Investment failure is showing

Sep 19 2012, 03:08 IST
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SummaryThe spectacular electricity grid failures in late July 2012 focused global attention on India’s infrastructure woes.

Essential to build political consensus on a core set of reforms

The spectacular electricity grid failures in late July 2012 focused global attention on India’s infrastructure woes. On the surface, the grid failure was the result of large-scale unauthorised excess drawal of power by Haryana, UP and other states that had experienced till then, a deficient monsoon. At a deeper level, the excess drawal was unavoidable, given the shortfalls in generation capacity and investments in coal mines, railways and transmission & distribution facilities. At the deepest level, however, the failures laid bare the shortcomings of the Indian political economy.

In virtually all key infrastructure sectors, power, highways, railways, irrigation, urban water supply, sanitation and municipal waste disposal–about the only exceptions being telecom and real estate for the non-poor—failures of investment have seriously constrained growth. In each case, while the proximate causes vary, the deeper failures of the political economy leading to inadequate investment remain the same.

In respect of highways, a deliberately flawed PPP bidding model, for a number of years, led to gridlock in assignment of contracts to developers, the bidding effort being deflected to a different end. In the case of railways, cross-subsidisation of passenger fares by freight has led to loss of freight traffic to roadways and consequent insufficient revenues, and thus to insufficient investments.

Irrigation tariffs throughout the country are way too low for meeting operational & maintenance costs, let alone new investment. In urban infrastructure, political reluctance to recover costs through realistic property taxation or user fees has constrained investible funds with the municipalities.

In ports, powerful longshoremen unions resist investments in modernisation, even though there are fewer constraints, in principle, on raising tariffs. In respect of coal, apart from the faulty mode of allocation of mines pointed out by the CAG, inadequate transportation connectivity means that sufficient coal cannot be taken out.

And finally, in the case of power, apart from insufficient coal availability, hugely subsidised tariffs for farmers have led to state utilities becoming near-bankrupt, leading to inadequate investment in transmission & distribution, and perception of high risks for payments to generators.

Common to all these sectors are two features of the Indian electoral system. The five-year cycle of elections and their high cost for parties and candidates place constant pressure on parties to raise resources for future elections. But money alone is not enough. Voters need to be placated through free or highly subsidised public, or

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