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Published on 17/01/2020 10:50:53 AM | Source: Live Mint

Opinion | Government needs to speed up the flow of private capital into infra sector

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The king shall promote trade and commerce by setting up trade routes by land and by water, and market town/ports."

This is from Kautilya’s Arthashastra and I am re-quoting it rather than quoting, since it was quoted in last year’s Economic Survey. Infrastructure means different things to different people. But, usually, people mean physical infrastructure. For instance, last year’s Survey mentioned a more than 0.90 correlation coefficient between investments in inland transport (road, rail, airports) and gross domestic product (GDP). The Survey also said India needs to spend 7-8% of GDP on infrastructure.

Recently, the finance minister mentioned the National Infrastructure Pipeline (NIP) mechanism. And one should take a look at the detailed report of the task force set up to formulate the NIP. Strictly speaking, NIP’s definition of infrastructure is broader than the Survey’s. NIP’s numbers show that as share of GDP, infrastructure expenditure has actually increased from 5.3% in 2013-14 to about 10% in FY19. However, with limited resources, how much can the government spend? To quote the Survey: “Given the fiscal constraints that leave less room for expanding public investment at the scale required, there is an urgent need to accelerate the flow of private capital into infrastructure." Within the government, there is the Union government and state governments. And, under the Seventh Schedule, several infrastructure areas are state subjects. According to the Survey, major challenges are funding constraints for large projects, delays in land acquisition, environmental concerns and time and cost overruns. There is gross simplification in asking what the budget can do to kick-start infrastructure investments. The budget is merely one instrument the government possesses, and there is continuity between what it does on that one particular day and what is done on the remaining days.

Of the 10% (as a share of GDP) investment in infrastructure, 3.8% is from the Centre, 3.7% from state governments and 2.5% from the private sector. “Power, roads and bridges, urban, digital infrastructure and railways sub-sectors together constituted 85% of the total infrastructure investment in India during FY08 and FY19. The Centre and the states were the major funding sources for power and roads and bridges, with moderate participation from the private sector. Digital sector investments were largely driven by the private sector, while investments in the irrigation sector were predominantly made by the state governments." Finance minister’s statement mentioned capital expenditure (in infrastructure) of ₹102 trillion in 2020-25. ₹42 trillion worth (expressways, national gas grid, PMAY-G, PMAY-U) is already under implementation and ₹19 trillion is under developmental (such as for smart cities). Thus, in addition to reforms in taxes, expenditure and the financial sector, what can one expect the Budget to do? (a) Privatization of central PSEs; (b) Focus on the bond market; and (c) An institutional mechanism for dispute resolution.

Bibek Debroy is chairman of the Economic Advisory Council to the Prime Minister.