The Hindu Business Line : Budget: `Core' weaknesses not addressed

The Budget was expected to give a major boost to infrastructure in the country. However, the measures announced may not quite be enough for the scale and speed of development needed.

THE Union Budget 2004-05 has set a target of 8 per cent GDP growth rate for the current fiscal. But with infrastructure reforms not receiving enough attention in the Budget, this growth is unlikely to be achieved and sustained. The inadequacy of quality infrastructure at internationally competitive prices has long been recognised as a handicap to the development of the economy.

In this context, it was imperative for the Budget to address issues that constrain economic development and to pursue infrastructure reforms with more rigour. But that did not happen. The efficiency of infrastructure is largely a reflection of the performance of the economy. Six key infrastructure and core industries (electricity, crude oil, the petroleum refinery products, coal, steel and cement) have a weight of 26.7 per cent in the Index of Industrial Production.

Coal production grew marginally from 4.6 per cent in 2002-03 to 5.1 per cent in 2003-04. The power sector also recorded high growth rates of nearly 4.5 per cent in 2003-04. However, petroleum, cement and steel saw a decline. But the major bottlenecks are in highways, ports, telecommunications and power.

To alleviate these constraints the Government initiated several sector-specific measures in recent years. In 2002-03, it undertook several steps to rectify problems in the power sector. The Electricity Act was notified in 2003, and 28 States signed the tripartite agreement for one-time settlement of the dues of State Electricity Boards (SEBs) to Central Public Sector Undertakings (CPSUs).

With regard to roads, the massive Pradhan Manthri Bharat Jodo Project for development of 10,000 km of roads connecting State capitals with national highways was launched in January 2004. An attempt has been made to attract private investment in infrastructure development by way of incentives.

For instance, a ten-year tax holiday has been given for such core sectors as roads, highways, waterways, water supply, sanitation and solid waste management, which developers may avail themselves of during the initial 20 years. Tax incentives have also been provided to investors providing long-term finance or investing in the equity capital of the enterprises engaged in infrastructure development.

Any income by way of interest, dividends or long-term capital gains from such investments is fully exempt. But are these measures sufficient to improve infrastructure significantly? If so, why is it that, despite all the incentives and concerted action by the private and public sectors, infrastructure facilities in India remain inadequate and poor. In this backdrop, the Budget was expected to give a major boost to infrastructure in the country. However, the measures announced — even the several new initiatives — are grossly inadequate.

For instance, an inter-institutional group in the power sector has succeeded in bringing six power projects to financial closure. Therefore, IDBI, IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and Punjab National Bank have formed an Inter-Institutional Group (IIG). These institutions will pool their resources, and Rs 40,000 crore will be made available as and when necessary. The IIG will ensure speedy conclusion of loan agreements and implementation of infrastructure projects. Initially, airports, seaports and tourism will be its target sectors.

Water and agriculture

Realising the importance of water for agriculture, which forms the backbone of the Indian economy, the Accelerated Rural Water Supply Progamme (ARWSP) has been allocated Rs 2,610 crore in the current year. It will focus on renewal of water sources and on serving uncovered and partially covered habitations.

Panchayati raj institutions will be encouraged to plan, implement, own, operate and maintain the rural water supply schemes in consultation with the State Governments. Funds will be given to such institutions to implement the ARWSP. The Government has also announced it will bring all drinking water schemes under the umbrella of the Rajiv Gandhi Drinking Water Mission. One positive feature of the Budget with regard to port infrastructure is the Government's proposal to construct an International Container Transshipment Terminal (ICTT) at Vallarpadam in Kochi port on a Build-Operate-and-Transfer (BOT) basis.

Even in the context of FDI, India is a major loser due to 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 due to lack of quality infrastructure at internal prices. However, the Government has raised the FDI limit in such select sectors as insurance, civil aviation and telecom.

Infrastructure growth

Despite the incentives offered, and the measures undertaken, by both the Government and the private sector, infrastructure growth has still a long way to go. It is evident that reforms in infrastructure sectors would not only imply regulatory reforms, but also require a developing market structure for promoting competition, allowing more players other than public-owned entities, and undertaking financial sector reforms. Considerable success has been achieved over the years in some infrastructure sectors. This could be attributed to the fact that gross capital formation in infrastructure investment rose from Rs 45,490 crore in 1993-94 to Rs 90,890 crore in 2002-03. However, as a proportion of GDP, total investment in infrastructure declined from 5.4 per cent in 1993-94 to nearly 3.7 per cent in 2002-03.

The need of the hour, therefore, is to boost investment in infrastructure projects. Of the total quantum of investment allocated to infrastructure by the present Government, nearly 70 per cent is in the power and telecom sectors; North India will receive most of the investments. The Southern region is expected to get 29.4 per cent of the total investments in the pipeline project sanctioned till 2008. Further, Bangalore and Hyderabad are slated to get 18.04 per cent of the total outlay for airport infrastructure development.

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

Six State electricity boards have been corporatised and the proposal for further reforms in 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 measures.

Power reforms

Further, in power sector reforms, the conservation of energy by checking T&D losses, as envisaged in the Energy Conservation Act 2001, needs to be pursued. However, while reforming the power sector 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 the rapid expansion of cellular services covering about 13 million subscribers during the period 2003-2004. Further, the total number of telephone lines grew about 40 per cent in 2003-04 to cross 76 million in March this year. Much reform has also been carried out in ports, roads, railways and civil aviation. But, again, whether these measures enough to the overcome infrastructural bottlenecks is the big question to be addressed.

If the Budget is serious about achieving the targeted 8 per cent GDP growth, attention to infrastructure sectors is a top priority. Infrastructure development, not only for the manufacturing and agriculture sectors but also for exports, requires urgent attention, including massive investment and provision of incentives by the Government. But the Budget has largely evaded addressing such issues.

Golden Quadrilateral

There is no mention of the Golden Quadrilateral project initiated by the previous government. It is essential that all the infrastructure projects announced are carried on without delay and shortage of funds.

The need of the hour, then, is to continue to accord the highest priority to infrastructure development to attain and sustain higher rates of economic growth. The Budget could have done a lot more in this regard by announcing a few other incentives to those willing to invest in infrastructure projects and to increase the allocation to infrastructure in the Budget, especially when the economy seems to be struck at an average 5-6 per cent growth rate over the last decade.

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