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Wednesday, Dec 25, 2002

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Mid-Year Economic Review — Sustained stress on infrastructure

Pravakar Sahoo
Geethanjali Nataraj

Inadequate progress in infrastructure areas has made India lose out in several areas, including FDI, and impacted economic growth. The recent Mid-Year Review, like the Economic Survey, points out that quick regulatory reforms, including State- specific legislation, and a competition-friendly market structure, are vital to boosting investments in key sectors, say Pravakar Sahoo and Geethanjali Nataraj.

THE Mid-Year Economic Review has predicted a growth rate of 5.4 per cent for this fiscal. But this is unlikely to be achieved or sustained over a period given the infrastructural bottlenecks constricting the economy. The Review says: "Inadequate availability of quality infrastructure at internationally competitive prices has long been recognised as a handicap for the development of the economy".

In this context, it becomes imperative to analyse the issues that act as a binding constraint on economic development and pursue infrastructure reforms with more rigour.

The performance of infrastructure is largely a reflection of the health of the economy. Infrastructure industries, measured by six key infrastructure and core industries (electricity, crude, petroleum refinery products, coal, steel and cement, with a weight of 26.7 per cent in the overall index of industrial production) grew just 2 per cent in 2001-2002 compared to 6.8 per cent in the corresponding previous period.

According to both the Review and the Economic Survey, cement and steel recorded particularly impressive growth rates of 9.3 per cent and 7.3 per cent respectively. But the major bottlenecks are in the areas of highways, ports, telecommunications and power. To remove these constraints, the Government has initiated several sector-specific measures in recent years. An attempt has been made to attract private investment in infrastructure development by way of incentives.

For instance, a ten-year tax holiday is available for core sector infrastructure projects in roads, highways, waterways, water supply, sanitation and solid waste management. This may be availed of during the initial twenty years.

Tax incentives are also provided for investors providing long-term finance or investing in the equity capital of enterprises engaged in infrastructure development. Any income by way of interest, dividends or long-term capital gains from such investments is fully exempt.

The introduction of the Electricity Bill 2001 in Parliament and its implementation will facilitate the participation of the private sector in transmission and distribution. In the telecom sector, competition has been introduced in all service segments. The outlays for roads, rural infrastructure and railways have increased manifold.

In this context, speedy completion of the Golden Quadrilateral would make road transport more efficient and cost-effective. In spite of all the incentives and concerted action by both private and public sector in infrastructure-building, facilities remain inadequate, often poor.

Even in FDI, India is a major loser due to its underdeveloped infrastructure. An investor planning to set up an export base in developing/emerging economies has the option of choosing between India and other locations with better infrastructure.

As the N. K. Singh Committee rightly points out, India is handicapped in attracting export-oriented FDI as it lacks quality infrastructure at competitive prices. However, the Government continues to undertake several measures to enhance FDI in infrastructure by way raising caps and removing procedural hassles (see Table).

Apart from raising the sectoral caps, the Planning Commission also recommends that the States consider enacting a Special Investment Law facilitating both domestic and foreign investment in infrastructure investment.

The Andhra Pradesh Infrastructure Act is an example; it provides comprehensive legislation to reduce administrative and procedural delays, details of various incentives and information on the project delivery process and helps in reconciliation of disputes with the private sector with a view to improving the level of infrastructure in the State.

A similar Act can be enacted in other States to enhance and augment infrastructure development across the country.

But in spite of all the incentives and measures undertaken by both the Government and the private sector, infrastructure industry in India has still a long way to go. The RBI annual report 2001-02 brings out that the gap in meeting targets and achievements in the infrastructure sector was wider in 2001-2002 than in 2000-01.

The gap between the target and achievements has increased for power (-0.2 per cent to - 4.5 per cent), telecommunication, in terms of thousand lines (-1.2 per cent to - 12.1 per cent) and for cement (-0.3 per cent to - 1.5 per cent).

It is evident that reforms in infrastructure areas not only warrant regulatory reforms but also require a developing market structure that encourages competition, allowing players other than public-owned entities, and financial sector reforms. Considerable success has been achieved over the years in some infrastructure sectors. However, the public sector Plan outlay (as a percentage of GDP) fell sharply in some key areas from 1990-91 to 1999-2000.

Investment in the important infrastructure sectors of electricity, gas and water supply and transport, storage and communication declined from 5.2 per cent of GDP in 1990-91 to 4.5 per cent in 2000-01. The investment in these infrastructure sectors, as a proportion to gross capital formation, also dipped from 23.6 per cent in 1990-91 to 22.8 percent in 2000-01. Thus the need of the hour is stepping up investment in this sector.

But it cannot be denied that infrastructure reforms have resulted in some positive developments. The power sector has witnessed a series of reforms recently. In terms of institutional improvement and transparency practices, the establishment of the Central Electricity Regulatory Authority and State Electricity Regulatory Commissions in 18 States so far is expected to ensure rationalisation of tariffs, fair competition and protection of the consumer market.

The State electricity boards have been corporatised in six States and the proposal for further reforms in the SEBs is an important step.

The development of the National Power Grid for optimisation of transmission networks and the Accelerated Power Development Programme are welcome steps. Further, in power sector reforms, conservation of energy as envisaged in the Energy Conservation Act, 2001 needs to be pursued. However, it must be ensured that needs of the rural sector are met by making universal service obligations a part of the reform process.

In telecommunications, fixed telephone lines have more than doubled over the last five years, apart from fast expansion of cellular services covering about 5.5 million subscribers in 2000-2001.

There has been a dramatic reduction in the tariff rate for long distance calls (STD and ISD), which resulted in substantial increase in tele-density recently. The demand-supply gap has narrowed down from 27.9 per cent in 1991-92 to 12.2 per cent in 2000-01. However, steps should be taken by the Government to provide adequate telecommunication facilities in rural areas.

The Review proposes to increase investment in railways and rail safety. Steps will have to be taken by the Railways to phase out subsidies in passenger fares while rebalancing freight tariffs to economically competitive levels.

The Government also has to pursue reforms in coal sector, which supplies more than 50 per cent of inputs to the total commercial energy supply. Large-scale investment is necessary to expand mining capacity and also install clean coal technology. Though limited private investment is allowed, foreign investment and more private participation in this sector has to be encouraged for more free and competitive coal industry.

Besides, there should be earnest efforts to enhance the capacity and modernisation of both the major and minor ports in India. Considering that this sector needs huge resources for development and modernisation, the Government has taken some initiatives, such as leasing port assets, constructions of ports, leasing of equipment and captive facilities for port-based industries. The speedy corporatisation of ports should be the goal, with a smooth mechanism for private-public partnership in place. Since these issues have been debated for long, it is time for the Government to act.

The reforms that are beginning to change the infrastructure sector are crucial to attaining the targeted growth of GDP. However, most of the reforms in this sector and the progress made have already been comprehensively discussed in the Economic Survey 2001-2002.

In this context, the Review 2002-2003 merely reiterates what was mentioned in the Survey and is mostly a rehash of it. But at least, it continues to stress and emphasise that infrastructure reforms are crucial and this fact itself will act as a catalyst to boost investment in this sector. The need of the hour is to continue to accord the highest priority to infrastructure development to attain and sustain higher rates of economic growth.

(The authors are faculty at the Institute of Economic Growth (IEG) and Institute of Foreign Trade (IIFT), New Delhi.)

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