Modi Government doesn't have the money, need a new dedicated infra-lending firm and sweeping reforms.
On the face of it, the government’s logic for a Rs 102 lakh crore infrastructure budget – the details were announced by finance minister Nirmala Sitharaman on Tuesday – is reasonably sound. In the past, the infrastructure-to-GDP spending used to be in the 7-8% range, so the government is looking at getting back to somewhere around those levels; indeed, the government is targeting a level of around 6.5% for the FY20-25 period and while the prime minister’s Independence Day speech had spoken of a Rs 100 lakh crore infrastructure investment over five years, the plan outlined by the finance minister is over a six-year period. What is worrying, however, is that these are not normal times; not only has GDP collapsed in both real and nominal terms, the investment impulse, especially for large-gestation and big capex projects has diminished considerably.
Going by the government’s own estimates, the infrastructure-to-GDP spend collapsed from 7.1% in FY08-12 to a mere 5.7% in FY13-17; indeed, in FY19, it was just around 5.3%; reviving that isn’t going to be easy. And the 6.5% infra-to-GDP projection of the government is based on nominal GDP growth recovering to 13.1% by FY25; if we take an average growth of 9% for FY20-25 versus the government’s 11.5%, the infra-to-GDP target is a much higher 6.9%.
The numbers get even more worrying after this since, compared to the actual infrastructure spending of Rs 36 lakh crore in FY13-17 – the numbers for FY18-19 given by the government are estimates – the government is looking at almost trebling this over FY20-25; indeed, while the infra-to-GDP spending was 5.3% in FY19, the FY20 projection is 6.6% though there has been no sudden improvement in the investment climate. Indeed, with stressed government finances – thanks to the huge shortfall in tax collections in FY19 and FY20 – it is not even clear how the government is going to contribute the large share of infrastructure investment that is envisaged. The estimates made for annual infra-capex (Rs 13.6 lakh crore in FY20) require a 40% step-up in central government expenditure since the plan envisages 39% of overall infra-spend will be, each, by the central and state governments and 22% by the private sector. And assuming both the government and the private sector have the ability to invest, even a 3:1 debt-equity ratio means debt of Rs 75 lakh crore will need to be found. In the past, when banks were funding this, they got into big asset-liability mismatches and it was seen that banks simply don’t have the ability to lend much to infrastructure; in which case, the first item on the government agenda has to be a credible debt-raising plan; while fixing the bond market will take time, is the government going to set up a dedicated infrastructure-financing organization and capitalize it adequately?
While the government has been pragmatic in looking at a fairly low private-sector share of investment, even getting this can be a challenge in the absence of sweeping reforms across the infrastructure sector. A fourth of the infra-spend is to be made in the power sector where, thanks to the failed Uday scheme, state electricity boards remain loss-making and strapped for cash; who will invest, or lend, till this isn’t first fixed? A fifth is to come from the roads sector where, an FE report points out, from 85% in 2013, the share of the private sector in road awards is zero today; all the projects in April-November 2019 were EPC ones where the private sector’s role is just construction while the government spends everything. The story of telecommunications is well known, so it is just as well that the plan envisages just a three percent share from the sector. There are issues like the need for genuinely independent regulators – in power, the regulatory failure is near-complete – and clarity on whether contracts can be renegotiated when projects run into trouble; and if this is to be allowed, will any government body have the ability to do so? If these issues are not dealt with soon, the ambitious plan won’t amount to much.