By Kumar V Pratap
It is widely recognised that infrastructure investment must be prioritised for inclusive growth, even in difficult times like the current one. Adequate transport and digital connectivity, uninterrupted power supply, and qualitatively superior social infrastructure, like health and education, enable enterprise and industries, provide employment and raise income levels. This seems to be the case for India too amidst the current Covid pandemic.
The World Bank’s Growth Report (2008) finds that fast-growing countries of East Asia, in their fast-growing phases, have spent about 7-8% of their GDP on infrastructure. Using this as our aspirational benchmark for infrastructure investment, we find that India spent 7.2% of its GDP on infrastructure in the 11th Five Year Plan period (FY2008-12), which came down to 5.8% in the 12th Plan period (FY2013-17) and is estimated to be about 5% of GDP in the last two years. The reasons for this slowdown in infrastructure investment are multiple—twin balance sheet problem, issues in land acquisition and environment and forest clearance of projects, aggressive bidding by the private sector, etc. But, even after this slowdown, India continues to implement one of the largest infrastructure programmes in the world, with an estimated infrastructure investment of about $140 billion in FY19, and occupies the second position in the developing world both by the number of PPP projects as well as the associated investments.
In April-May 2020, the Covid pandemic slowed down the infrastructure programme of the country, both from the demand and the supply side. Passenger traffic on roads, by railways and by air was under lockdown, and in the power sector, there was a major demand slow down (about 28% less than business-as-usual) with most industrial and commercial activity locked up. On the supply side, supply chains and construction labour force were dislocated because of the pandemic.
There are implications of the pandemic on the National Infrastructure Pipeline (NIP) too. The government, in a major pro-active initiative, drew up the NIP with an ambitious plan to invest `111 lakh crore (about $1.5 trillion) on infrastructure in the period up to FY25, roughly planning to double the annual infrastructure investment compared to what has been achieved in recent years. As per estimates in the NIP Task Force Report, about 80% of the required investment would come from the Centre and the state governments, and these would be constrained given the state of our public finances and the higher priority demands of the pandemic.
This would adversely impact the implementation of the NIP unless the slack is picked up by the private sector, which seems unlikely in the current financial year. But, since NIP is a six-year infrastructure investment plan, the current year’s slack may be bridged in the later years given the infrastructure investment green shoots that have appeared recently.
The more recent infrastructure numbers are encouraging and suggest that, barring the onset of a second Covid wave, the worst is behind us. Power consumption, freight traffic by railways, fuel consumption, and GST collections in June 2020 are around 90% of the corresponding month last year.
Infrastructure green shoots
If we classify events as those occurring pre-Covid (before March 2020) and after Covid (after March 2020), we find that even as infrastructure investment slowed down in recent years, there is anecdotal evidence that some notable deals happened. The noteworthy transactions pre-Covid were:
1. Successful awarding of NHAI Toll-Operate-Transfer (TOT) bundle 3 to Singapore-based Cube Highways (November 2019);
2. Award of Jewar Airport, a greenfield project, to the Swiss airport operator, Zurich AG (December 2019);
3. Successful award of electricity distribution license in Odisha’s five circles to Tata Power (December 2019).
After Covid, the noteworthy transactions are:
1. Adani Green Energy has bagged the world’s largest solar tender to construct 8 GW photovoltaic power plant and set up 2 GW solar cell and module manufacturing capacity at a total envisaged investment of $6 billion (June 2020);
2. IRB Infrastructure achieved financial closure of Mumbai-Pune Expressway in a major brownfield asset monetisation initiative at the state level for a total consideration of Rs 8,262 crore (June 2020);
3. Spanish Solarpack Corporation won the bid at Rs 2.36 per unit for 300 MW of solar power (lowest solar bid in India) in a SECI tender (June 2020);
4. The most noteworthy transaction was raising of Rs 152, 057 crore (and counting) by Reliance by selling just under a third of the stake of RIL in Jio Platforms (April-July 2020).
The total value of these transactions is about Rs 2.5 lakh crore, which has been achieved in just nine months in the extremely difficult Covid times. What is noteworthy about these transactions is the diversity of sectors—roads, airports, telecom, solar, and the most difficult, electricity distribution—which implies the overall attraction of the Indian infrastructure to investors; in addition to brownfield assets, investment also in greenfield projects with high construction risk; transactions at both the federal and the state level; funding pre-dominantly from foreign investment, implying internalisation of currency risk inherent in infrastructure investments, which in turn shows that foreign investors are betting on a stable Indian economy over the longer term; and the large size of projects. All this augurs well for future infrastructure resource mobilisation.
To sustain the trend, the government is opening up new sectors to private participation, most prominently, the railways (railway stations and passenger trains), social sectors like health and education, and even strategic sectors (medical and industrial use of radioisotopes). However, as we follow the private path for resource augmentation and efficiency improvements in infrastructure, we must be cognisant that expediency (diluting entry conditions for private participation) may not be a substitute for adequate project preparation and consonance with international best practices, as a failed PPP project is worse than no project.