By Ejaz Ghani
India’s infrastructure is simply not good enough to facilitate the expansion of the manufacturing sector, or meet the needs of a rapidly increasing middle class. The business community has continuously cited poor infrastructure as the biggest constraint towards improving economic growth and corporate performance. The current global glut in saving, low interest rates, and expected high returns to infrastructure investments—thanks to India’s rising middle class and young population—provide an unprecedented opportunity to scale up infrastructure investments. The country’s infrastructure investment, demographic dividend, and rapid economic and job growth, all go together, hand in hand.
There is a strong consensus amongst macroeconomists that scaling up infrastructure spending is the right response during an economic downturn. Most developed countries have already announced large fiscal stimulus packages that have a major infrastructure component. US President-elect Joe Biden has identified increased infrastructure spending as a key priority, with an emphasis on stimulating growth and combating climate change.
India’s biggest initiative towards infrastructure development is the creation of the National Investment and Infrastructure Fund, with investors that include the Abu Dhabi Investment Authority, Temasek of Singapore, and the HDFC Group. But more actions are still needed to scale up investments. The Ministry of Finance will need to be less stringent on its fiscal stance, the monetary authority needs to appreciate complex interactions between financial and real sectors, and the state-level authorities and the city administration need to expand the use of public-private partnerships (PPP), as a tool for scaling up infrastructure projects.
What comes first: Banks or infrastructure development?
Although India did announce increased spending on infrastructure projects in 2020, all signs indicate that infrastructure spending actually declined during this economic downturn. This may be due to several factors, including the lockdown associated with the coronavirus, poor preparation and implementation of infrastructure projects, and the preoccupation with the financial sector.
Policymakers, and newspaper headlines, have been preoccupied with India’s twin-balance sheet problem, a fragile banking system, and that sky was about to fall. Although a few non-banking finance companies had ‘some deep-rooted issues’ due to their corrupt practices and fraud, the problem was blown out of proportion, and the problems facing the real sector were ignored.
Policymakers have to decide on what comes first—banks or infrastructure? India provides a rich laboratory and data point to examine whether finance or infrastructure comes first, as the recent infrastructure projects provide high quality data that are impossible for advanced economies, like the US, where infrastructure work began long ago. On financial development, we used detailed data on bank lending across India over an extended period, drawn from the Reserve Bank of India (see our Harvard Business School working paper ‘Infrastructure and Finance: Evidence from India’s GQ Highway Network’; https://hbs.me/2L6tYnB).
Empirical results show that infrastructure comes first for India’s economic growth. There was a strong response in bank lending activity, in districts adjacent to the Golden Quadrilateral Transport Highway, which manifested in terms of both loan counts and larger loan sizes. This points to bank lending responding to the increase in real activity that arose from improved transportation infrastructure. The policy lesson is ‘build it and they will come’, and economic growth will be boosted if policymakers can increase their focus towards scaling up infrastructure investments.
Scaling up PPPs
Foreign institutional investors have already begun to place big bets on India’s infrastructure sector. This will be facilitated by scaling up PPPs in new projects. This requires further improvements in regulatory procedures that will promote fair and transparent procurement processes and improved governance of project implementation to ensure efficiency, affordability and sustainability. India has more room to adopt internationally-recognised good regulatory practices oriented towards sound preparation, procurement and management of large infrastructure projects. A set of good regulations will signal to the global and local private sector developers and operators—as well as citizens—a commitment to efficiency, affordability and sustainability of infrastructure investments.
Increased investments can be associated with severe challenges in managing public expenditure in the future, incurring unforeseen costs related to off-book commitments, and excessive debt. This can be avoided if policymakers can improve risk allocation in PPPs. Governments taking more risk does not necessarily attract more private investment. Instead, this can create moral hazard problems.
Often, public-private infrastructure projects turn out to be significantly more expensive, and much slower to implement. An alternative option is to build the infrastructure project using government money first, and once it’s a cash flow yielding asset, hand these over to the private sector to operate. Mumbai and New Delhi airports are prime examples of private sector companies taking over operations, after they were built with public funds, and they also make way for construction of additional terminals.
Implementation of new structures, such as special purpose vehicles (SPVs), will also help, as these enable many private sector companies to participate in smart city projects, including smart metering, water treatment and sewage treatment. India’s state and city governments play an underappreciated but crucial role in ensuring the success of infrastructure projects.
India will attract increased interest from global capital markets, as it develops more commercially viable projects; improves execution, regulation and governance that signals commitment to efficiency and sustainability; and appropriate risk allocation between public and private sectors.
Tapping digital technology
Digital technology is changing the pattern of mobility, urbanisation and spatial development, and the ways in which we live and move around for work, leisure and learning. It is disrupting traditional patterns of movement and learning, and introducing new options for work and play that have huge implications for infrastructure projects. Digital technology can increase citizens’ access to public and private information, improve data collection, and enhance the preparation, administration and supervision of infrastructure projects.
India has the second largest pool of internet users in the world, yet half of its population lacks internet access. More than 55,000 villages in India remain deprived of mobile connectivity. To truly benefit from the digital revolution, India should explore the potential for establishing a national digital institution that will promote investments in digital infrastructure, build strategic partnerships with the private sector, and reduce the digital divide. India needs to scale up last-mile connectivity in remote rural areas. PPP models could be used in the expansion of digital infrastructure, as has been the case with some traditional infrastructure projects. Traditional government infrastructure assets like post offices, and other buildings, can also be potentially used in the provision of digital services.
I reiterate, the current global glut in saving, and the expected high returns to infrastructure investments due to India’s young population and a rising middle class, provides an unprecedented opportunity for global and local private investors and pension funds. India’s infrastructure investment, demographic dividend, and high economic and job growth, all go together, hand in hand.
(The author is senior fellow, Pune International Centre, and has worked for the World Bank and Oxford University. Views are personal)