Has the Budget done enough to boost infrastructure?

Published: March 5, 2015 12:16:57 AM

While the allocation to the infrastructure sector will go up by R70,000 crore in 2015-16 over last year, the sector needs consolidation in policy framework

The inadequacy of quality infrastructure at globally competitive prices has long been recognised as a handicap to the development of the economy. Given the focus of the government on Make-in-India to create mass manufacturing for job creation, it was imperative for the Budget to address issues that constrain the infrastructure sector and pursue reforms with rigour. But has the Budget done enough to boost the sector?

Broadly, the key measures announced in the Budget provide a renewed impetus to the investment cycle and infrastructure sector in the country.

A few measures include creation of a National Investment and Infrastructure Fund (NIIF) with annual inflows of R20,000 crore which would make funds available to firms for new projects, corporatisation of ports, revisiting the PPP framework and the announcement of five new UMPPs. These will each be of 4,000 megawatts, totalling 20,00 megawatts and entailing investment of R1 lakh crore. The best part of the UMPPs is that all approvals will be taken in advance and bid winners will only run the risk of project development and execution. The long-standing demand for developing a bond market for infrastructure has also been addressed with the introduction of tax-free infra bonds for railways and roads. Further, R20,000 crore has also been allotted to the Rural Infrastructure Development Fund.

For FY16, the increased provisions have been made for development of national highways, including expressways, and six-laning of crowded stretches of the Golden Quadrilateral and two-laning of highways under the National Highways Development Project. The Budget has proposed connecting each of the 1.78 lakh unconnected habitations by all-weather roads. This would require completing 1 lakh km of roads currently under construction, in addition to sanctioning and building another 1 lakh km. The planned allocation to the road transport and highways ministry has shot up to R42,913 crore in 2015-16 as compared to R28,881 crore in the current financial year.

Infrastructure spending currently stands at 8% of GDP and the aim is to increase this to 10%. The extent of scaling up needed in infrastructure development in India is huge as our peer China spends nearly 11% (with more than three times of India’s GDP) of its GDP on infrastructure, one of the factors responsible for the competitiveness of its manufacturing sector. The projected investment in infrastructure in the 12th Plan (2012-17) is R1 lakh crore with more than a third expected from the private sector. However, private participation has been low due to several bottlenecks and challenges related to availability of bankable infrastructure projects along with land acquisition and environmental issues.

Progress is slow because of delays in decision-making and problems with land acquisition, while environmental clearances have added layers of complexity for investors trying to navigate India’s bureaucratic bylanes. NGOs add to the delay by holding up projects by filing writ petitions.

But the government has given enough indications for transparency in environmental clearances and making land acquisition easier. It is hoped that the measures announced in the Budget would help kick-start activity in this sector with active participation of private players in the future.

One of the key reasons why infrastructure development has failed to take off in a big way is the dismal performance of PPPs, which were once considered to be a panacea for all infrastructure challenges facing the country. They were scaled up to a large extent in the last decade, presuming that they would transform infrastructure landscape. A close scrutiny of the projects reveals that they are beset with a plethora of problems. The reasons why PPPs have failed to take off include red-tapism, power struggle between different agencies, lack of trust between the government and private operators, corruption, land acquisition issues and environmental clearances. The government needs to revisit the PPP model and take up projects on its own, and then auction these to the private players for efficient management.

To improve India’s poor roads, narrow bridges and dilapidated airports, which choke the flow of goods and people, a large injection of capital into the system is required. Thus, the infrastructure sector is being paid maximum policy attention to ensure that supply shortages do not trigger runaway inflation. It offers significant opportunities to private investors, both domestic and foreign. The policy measures initiated by the government are expected to reduce infrastructure supply-demand gap. A lot depends on the central and state governments’ efforts to spur investment and weave together the regulatory and institutional mechanisms needed for speedy implementation of infrastructure projects. Infrastructure development is crucial to improve competitiveness for the Make-in-India initiative. While the sector will see the allocation go up by R70,000 crore in 2015-16 over last year, it needs consolidation in policy framework starting from approval to implementation, an institutional mechanism for fair pricing and competition, and developing financial markets along with enhanced budgetary allocation to help India achieve its growth potential.

By Geethanjali Nataraj

The author is senior fellow, Observer Research Foundation, and policy lead, Knowledge Partnership Programme, DFID India-IPE Global

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