Softer demand from China, combined with still lacklustre conditions in Europe and Japan, has subdued India’s growth prospects to some extent. This, along with poor domestic demand mainly on account of policy paralysis in the area of land acquisition and delay in getting clearance for big projects, has adversely affected the real sector of our economy. The recent Chinese currency devaluation has further aggravated growth prospects. In a situation where the global market is yet to pick up and export markets on the blink, for any country to grow there is a need to generate ample domestic demand. India is no exception.
For this, we need proactive fiscal and monetary policy measures. To boost growth, in recent past RBI has taken accommodative monetary measures by softening interest rates, which has been possible mainly due to low inflation rate. In terms of economic theory, in the short run, there is a tradeoff between inflation and growth. This means if the central bank cuts the interest rate by, say, 100 bps today and the bank passes it on, then demand will pick up and we could get higher growth. But if there is supply constraint, then monetary policy (rate cut to boost growth) will not be effective at all, rather we could see sharp rise in inflation in the long run, which will reduce growth. Considering India’s current economic scenario, it can be said that RBI’s rate cut alone may not be effective to boost the country’s growth, until and unless supply bottlenecks in real sector are not addressed. For this, we have to give more emphasis on new fiscal policy measures mainly on infrastructural sector. Infrastructural development is one of the major determinants of economic growth in any developing country. Despite being the third largest economy in the world based on purchasing power parity calculations, India’s position is undermined by lack of world-class infrastructure.
India’s investment in infrastructure was very low, at 4.7% of GDP, during 1992-2010 as compared to 7.3% in China, Indonesia and Vietnam. India ranked 90th out of 144 countries as per the World Economic Forum Global Competitiveness Report 2014-15 in terms of quality of infrastructure.
For growth of any sector, there is a need for demand and supply of funds. The major bottleneck for development of infrastructure sector is not the supply of funds, as can be seen that banks’ exposure to infrastructure sector as a percentage of total advances has gradually increased from 11.8% in March 2010 to 15.62% in September 2014.
Further, in order to increase the flow of funds to this sector, RBI has permitted banks to issue long-term bonds with minimum maturity of seven years to raise resources for lending to long-term projects in infrastructure sub-sectors and affordable housing. The instruments are exempted from regulatory requirements such as maintenance of CRR/SLR and priority sector lending. Thus, the real issue for infrastructure sector is generating adequate investment demand. The demand for infrastructure projects would pick up only when investment in infrastructure appears attractive in terms of viability, cost and return of the projects.
* There is an urgent need to expedite the process of creation of independent regulatory authorities for ensuring a level-playing field, mainly in the roads, water, port and oil & gas sectors. The independent regulators should be transparent and enjoy autonomy in framing sector-specific policies. One of their major tasks would be to usher in healthy competition.
* Rationalisation of prices is another important issue. For any infrastructure project, particularly those relating to roads and water, the government has to first identify the customers who will pay for them. For this, mechanisms such as the “private finance initiative” followed in the UK, Australia and Chile may be followed. The government must also develop a scientific pricing mechanism through tariff or other means, by strictly adhering to the “user pays” principle. This will help bring commercial viability to many infra projects like power and water, where it has been observed that in India even today 30% of the power that is produced is not paid for and larger number of farmers generally do not pay for the water they consume.
* Infra projects are perceived as highly vulnerable to time and cost overrun, operational risks, and risks pertaining to market, interest rate, foreign exchange, payment, regulatory and political. This makes investment in this sector less attractive by private players. Policy-makers should reduce the perceived risks by introducing greater policy clarity with risk-mitigation measures which will attract investor confidence.
* As foreign direct investment (FDI) is one of the important sources of funds in the infrastructure sector, the government may fix annual FDI targets for this sector. To boost more domestic funds by way of debt from banks, RBI may consider all infrastructure financing by banks to be treated as priority sector lending. This will be win-win situation for both banks and those seeking project funding. Banks, FIs, pensions funds, insurance companies may be allowed to provide credit enhancement in the forms of guarantee for infra bonds issued by the infra company.
* One of the major hurdles for generating investment demand in this sector is lack of enabling business environment. As per the latest High Level Committee on Financing Infrastructure, a large number of infrastructure projects are stuck or delayed across various stages of award, construction and operations, mainly due to fuel supply constraints for power plants, environmental clearances, land acquisition etc. Apart from addressing policy-level issues, which the government is implementing with respect to mega-projects, beyond a certain cut-off point there is a need to adopt “single window clearance approach” to cut down the implementation period.
* To infuse funds in the PPP model, there is a need to set up an Infrastructure Development Fund, where the corpus can be raised from disinvestments, taxing the agricultural income of rich farmers, raising more tax revenues from the services sector and floating long-term infrastructure bonds by offering a low coupon rate of, say, 5% per annum with no upper limit for investment or disclosure of sources of income. At the time of maturity, only normal rates should be applicable.
To remove India’s economy from the cobweb of lower growth path, there is a need for higher investment in the infrastructure sector, along with proper enabling environment comprising of strong regulatory policies, sound legal system and efficient administrative machinery. Only then will infrastructure-led growth push the overall growth of the economy.
The author is deputy general manager, Corporate Banking, IDBI Bank Ltd. Views are personal