Prudence in hindsight
Infrastructure spending without proper oversight, planning and execution is likely to do very little in resuscitating the Indian economy
The government's latest resolve to invest as much as Rs 102 lakh crore in infrastructure is most welcome. But, it may have little impact on the country's shrinking economic growth unless properly executed, monitored in stages and the impact gets thoroughly audited. After all, the government's claim of spending over Rs 50 lakh crore on infrastructure over the last six years seems to have failed to generate positive results on the economy. The questions are naturally raised about the sources of such large funds, specific investment projects, their locations and implementation schedules and the resultant impact on employment and national income. Finance Minister Nirmala Sitharaman recently claimed that "in the last six years, there has been an investment of around Rs 50 lakh crore in infrastructure." She said infrastructure investment (in power, railways, irrigation, education, health, digital, urban, mobility, water) forms the bulk of the projects in the pipeline. The prime minister spoke about the setting up of a task force for India's infrastructure development. "The task force has identified Rs 102 lakh crore worth of projects, after conducting 70 stakeholder consultations in a short period of four months. These projects are spread across 21 ministries and 18 states and Union Territories," she said. The plan is certainly noteworthy. It would be nice if the government gives some specific details of these projects, including those responsible for their implementation, end results and contribution to employment and income generation. Large scale infrastructure spending is universally recognised as the surest way to push economic growth.
Unfortunately, India's implementation record of public-funded projects has been truly dismal. The Asian Infrastructure Investment Bank (AIIB) had recently expressed its concern over long delays in project implementation in India. The resultant cost overruns cause the biggest worry when it comes to funding India. AIIB is aware that India has a lot of appetite for credit and will continue to be a very large borrower in the near future. The bank was established in 2016 to fund developmental projects which take both equity and debt interests. India is the second-largest shareholder in AIIB after China. According to chief investment officer, D J Pandian, "... the concern is how quickly a project is implemented. Time overrun will always take the project cost higher. If you are able to stick to the plan and do the project in time, that would be great."
Interestingly, Pandian thinks India's current economic slowdown trend is
temporary and more cyclical in
nature. The bank is not too perturbed by the negative headlines on GDP
expansion. The government must do more for infrastructure when there is a slowdown as it helps in a pickup. "Slowdown should not deter the government from building infrastructure as this is one of the surest ways to restart faster growth," he said. Notably, public infrastructure investments, such as spending on roads, ports, rail network, bridges, housing, water supply, sanitation and other such projects, are one of the most well-known tools for anti-recessionary fiscal policy.
AIIB is willing to fund USD one billion worth of projects in India per annum for some more time, considering the fact that India's domestic needs are quite large. The bank's top investment officer thinks "India can afford to borrow, the space for borrowing is there. Many countries don't have the limits by being under IMF watch or some similar thing. India has good quality projects." The bank has over USD six billion worth of pending projects from India. In fact, China has doubled the value of infrastructure project approvals to stave off economic slowdown amid trade war with the US, last year. The sharp increase in infrastructure project approvals implies greater infrastructure spending in coming years to help stabilise China's economy. The actual infrastructure investment in China accelerated to 4.5 per cent in the first nine months of 2019, up from 4.2 per cent in the first eight months. Last year, China's National Development and Reform Commission (NDRC) approved 21 projects, worth at least 764.3 billion yuan (USD 107.8 billion). The amount is more than double the size of the previous year's 374.3 billion yuan (USD 52.8 billion) in approvals recorded over the same period. These included 11 projects such as railways, roads and airports. On the other hand, the US administration is in the process of enacting comprehensive legislation that will provide USD 200 billion over 10 years to meet America's goal of generating at least USD 1.5 trillion in total infrastructure investment.
The government of India is obviously on the right track. However, it must pay proper attention to the approval and execution schedules of the projects. Sadly, this has not been happening. It should be remembered that infrastructure projects facing a big time and cost overrun will have little impact on the economy as the ultimate consumers may not find them quite useful or pocket-friendly when the projects are finally ready. Previous track records of contractors to be engaged in new projects need to be seriously considered before awarding fresh orders. Years ago, the Vizag steel plant had to spend ten times more than the original cost for a simple ash pond when it was finally ready after a long time overrun. Such government or public sector jobs helped some of the private contractors emerge, in due course, as among the country's major industrial houses while the original projects suffered permanently. Cost overruns in government-funded construction projects have become an industry-wide phenomenon. According to a KPMG study, just 31 per cent of all projects came within 10 per cent of the budget in the past three years. Construction professionals can't afford to accept the new normal. Project selection and fund allocation without their strict compliance are most unlikely to meet the purpose of infrastructure spending to revive the economy and its growth. This appears to be the major challenge before the Modi government.
Views expressed are strictly personal