The Hindu Business Line : Importance of public investment in infrastructure

ONE of the planks on which the Congress(I) came to power was seeing greater role for the government in the economy. This is welcome. One only hopes the party will not get derailed from this policy by the World Bank's advice.

After all, the Prime Minister, Dr Manmohan Singh, has been close to these multilateral institutions. The World Bank has been teaching India for the last 10 years that it needs a large amount of foreign capital for investment in infrastructure; that foreign capital will come only when the domestic economy is stable; that stability will come when inflation is in control; and that the government will have to reduce its expenditure to control inflation.

Developing countries have more or less followed the World Bank approach. In India, for example, inflation has been under 6 per cent for much of the last six years. This is much lower than the 8-13 per cent inflation of the earlier decade. Yet, foreign investment in infrastructure in the developing countries has declined instead of increasing. According to World Bank's Global Development Finance Report 2004, the share of foreign investors in investment in infrastructure of the developing countries was 6.2 per cent six years ago. This declined to 3.4 per cent last year.

The World Bank taught India that foreign investment will rise if you maintain economic stability but exactly the opposite happened. Foreign investments have dropped in developing country infrastructure because they have not been profitable.

A survey of 32 road projects by Standard & Poor's found that the use of roads was less than projected in 28 cases. Investors laid excellent roads thinking that many vehicles would ply on them but this did not happen. Similarly, State Electricity Boards entered into agreements with foreign investors to buy power at high prices thinking the increasing demand would make it possible for them to sell expensive power to the consumers. But demand for power did not materialise and investment in power sector came to a standstill.

Telecom companies made huge investments in optic fibre cables and 3-Generation mobile phones across the world. But these investments are yet to return any profits.

Why did the expected demand for infrastructure not happen? The reply the World Bank and mainstream economists give is that the fiscal deficit of the government is still large and deeper economic reforms are required. But they fail to explain why the positive impact of reforms is not to be seen.

Why is the share of foreign investment in developing country infrastructure declining? The truth is that the mantra of economic stability works like a double-edged sword.

On the one hand, investments may increase because private investors have greater confidence; but on the other, public investment declines because the government has to control its fiscal deficit. New Delhi was investing 10 per cent of GDP in the 1980s, according to Economic Survey. This has declined to 5.9 per cent in 2002. This decline in public investment led to a slowdown in the economy. As a result, the demand for infrastructure did not arise as projected and the foreign investors ran away. This explains the decline in the share of foreign investors in developing countries.

The World Bank has indirectly accepted this reality. It has said in its Global Development Finance report that "public sector support will remain crucial in attracting private capital, particularly in sectors such as water and road transport." This is strange. This is precisely what the Government of India was doing in the 1980s. It was investing 10 per cent of GDP. At that time prices were rising at 8-12 per cent per year. Infrastructure was being developed. At that time the World Bank got the government to stop investing saying that it was more important to establish macroeconomic stability. Now that there is considerable macroeconomic stability, the Bank is saying that the role of the public sector is important!

The country was moving in the right direction. It was unnecessarily pushed the wrong way by the World Bank. It is even more unfortunate that the World Bank continues to harp on the importance of economic stability which practically means that public investment in infrastructure has to be further reduced. It can be argued that government consumption should be cut so that public investment can rise along with lowered fiscal deficit. But that is asking for the moon. Salaries constitute a large part of the revenue expenditures and they are difficult to cut. Moreover, revenue expenditures in Defence, research, space, law and justice have the positive effect of fostering economic growth. One question remains. How did China secure high rates of growth by following the World Bank prescriptions? But this may prove to be short-lived. The figures may also be suspect. But the more important point is that China is saving 45 per cent of its national income while India is saving merely 23 per cent. Yet the growth rates are nearly equal. This means that about 22 per cent savings of China are being taken away by the MNCs. Thus, India should not get distracted by China's experience. The role of government in infrastructure is important. It is welcome that the Congress(I) has adopted this stance. Let us hope that it stays on course.

(The author, a freelancer, can be contacted at bharatj@nda.vsnl.net.in)