25 years ago, when our first edition rolled off the press, the state of infrastructure in the country was abysmal. Development was sluggish across sectors, choking economic growth. What was wrong? A number of things, but a large part of the problem was the underdeveloped policy landscape. Our inaugural cover story from 1998 highlighted the key issues at the time and the policy deficit that was stalling infrastructure development…
Over the last one year the economy has slow down considerably. Growth rate of 8-10 per cent now out of reach, at least in immediate future. In fact, there is a very real danger of the growth rate falling below 5 per cent.
There are many reasons for this economic slowdown. They include tight money policy, changes in government and lackluster capital markets. But the most important of them all is the fact that the growth infrastructure has simply not kept pace with economic growth over the last five years. Instead of providing a fillip of growth, infrastructure has become the biggest bottleneck.
Indian industry is still staved of power. It is made to pay the highest rates in the world for telecom services. Hauling goods from the point of production to ports is always an expensive odysseys. The ports themselves are not gateways but choke points. And real estate is the most expensive in the world.
Given the state of infrastructure, Indian businesses cannot be blamed for not being competitive. They are playing the game with their arms and legs tied.
And the biggest reason for the poor state of infrastructure is not lack of interest on the part of prospective investors or lack of demand for the services on the part of prospective customers, but the policies of the government or the lack thereof.
Some of the policy problems are rector-specific. Others bedevil all infrastructure areas. We begin with the common issues that affect all sectors….
Lack of clear and transparent policies…
The investors and the financiers need to know he rule of the game. The bureaucrats have not being willing to spell out, in black and white. Instead of clear and coherent policy document, we have an endless series of notifications from the ministries which even the lawyers cannot decipher. Then there is a tendency to evaluate the projects on a so-called case-to-case basis. This not only slow the decision making process, it also create opportunities for corruption. Not all investors are willing to play this game.
Lack of consistency…
The policies are formulated in haste and not always through. As a result, they keep changing. One day the government wants competitive bidding on power projects, the next day it decides to proceed on the basis of negotiations. One minister seeks foreign investment in airlines, the other one rudely turns down the proposals. One government signs an agreement, the next wants to renegotiate. Lack of clarity is compounded by lack of consistency. In the minds of the investors, this creates uncertainty which spells risk. Some do not want to deal with the risk and walk away. Others persist but wants higher returns. Either ways the Indian business ends up paying for it.
Slow clearance process…
Despite the urgency of situation and the promise of single window clearance, the list of approvals required is very long. Some power projects, for example require one hundred difference clearances from more than a dozen agencies. The situation is making worse by the recalcitrant bureaucrats who sit on the files for ever and ever. Some agencies like the central Electricity Authority take years to approve projects. Not all investors have the patience to deal with our idiosyncrasies.
Cross-purposes, not coordination…
The different government agencies seems to act at cross-proposes. This delegates the abundance of high powered committees, inter-ministries groups and monitoring cells. One ministry proposes, the other disposes. The ministry of finance may want to encourage foreign investments, but the ministry of Civil Aviation has other ideas. The ministry of power feel the need for liquid fuels power projects as an emergency measure, the ministry of Petroleum takes a year to develop procedures.
Subversive monopolies…
The bureaucratic and unhelpful attitude extends from ministries at the Centre and states to public sector monopolies. Most of this units consider it their honour-beyond duty to thwart reform and prevent competition. They are also inefficient and unprofitable. Which would not be such a big problem except for the fact that they are often the only buyer or seller in town. For example, may powers projects are not financable because there is only one buyer (the state electricity board) which is on the verge of bankruptcy. Most projects cannot achieve financial closure because of this hurdle. The power projects also have to contend with the monopolistic sellers of fuels- Coal India when they buy coal or public sector oil companies when they buy petroleum. Meanwhile the private telecom operator and airlines can bitterly attest to the disruptive capabilities of DoT and Indian Airlines.
Inadequate or biased regulators…
The reason DoT and Indian Airlines can lay their games is because of the absence of autonomous and independent regulators who would balance the interest of the service providers and the consumers (all-segments). And level the playing field between public and private sectors, domestic and foreign businesses, buyers and sellers. Most public sector units, having resisted the notion of umpires, want to become one now and at the same time keep playing the game.
The power sector still does not have the promised state electricity regulatory commissions. DoT keeps taking Telecom Regulatory Authority of India to court. And the Insurance Regulatory Bill has still not been passed.
Import duties…
The government does not seems to have decided what it considers more important, maximization of customs revenue and protection of the public sector units or availability of low cost infrastructure. Whether it is telecom infrastructure or hardware or power project equipment, these import duties raise the cost to the end-user. In some cases they end up making the whole project economically unviable. The government needs to realize that infrastructure is not an end in itself but only the means. It is important that Indian businesses have access to power and telephone lines. But it is also equally important that these are available at competitive prices. Protecting units like BHEL and ITI carries a high price.
Vote bank subsidies and irrational tariffs…
Just about every infrastructure area suffers from the burden of cross-subsidies. Not all of these subsidies have merit. Most are motivated by crass vote bank politics. Subsidizing electricity for lighting in low income housing is desirable. Providing free power to flour mills for rich farmers is not. The method of delivering subsidies is also often ill-chosen. It may be acceptable for the state government to subsidies power to the farmers if it can afford the same. But forcing SEBs to do it and thus driving them to bankruptcy is not.
These subsidies have resulted in distorted price and tariff structures. The irrational tariffs not only force public sector units into financial disrepair, they also act as a barrier to private sector entry. Power, oil, road and urban infrastructure sector on particular have been adversely affected because of this problem.
Fiscal deficits…
The government’s fiscal impudence driven by populist policies reduces the availability of capital and raises its cost for everybody else. High interest rates are particularly onerous for infrastructure projects which have long gestation and even longer payback periods. An Indian project promoter can expect to pay 17 to 21 per cent on rupee debt. Dollar debt is cheaper in theory by when you add country premium, forex cover and rupee depreciation, it ends up costing dear as well. Compare these rates to those in other countries ranging from 8-12 per cent and you can appreciate why infrastructure service more in India.
Slow pace of privatisation…
Six years later, disinvestments is still just name of a commission. The government continues to be over-extended in areas that have nothing to do with governance, be it hotels, fertilisers, telecom or airlines. Most of these are in the red. The government bears their losses and backs their borrowings, adding to the fiscal deficit. Again, the interest rates go up for everybody else. Meanwhile, the units themselves continue to deliver low quality products and services at high prices.
Underdeveloped capital markets…
Very few infrastructure investments can hope to raise money in the local equity market. Raising debt is not easy either, because the secondary debt is underdeveloped. The government has also done a poor job of providing forex cover and hedging products. As a result, the forex risk allocation tends to become a bone of contention between the international investors and local parties.
Denying access to long-term investors…
Through a combination of policies, the government has managed to keep foreign insurers and domestic pension funds out of reach of the infrastructure development. These funds look for a big and long term investment and are an ideal source of money for infrastructure projects. By keeping them out of the game, the government has made the financing of infrastructure that much more difficult.