How to boost growth through rural infrastructure

PVS Suryakumar | Updated on January 22, 2020 Published on January 20, 2020

A national entity for the identification and prioritising of projects for funding and monitoring must be set up. Also, the RIDF should be improvised and relaunched

Prime Minister Narendra Modi powered his intentions of making India a $5-trillion economy by announcing an investment of ₹100 lakh crore in infrastructure. Finance Minister Nirmala Sitharaman has also unveiled a report of the task force on National Infrastructure Pipeline (NIP). The report estimated ₹102-lakh crore investment in infrastructure by FY25. Rural infrastructure gets ₹16 lakh crore.

The purpose of this article is to present a few ideas on rural infrastructure. Hence it is appropriate to begin with the Rural Infrastructure Development Fund (RIDF), established in NABARD since 1995. The first tranche of RIDF (1995-96) was ₹2,000 crore and the current tranche (2019-20) is ₹28,000 crore. The cumulative disbursements are about ₹2.7 lakh crore.

The RIDF was originally conceived to fund State governments for stalled irrigation projects and unlock their potential. Funds for the RIDF come from the shortfall in priority sector lending by commercial banks. The current arrangement is, banks get 3.9 per cent interest for the funds provided to RIDF corpus (Bank rate 5.4 per cent minus 1.5 per cent).

The size of the RIDF is small when compared to the total priority sector shortfall (which is not declared), but its benefits are huge in terms of improvements in living standards, ease of living, and giving a fillip to the rural economy, which impact banks’ business positively. In its humble way, the RIDF has contributed to nation building — through 330 lakh hectares of irrigation potential, 5 lakh km of roads and nearly two lakh mandays of employment.

What can the RIDF teach us in the context of the huge demand for rural infrastructure? The Task Force has identified irrigation, micro-irrigation, agro-logistics from farm-gate to consumers, and digital infrastructure for agricultural produce in its report.

Rural infrastructure is mostly in the realm of State governments; most of them are in the nature of public goods and hence cannot pay back quickly. Investments in this area by individuals will work after the State invests. The investment amounts are not big and are interest rate sensitive.

Rural infrastructure has the potential to improve the ease of living and double farmers’ income. The World Bank opines that economic growth in agriculture is effective in reducing poverty.

Boosting rural infrastructure

The following suggestions can catalyse economic growth through rural infrastructure:

First, there must be a national entity which is responsible for the identification and prioritising of projects for funding and monitoring. To illustrate, there are subsidies for warehouse construction, not synchronised with the regulated market(s). Most of them do not even comply with the norms of Warehousing Development and Regulatory Authority.

Second, the RIDF should be improvised and relaunched. The USP of the RIDF is good appraisal, regular monitoring and assured funds flow. At present, the RIDF caters to 37 different activities. Henceforth, it should focus on projects of national priority or which impact the State’s economy.

The RBI’s ‘Internal Working Group to Review Agricultural Credit’ observed that the RIDF improves credit absorption capacity in rural areas and recommended that its corpus be increased.

Third, the rate of interest impacts viability of projects, and affects both State governments and individuals. Providing interest subvention can help expand the RIDF corpus with funds mobilised by NABARD from the markets.

The interest subvention can come from several sources; exempt NABARD from income tax and use the amount for interest subvention and match it by government contribution, CSR funds, tax free bonds, etc. Financial innovation is required in these aspects.

Fourth, the initial focus of rural infrastructure investments should be on the State government and its entities, powered by interest subvention. After about 2-3 years, individual investors should be invited to invest in those places where governments have created necessary infrastructure, through a combination of interest subvention and viability gap funding.

The writer is Chief General Manager, NABARD, Karnataka. Views are personal

Published on January 20, 2020
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