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Business News/ Opinion / Views/  The structural reforms we need for infrastructure investment

The structural reforms we need for infrastructure investment

The settlement of government dues to private vendors and a firm commitment to future payments on time would spur growth

Photo: MintPremium
Photo: Mint

The US election has commanded our attention, but rather like the aftermath of a riveting cricket match, we are left with having to return to our own pressing issues. In particular, we need to focus on the structural obstacles to getting our infrastructure stimulus (the 12 October package) off the ground.

Reports tracking centrally-funded infrastructure projects continue to be issued every month by the ministry of statistics and programme implementation (MOSPI), most commendably in these difficult times. The latest report was released on 19 October. Of a current total of 1,661 incomplete infrastructure projects, each costing above 150 crore, delays were assessable only for 754 projects on which timing data were available. Of those, 70% were delayed (539 projects), with an average delay of three-and-a-half years.

Project delays are a sad old story in India. The stated reasons include land acquisition and green clearance. What makes the high delay percentage alarming in corona times is that these are the very projects expected to stimulate both supply and demand through wages paid to construction labour.

That an approved project with committed expenditure should not have resolved land and green issues before launch speaks of a huge governance deficit. The projects mostly involve rail and road connectivity. How can such projects move from anvil to commissioning when land has not been acquired, or environmental approvals not obtained? Or is there some other structural infirmity at work?

It is well known that payments by governments (both Centre and states) to vendors of all types, not just construction contractors, are seriously delayed. I have for a long time argued that a one-time settlement of dues to private vendors was absolutely essential to restore the credibility of the fiscal system. It is commonly estimated that these dues amount to 2 trillion at a minimum.

Now that covid has made fiscal extravagance a virtue, where could we find a better use for public funds than payment of overdue bills? Who could possibly be more deserving than the contractor who has delivered roads or affordable housing?

Fiscal failure to pay on time has a domino effect on the financial sector. The unpaid vendor has to borrow more to cover enhanced working capital requirements. The default of Infrastructure Leasing and Financial Services (ILFS) in September 2018, when the Reserve Bank of India (RBI) had to move quickly to prevent a financial meltdown, must never be forgotten. ILFS was a major builder of highways, and had covered delayed payments by moving finance between the many entities under its umbrella, until the whole structure collapsed.

The listed causes for delay in the MOSPI report could well be a cover for unpaid dues by governments. The report mentions the repeated failure of projects to report milestones, which would have helped reveal the true cause of delay.

When the government takes on a large multi-year project, tranches falling due are not factored in as committed expenditures for years subsequent to the starting year. The medium term fiscal plan required under the Fiscal Responsibility and Budget Management (FRBM) legislation, whether at central or state levels, has become a mere statement of aspirational intent, where the fiscal deficit is not the true residual after constituents of expenditure already committed to have been accurately pencilled in at the points in time when they fall due.

Rather like flights overbooked in expectation of cancellations, governments take on more expenditure commitments for future years than they know can be accommodated within the fiscal deficit path committed to. If payment dues exceed what can be honoured, they are quite simply delayed. This phenomenon characterizes all governments, regardless of the party in power. The fiscal system is deeply in need of reform, towards multi-year budgeting of committed expenditures, and calculation of deficits as a serious residual rather than as a priority in itself to which expenditures will be shaped.

Many infrastructure companies are unwilling to engage with governments because of payment delays. Companies with an excellent record have chosen to remain boutique enterprises. They do not want to scale up to the ILFS model of accommodating delay by dangerously ramping up their own debt. Former RBI governor Raghuram Rajan has warned that without “relief" payments to keep dying but fundamentally sound enterprises afloat, the potential growth rate of the economy would be seriously reduced. The problem with that is having to choose winners and losers. In my opinion, nothing would raise the potential growth rate of the Indian economy as much as a one-time payment of all past dues, and a credible commitment to future payments on time.

The second stimulus announced by finance minister Nirmala Sitharaman on 12 October earmarks roughly half of the total for capital expenditure, both directly by the Centre ( 25,000 crore), and by states ( 12,000 crore). For the latter, the Centre will give interest-free loans to states with bullet payment after 50 years. The funds “are to be used for new or ongoing capital projects needing funds and / or settling contractors’/ suppliers’ bills on such projects". That will be music to the ears of unpaid vendors to state governments.

Indira Rajaraman is an economist

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Published: 05 Nov 2020, 08:56 PM IST
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