering between 13- 16%. Under these conditions government?s hopes are unrealistic.
In contrast, as the latest ministry of statistics and programme implementation report shows, the official delivery system is improving. There has been a decline in cost overruns for infrastructural projects. One third of 909 projects covered by the report are on or ahead of the schedule. Most of these are public projects. Also, governmental agencies have been able to pump in a reasonable amount of money. During 2007-08, as much as Rs 55,862 crore was invested, about 86% of the total planned outlay. Similarly, the PM Gram Sadak Yojna has been satisfactory.
And some measures can improve the implementation of public projects immediately. For example, if project reports are prepared seriously and the rules for EPC contracts are made clear and consistent, this will reduce the disputes over project design and scope changes, a major cause of delays. The point is that there is room for enhanced spending. Indeed, several railways projects are getting delayed for the want of funds.
The present slowdown is severe. Core sectors like construction, coal and cement etc, are tottering. A minimum Rs 50,000 crore extra needs to be invested in infrastructure. To avoid crowding out, government should raise this amount from abroad, from multilateral agencies, from NRIs and other private entities. It has done so in the past and should be able to do now.
It is important to prioritise the spending of available resources. The implementation of ongoing 700 odd projects should be expedited. Since, financial commitment has already been made for these projects, there is every case for mobilising and spending of funds now rather than later.
In addition, the government needs to spend more on developing connectivity to and within the hinterlands.
Private investment will not come in rural roads, hospitals, schools and houses anyway. However, such investment has several benefits. It is labour intensive and uses locally available resources. It provides income security to those most in need, who consume most of their income. The local economy benefits at large.
?The author teaches at the Delhi School of Economics. ramsingh@econdse.org