The Hindu Business Line : Infrastructure’s burden

Simply allocating funds for infrastructure or tempting investors is not enough if the arcane regulatory framework still exists, untouched by policy reform, says ASHOAK UPADHYAY

Since various infrastructure sectors are regulated differently, the power to execute projects often vanishes in a quagmire of indecision.

For a government that presided over a dream run of the economy since it took charge in 2004, the present situation must come somewhat as a bathos tinged with despair. Presenting his first full Budget in 2005, the Finance Minister was on song; the UPA aims were grand and growth expectations modest.

Every year, while growth surpassed expectations, the grandiose aims remained largely on paper. No one seemed to mind that promises were unredeemed except in higher allocations, simply because a rising exuberance blinded everyone to the roadblocks. Now they are upon us and the optimism is a bit guarded but the policymakers are soft-selling — not the economy as much as themselves.

At the India Economic Summit the Finance Minister spoke of the unfinished reforms and the reluctance of policymakers to consider new institutional delivery systems with a frankness that was both fey and self-exonerating. In all likelihood, he was responding to the challenges facing the economy that the summit had identified; challenges that must appear almost insurmountable to the Cabinet of Dr Manmohan Singh: rising population, drinking water shortages, malnutrition, illiteracy and, of course, poor infrastructure.

The last challenge has always been the least remarked upon; for four years as the economy sped along, potholes did not seem to matter. But investors notice things and calibrate them into their plans. Barely six weeks ago, Japan’s second largest trading firm, Mitsui grumbled about the poor roads and power shortages, among other things and thought China a better bet for future investments.

Some time back, the chief of Siemens in India complained about Bangalore in a similar vein. Those complaints will mount even as policymakers remind the nation that the infrastructure will remain a priority.

Allocations

But too little comes too late. The sums required for infrastructure have been fairly well documented; among others, Rs 2,20,000 crore for roadways, Rs 40,000 crore for airport modernisation and Rs 60,000 crore for leading seaport modernisation, not to mention resources for drinking water and power generation. The Eleventh Plan contains it all. That’s the bare minimum required of policymakers, late as it is.

Of course, there is the backlog of missed targets from the Tenth Plan; post-Independence history is replete with legacies of delays handed down to successive governments. But the present government has generated far too much optimism and hype about its capacity for reform to pass on that legacy of failure without paying a price.

Success creates its own demands on failure and the frequent statements by the Prime Minster and others about the persistence of endemic problems will not fill those potholes or shed light on benighted villages.

Missed Opportunities

No other government in the post-reform period has enjoyed such a confidence among global and domestic investors as this one. Sixteen months is long enough to set the ball rolling for changes both in the way funds are raised and deployed. Just the repeated mention of infrastructure as the priority of the government is enough to get funds rolling in, or so it seems.

While the government dithers on using $5 billion of foreign exchange reserves on infrastructure, mutual funds floating infrastructure schemes are raking it in. In the last quarter according to a report in this paper, about 15 new fund offers have raised more than Rs 15,000 crore and another 15 in the next quarter can reasonably be expected to be as popular.

By the end of the year, infrastructure linked schemes would have garnered more than Rs 20,000 crore compared to just Rs 2,500 crore last year. The Reserve Bank of India for its part has allowed banks to invest in unrated bonds of infra companies, a logical extension perhaps of the confidence that banks have shown for the infrastructure sector that was the beneficiary of the highest incremental credit growth last year.

The slip between the cup…

Numbers benumb; the magnitude of funds required for the entire spectrum of services – from roads to drinking water – blinds the policymaker to its chances and challenges. Instead of worrying about the sources of funds, New Delhi, in concert with States, should be peering into the dense thicket of the constrictive regulatory framework and the multiple legislations that are hopelessly archaic.

All over the developing world, and in China, funds are eager to flow into the infrastructure so long as the policy environment for the deployment of funds is right. In India it is terribly wrong.

With the States equally sharing the responsibility for infrastructure development, the legislative framework is more complex than it needs to be.

The lack of financial devolution of powers below the States level to cities makes the task of urban renewal even more cumbersome. Only the strong-willed or the stupidly obdurate investor would contemplate building a new airport for a city or a power plant, even in a State like Maharashtra, for example.

The restrictive framework

A recent Deutsche Bank report, ‘450 bn reasons to invest in India’s Infrastructure’, at first glance seems like a ringing endorsement of the new world for global investors, considering the huge gap between needs and government resources, and the willingness of the policymakers for Public Private Partnerships.

But it singles out the regulatory barriers as significant deterrents; among others, the federal structure and the differing competencies of the Centre, States and local governments weaken the enforceability of obligations.

Since various infrastructure sectors are regulated differently, for example, the railways by the Centre, roads by the States and highways by both, the power to execute projects often vanishes in a quagmire of indecision. The lack of a regulator that can standardise concession arrangements is also a major setback.

The report, typical of western countries fearful of coalition, mirrors the concern. But this is overstated as the history of the post-reform period would attest. More to the point, weak ideologies and strong partisan politics can create problems; the fact that Mayawati overruled most projects sanctioned by the Mulayam Singh Government highlights the risks of a fragile commitment to contractual obligations.

This land is my land…

But one hurdle that the Deutsche Bank overlooks is the most dangerous one; that no policymaker ever dreamt of as a problem despite the evidence, and that is land acquisition. For decades the public sector driven dams and power plants faced resistance from the displaced. But when the Special Economic Zones Act was passed in 2005 and the idea of large townships and industrial hubs took root in fund-rich investors, every policymaker assumed the transfer of agricultural lands as a routine matter.

Every policymaker was proved wrong; despite the violent opposition to land acquisitions in some States, New Delhi seems to ignore the simple fact that the whole mess has been its doing.

Had it put in place the mechanism to enable land transfers by arming the weaker party in the transaction, the seller, with powers to bargain for the right price, matters may not have reached the impasse they have.

The amendments to the Land Acquisition Act on rehabilitation and compensation will have to wait for the budget session; in the meantime, tensions simmer in rural areas marked by farm stagnation. Some foreign investors are holding onto their money fearing a Posco-like situation in States that most urgently need core sector growth. Some 13 steel projects await land acquisition clearances. But there is no compromise in sight.