India’s past does not inspire confidence. If the TOT model fails and insolvency creeps into NHAI, pfc, etc, India could be staring at a low-level growth trap.
Ever since the success of the Golden Quadrilateral National Highway Project, initiated by the Vajpayee government in 2001, investment in ambitious infrastructure projects has caught the imagination of policymakers. Various public policy documents have tried to quantify such ambitions into investment targets: The 11th five-year plan (FY08-12) under the UPA government was able to raise infrastructure investment to 7% of GDP—a target advocated by the World Bank’s Growth Report, 2008. Emboldened, it set an even higher target of 8.2% in the 12th five-year plan (FY13-17), but the bang ended in a whimper, a mere 5.8% of GDP. The `102.5 lakh crore infrastructure spending plan under National Infrastructure Pipeline (NIP) is another attempt to scale up the ambition—albeit to kick-start sagging economic growth!
Thus, big infrastructure spending is back, centrestage of a growth-revival strategy when private domestic demand has collapsed. This has certainly excited its advocates. But, critics have questioned the government’s capacity to mobilise funds given on- and off-budget fiscal limitations. Whether the government should cross the fiscal red line has become contentious: With general government debt at 70% of GDP, it must be worrying about the market appetite for more borrowings and patience of credit rating agencies. Having let current expenditure expand both on and outside the budget over the last six years, the Modi government has only itself to blame for not having the space to invest in infrastructure.
There is no disagreement the country has a huge infrastructure gap, as is well articulated in the NIP report. The real challenge is to find resources. “Money does not grow on trees” is an old saying. By now, the government should have internalised that forced filing of more income tax-GST returns does not automatically guarantee higher tax buoyancy. So, the way forward appears to be to borrow and invest. Whether these would be on/off-budget are matters of detail. Notwithstanding the emerging financing challenge, this article intends to bring some stylised facts and a sobering account of India’s past experiences of infrastructure investment-led growth, both for the government and the private sector.
Historically, the larger share of infrastructure investments has come from the central and state governments (see graphic). In the 10th five-year plan (FY02-07), this was a modest 5% of GDP and appropriately funded; one could argue, this was likely demand-led, or at least so enabled, as genuine fiscal consolidation happened in the period. The 2008 crisis, and the resulting sharp dip in GDP growth led UPA II to reorient its growth strategy and put infrastructure investment at the core plan for economic revival.
As G20 consensus to let countries with fiscal room spend evolved, government investments were scaled up in the 11th five-year plan; the fiscal deficit more than doubled in the two years to FY10. More importantly, the private sector was roped in with supportive policy incentives, and bank financing. Private enthusiasm is evidenced by the fact that India was the top receiver of PPI activity (Private Participation in Infrastructure, World Bank) between FY08-12, accounted for almost half of new PPI investments in developing countries in 2011; its public-private partnerships (PPPs), too, are one of world’s largest programs. Several warnings that banks could face asset-liability mismatch were simply bypassed!
Growth recovery was short-lived and ended abruptly as the booster turned out to be artificial, and unsustainable. As macroeconomic conditions deteriorated, most of these investments turned bad. The outcome was near-complete economic paralysis: The government was forced to tighten its belt; overleveraged corporates were left with impaired and weakened balance sheets, and the banks saddled with NPAs. The collateral damage, however, radiated much beyond these as motives were ascribed to many of these investments. Instead of critically questioning the growth-revival strategy through ambitious infra-investment targets, the blame was heaped on entrepreneurs and bankers. The fallout was that the private sector withdrew from infrastructure altogether, and banks became completely risk-averse.
However, fascination for investing in big infrastructure projects continued under Modi 1.0. The excuse was to deploy public investment in infrastructure as a countercyclical tool. Ambitious road and railway projects were rolled out, financed largely through off-budget spending, quasi-government guarantees extended to government-owned National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC), etc. In spite of the breathtaking pace at which roads and railtracks were built in these last five years, the growth outcome has been no different. Some private NBFCs enticed into fresh infrastructure exposure ended up damaging their balance sheets, just as banks did under UPA-II. The government’s tagline that it would monetise assets built under EPC contracts through toll-operate-transfer (TOT) model has hardly any takers.
The medium-term impact of infrastructure investment-led growth experience can, thus, be summarised in the following stylised observations:
* Elevated non-performing assets (NPAs), risk-aversion of banks to infrastructure exposure, lending standstill, partial response to monetary policy changes;
* Shrinkage of private interest and equity participation in infrastructure;
* Fiscal deterioration, crowding-out, high interest rates, with low inflation and monetary easing;
* Further deceleration of growth extending to consumption slowdown, non-restoration of private investment;
* More importantly, efficiency gains, though visible, could not yield the desired competitive edge, e.g., corporate savings are decelerating since FY14.
It is time to critically question the strategy to revive growth through ambitious infra-investment targets much beyond the economy’s financing capacity. It was the World Bank’s Growth Report (2008) that suggested countries aiming to grow faster should invest 5-7% of GDP in infrastructure; this, at best, was a historically-observed statistical correlate. But, India’s experience, so far, has been to the contrary. It is, instead, a glaring example of how scaling-up infrastructure investment has failed to uplift growth and crowd-in private investment, caused serious collateral damages to the critical business and financial sectors, worsened public finances, and clogged macroeconomic channels.
Whether India is able to sustainably finance more than 7% investment in infrastructure remains an open question! The National Infrastructure Pipeline (NIP) rolled out by Modi 2.0 is another ambitious plan on the table, ostensibly to achieve a $5-trillion economy. The narrative sounds familiar—should we worry?
Given the lack of private appetite, NIP conceives public sector to finance 78% of the planned Rs 102 lakh crore of investments. Of this, nearly 60% of the central government share is off-budget financing (see graphic). Effectively, this would perpetuate diverting of most financial surpluses towards the government sector, be this through banks, bonds, or any other method.
But, more emphatically, one should not forget how such ambition has impacted the country’s private sector, banks (both public and private), and NBFCs in the past. What has survived so far are government-owned, mega institutions, such as NHAI, PFC, IRFC, etc, which are mostly backed by quasi-sovereign guarantee or the status in fund raising. One should worry if the TOT model fails to achieve significant monetisation of public assets, and insolvency creeps into these institutions too, because few missteps, and India could be staring at a low-level growth trap in the decades ahead! Tread with caution.
The writer is New Delhi based macroeconomist. Views are personal