There is much to commend in the Narendra Modi government’s infrastructure push, such as the opening up of railways infrastructure to 100% foreign direct investment, rural electrification, driving the construction of new airports and sea ports across India, and divesting completed tollways through the toll-operate-transfer route to release capital for further investment. India needs over $1.5 trillion in the next decade to build infrastructure, and has thus far been looking abroad. With some creative policy thinking, a part of the solution might be found at home, especially for areas like crop storage and irrigation where several regions still lag behind.
In the aftermath of the Pokhran nuclear tests of 1998, India faced the world’s ire and economic sanctions from the US. Foreign exchange reserves barely exceeded $30 billion in those days and India had suffered a humiliating balance of payments crisis in 1991. In that precarious environment, the Atal Bihari Vajpayee government launched the Resurgent India bond issue, raising $4.2 billion from Indian diaspora.
It was a significant sum, and India would have found it difficult to raise it from other sources. The lesson from this experience is that earnestly mobilizing those who care about India’s future can make it possible to raise very large sums of money, no matter what the circumstances.
Prime Minister Modi has himself spoken on many occasions about the importance of jan bhagidari, or people’s participation, for development. Under the government’s Give It Up initiative, over 10 million people (or 5% of subsidy recipients) have voluntarily surrendered their LPG subsidy. Academics who view the individual citizen as homo economicus might find themselves at a loss to explain this public response.
The domestic environment is stable and positive, and India has over 30 million stock market investors. The formalization of the economy catalyzed by demonetization and implementation of the goods and services tax means that investible financial savings will increase across income groups. This creates an opportunity to raise significant capital from domestic investors.
The government could launch a long-term bond where individual investment is capped at, say, Rs2 lakh per investor with attractive terms such as tax deductibility of principal and not just interest. Additional checks and filters can be included to incentivise low middle-income earners to invest. The proceeds would be earmarked expressly for agriculture infrastructure investment.
If 10 million investors participate, the government can comfortably raise over $20 billion, and the capital can be used to rescue Indian farmers from an existential dependence on the monsoon or on largesse via minimum support price escalations that in-turn adversely impact the fiscal situation. It is appalling that the weather determines the fate of tens of millions of Indian farmers so many decades after independence. Crop storage facilities will provide farmers flexibility on when to sell, rather than being forced to sell for fear of the produce being spoiled.
This is the type of infrastructure that is also harder to finance through conventional mechanisms or with foreign capital, and where the role of government is critical. Recent changes by the Securities and Exchange Board of India to introduce options contracts for commodities and the government’s effort to create the electronic national agriculture market need to be supplemented by investment in irrigation and storage. It is not possible for the agriculture sector, and consequently India, to grow faster without such enabling infrastructure.
Madhya Pradesh, which achieved an agricultural growth rate of 9.7% from 2004-2015 (when the national average stood at 3.6%) did so on the back of substantial irrigation investment. Irrigation ratio measures the gross irrigated area as a percentage of the gross cropped area. Madhya Pradesh’s irrigation ratio increased from 24% in 2001, when it was well below the national average, to 42.8% in 2015. Long-term capital coupled with focused execution in states like Uttar Pradesh and Maharashtra on this front will do wonders for national agricultural growth and farmer’s wellbeing.
The highly successful Pradhan Mantri Gram Sadak Yojana (PMGSY) pioneered by the Vajpayee government that linked India’s hinterland to towns and cities speaks to the multiplier effect that enabling infrastructure can have on rural communities. PMGSY was carried forward by the Manmohan Singh government and transformed road connectivity across India. A programme structured similarly and directed towards agriculture infrastructure, funded through an innovative method, can increase agricultural productivity and help the government achieve the goal of doubling farmer’s income by 2022.
Creating the right financing instrument would enable even conservative institutional and religious endowments to invest. Not only would this develop a sustainable, home grown capital source, it would forge a participative commitment from Indian investors of all stripes towards building of the new, first-world India, where farmers are seen as contributors to gross domestic product growth rather than romanticized for facing hardships. Bringing stability to agriculture and dampening volatility in farmer incomes would also take pressure of the banking system, which has routinely had to bear the brunt of loan waivers.
After 70 years of independence, a historic opportunity is within our grasp. Achieving a sustainable trajectory of 10%-plus economic growth will elevate tens of millions more to a higher standard of living and help eliminate poverty. The government has been moving on the right track. Investing in agriculture infrastructure will help India achieve escape velocity for double-digit growth.
This is the second article in a two-part series on how to put India on the path to double digit economic growth. The first piece can be read here.
Navroz D. Udwadia is co-founder of the New York-based investment firm Falcon Edge Capital. Rajeev Mantri is executive director of venture capital firm Navam Capital.
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