It is reasonable to expect that Arun Jaitley’s first Budget will provide substantial support for the creation of smart cities and other modern urban infrastructure. In addition to the assorted pronouncements of the urban development minister, such a thrust would also be consistent with the high technology image the Prime Minister sported during his campaign.
What is less evident as of now is how the Government plans to pay for any massive investment in urban infrastructure. And the choice of specific methods to finance urban development would determine not just the type of urbanisation that emerges, but also the success of this initiative.
The Government typically faces three broad options in planning its resources for urban development: it could use State finances; it could invite private investment; or it could get the user to pay.
Each of these options has its limitations. The use of public funds involves placing the burden on the entire population. The poor may not pay direct taxes but there is a tax element in virtually every commodity they consume. While the burden on the poor may appear small in absolute terms, it can still be very significant relative to their low incomes.
And with a substantial majority of the population still living in rural areas, the case to get them to pay even a small part of the urban development bill would be unfair.
The better option? Inviting private investment looks to be an attractive option on paper. It suggests that the Government is achieving its objective of developing infrastructure without having to foot the bill. But the costs of attracting private investment, both stated and hidden, could be quite substantial.
Infrastructure projects have a long gestation period and they do not often pay for themselves. This viability gap has sometimes been bridged by financial support from governments at both the Centre and the states. And the hidden costs could be even higher.
In their eagerness to attract foreign investment, infrastructure projects are often provided more land than they require, thereby adding a real estate dimension to the deal.
Private investors, both Indian and foreign, tend to present any hesitation on the part of the Government to accept unreasonable demands as a sign of policy paralysis. As a result, there is an upward pressure on hidden costs.
When the user must pay The very nature of private investment also ensures a greater reliance on the third option, that of getting the user to pay. And in the general mood of liberalisation this principle is being used in most Indian cities for public sector infrastructure as well.
At the level of individuals this would appear to be entirely reasonable — those who use infrastructure should be willing to pay for it.
But at the macro level the emphasis on world class infrastructure can substantially increase user charges. This raises the cost of living and this in turn generates an upward pressure on wages and salaries.
The effects of higher wages will be felt most in low margin and low wage industries, like readymade garments. A sustained growth in lower-end wages, spurred by higher costs of living, could see Indian cities losing out to global competitors in low wage industries — a process that may have already begun.
Better infrastructure The higher-end industries may not also be immune to higher costs of infrastructure. If Indian cities are to continue with their focus on world class infrastructure they must be reasonably certain that this infrastructure will lead to the setting up of industries that can compete with the products and services coming out of the global cities that can afford this infrastructure.
If the Indian IT industry, for instance, is to lay claim to infrastructure comparable to that available in the United States, they must come up with products that can compete with those of Microsoft and Apple. If they do not, their rising infrastructure costs will, sooner rather than later, make them less competitive in the lower end of IT activity.
The Budget could provide some indication of official thinking on the issue of infrastructure costs. If the concept of smart cities is interpreted to mean an intelligent approach to cities, we would see differentiation between cities catering to different economic goals.
At one end there would be cities with low-cost but effective infrastructure that would enable industries to compete in the low wage markets of the global economy. At the other end we would see cities with high-cost infrastructure where the higher bill is easily absorbed by industries competing with the most successful players in the world.
If, instead, smart cities are taken to mean the even spread of expensive high technology, we are only likely to see higher costs dragging India further down the ladder of global competitiveness.
(The writer is a professor at the School of Social Science, National Institute of Advanced Studies, Bangalore)
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