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Why the government’s infrastructure spending spree is not really good news

LiveMint logoLiveMint 10-04-2017 Sachin P. Mampatta

Ever since the Narendra Modi-led National Democratic Alliance (NDA) took charge at the Centre in 2014, it has emphasized infrastructure as one of its key priorities. Halfway into its tenure, it is worth asking how far the government has fared in fulfilling this priority?

A Mint analysis of data on infra capex in India compiled by the Centre for Monitoring Indian Economy (CMIE) shows that while public spending on infra projects has indeed risen over the past couple of years, overall growth in infra spending still remains muted largely because of lack of infra investments by the private sector.

While the overall growth in infra projects was in double-digits for four quarters in a row, it has dropped back to single digits at 8.8% in the just-ended quarter, CMIE data shows.

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The analysis considers spending on transport, electricity, communication, irrigation, storage and distribution (of water, gas etc.) as infra spending. The slowdown in growth of infra projects was because of a drop in projects in the communication services and power sectors in the latest quarter.

The slowdown in infra spending comes amid a boom in public spending on infra projects. The government now accounts for two out of every three rupees spent on infrastructure in India. The rolling four-quarter average of overall government share in infra projects (under implementation) touched 67.96% in March, the highest level since June 2007. This means that the private sector’s share in infrastructure spending has witnessed a proportionate decline.

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State government spending on infra projects accounted for around 40% of government spending in the latest quarter. Central government spending accounted for around 58% of overall public spending, with joint projects and local body projects accounting for the remaining public spending on infra projects. The proportion of spending by the different tiers of government has remained roughly the same over the past decade.

The lack of private sector interest in infrastructure is a legacy issue that the NDA government has inherited. During the United Progressive Alliance (UPA) regime, private investments in the infra sector boomed thanks to the public-private-partnership (PPP) model that the government adopted with great gusto.

The infra boom turned to bust in a few years even as the PPP model gradually fell into disrepute as several policymakers and the national auditor began raising questions over the skewed nature of several PPP contracts which allowed the private partner to corner gains at the cost of the public exchequer, as an earlier Mint article pointed out . As distrust between public authorities and private firms grew, many projects were stalled, and bankers who had loaned money for such projects became wary of lending anew to this sector.

The infra sector has been unable to shake off the toxic legacy of the boom years. As Mint reported earlier this year, bankers are still not keen to lend to the infra sector. The delay in resolution of stressed infra assets has only compounded problems. The proportion of stalled projects in the infra sector has risen to 9.5% in the March-ended quarter, according to CMIE, the highest level since December 2014.

The Asian Development Bank estimates that India needs additional funding of $112 billion a year to meet its infrastructure targets, equal to 4.1% of the GDP (gross domestic product). This means that India’s infrastructure spending gap is too large for the government to fill alone. But in the absence of a viable alternative to the PPP model, private firms do not appear keen to invest in a sector which faces several uncertainties.

If the lack of private sector participation is one big worry in the infra sector, the other big but under-appreciated problem is the extremely skewed nature of infra spending in India.

India’s top 10 states account for more than half of the infrastructure projects under implementation, according to CMIE data at the end of fiscal year 2017. They account for a similar proportion of completed projects.

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These 10 states also accounted for 62.88% of India’s GDP, shows CMIE data (based on 2013-14 figures at constant prices with 2004-05 as base year). This means that most infrastructure investments have occurred in the richest states.

This is a cause for concern because of the already persistent trend of regional imbalance in India. As a 2014 Plain Facts column had pointed out, there has hardly been any sign of convergence among India’s richest and laggard states over the past three decades. The list of the top 10 states has remained nearly the same over this period, whether one ranks them by their contribution to India’s GDP or by per capita income. This is in contrast to the experience of states in the US or provinces in China, or even countries of the EU, as an October 2016 briefing note by Praveen Chakravarty and Vivek Dehejia of the IDFC Institute noted.

Infra spending by the poorer states can help them raise growth and catch up with the rest of the country. The wide gap in infra investments between the rich and poor states is, therefore, a cause for concern as it will only accentuate the regional divide within the country, and make India’s development even more lop-sided than it already is.

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