It was just five years ago that an expert investment committee, headed by Ratan Tata and set up by the Prime Minister, came up with a report which said that India should aim for increasing the investment rate to the mid-30s range over the next decade. Before the ink was dry, India was investing at that rate. A large part of the demand for new investment was to be in infrastructure, and a just released report, under the chairmanship of distinguished economist and policy wonk Isher Ahluwalia*, is arguing that India needs R39 lakh crore investment spread out over 20 years if the country is to sustain, and improve, its GDP growth rate of 8% per annum. This translates into an increase in urban infrastructure investment from 0.7% at present to 1.1% of GDP 20 years later. How realistic is this estimate? Or will it suffer the same fate as the Ratan Tata forecast?
Let us place the report, and its demands, in context. This will be the ninth year running that India will grow above 8% per annum (yes, I know, there was global recession in 2008-09 when the growth rate dipped to 6.7%). Yet, many learned scholars keep arguing that India is overheating and should be ?proud? to settle into the non-overheating zone at the earliest opportunity. Of course, they never specify what that non-overheating zone is because that is not the concern. It is inflation, and if inflation is 6% with a growth rate of 6%, well then we are overheating! But that is to assume that inflation and growth are twins separated at birth. An untenable, and even ridiculous, assumption.
The latest Budget places infrastructure investment to be around R12 trillion, or about 13% of the total budget, or about a third of the investment budget. While the definition of infrastructure investments has changed, and will change, a one-third share was last seen in the 1980s. Infrastructure investments in general, and investments in urban areas in particular, are likely to increase much more than that envisioned by the Ahluwalia committee. So, on that score, the forecast is likely to be in error, and an underestimate. And with it the fears that unless this investment was forthcoming, Indian GDP growth of 8% will be in jeopardy.
Besides this unrealistic underestimate of future urban investments, the report is excellent and spot-on. The most urgent need in India is to face up to the forthcoming urbanisation problem. To date, India has been able to side-step this issue because its rate of urbanisation has been much slower than predicted. Figures just released for China indicate that their urbanisation rate has increased from 36% in 2000 to 50% today. Admittedly, China is three times as rich as India, but urbanisation has to do with both the level of income and its rate of growth. And with the kind of growth rate India has been experiencing, and this without any economic reforms, one can only conjecture what will happen to urbanisation, and growth, once there is reform renewal.
While I have quibbled with the forecast of the level of urban investments, I must emphasise that the report is brilliant in its dissection of the past, and its recommendations for the future. The future is outlined, in eight different areas?water, sanitation, roads, etc. But one among several real contributions of the report is in its emphasis on financing. This is a big, and welcome, departure for Indian policy. It indicates that the report writers are well aware of the changing world, and domestic, order. Infrastructure is a public ?good? but it does not mean that there has to be a strain on the central budget. Cities will develop, and their development will have to be increasingly self-financed. Hence, the very welcome discussion, and recommendations, about how municipalities (urban local bodies) will have to be developed, strengthened, and given the right to administer and collect ?exclusive? taxes. This will involve changing the all important nature, and structure, of property taxes in India. The report does not discuss, but capital gains taxes for property also need a major reworking, and reduction. It is high time our tax administrators realised that both governance and revenue maximisation involve lower tax rates?alternatively, lack of tax collection, bribery, corruption, black money generation all require high tax rates.
The Ahluwalia report rightly stresses reforms and governance. We have had precious few of these in the last decade, and certainly none since the growth spurt started in 2003-04. Does that mean reforms are not necessary? Just the opposite?both to sustain this 8%-plus growth, and to increase it, reforms such as those suggested will be absolutely necessary.
One area of infrastructure where we have known what to do, as testified by the several committee reports (the latest being the Kirit Parikh 2010 report), is on the pricing of domestic oil products. But these reports have made little difference to the fact that in terms of oil (an important element of infrastructure), the Indian government, and especially the UPA, has followed one of the stupidest policies in the world. So why would the Ahluwalia report not suffer the same fate and why will stupidity not reign supreme? Because like the slow pace of urbanisation, those days are gone. Governments and inappropriate policymakers have no place to hide.
I don?t want to end on a pessimistic note?it is not part of my DNA. But what ultimately proves worthwhile in the muddling thru, but entertaining and exciting, society of ours, are studies like the infrastructure report. Most questions are discussed, analysed, and suggested paths outlined. If only India were to begin to listen. But it is! And at long last, even the UPA is beginning to recognise reality.
* Report on Urban Infrastructure and Services, Chairperson, Isher Ahluwalia, Ministry of Urban Development, March 2011
The author is chairman of Oxus Investments, an emerging market advisory and fund management firm
