The Narendra Modi government has unveiled a National Infrastructure Pipeline with projects worth Rs 102 lakh crore by 2024-25. This investment is expected to spur demand, improve efficiency and India’s competitiveness, and take the economy towards the government’s $5-trillion goal.
The bulk of infrastructure investment would be undertaken by the central and state governments, 78 per cent, with equal shares for each, and the remaining 22 per cent by the private sector. The projects identified are not new, they are in the pipeline at various stages of implementation – conceptualisation to development.
If the National Infrastructure Pipeline (NIP) brings additional focus to implementation of projects on time, especially where the bureaucracy is a hurdle in the often long and painful process of getting clearances from government departments, this would be a useful contribution to project management and getting work done on time. Further, if the NIP is able to bring bureaucratic and political capital behind the need for financial sector reform that is critical for financing these projects, it would go a long way into making the projects materialise.
The finance problem
One of the biggest constraints in infrastructure is financing. It is fairly obvious that on the one hand, a rapidly urbanising and growing economy needs new roads, ports, airports, pipes, power and telecom. On the other, it is also fairly obvious that better infrastructure improves productivity. Every country wants better infrastructure for both growth and welfare of the population.
In 2018-19 and 2017-18, infrastructure investment in India was about Rs 10 lakh crore per year. This year, in 2019-20, it is estimated to be Rs 13.6 lakh crore. Most of this year’s investment would have been done by now because only the last quarter of the year is left and the finance ministry has issued guidelines that no more than 25 per cent of allocated budget can be spent in the last quarter.
The challenge is going to begin in 2020-21 when spending on infrastructure has to be Rs 19.5 lakh crore. The projected number for 2021-22 is another Rs 19 lakh crore. Broadly speaking, this means nearly doubling infrastructure spending next year.
Need for tax incentives
The constraint, in particular, is money that is willing to be locked up for many years. The last time, in the mid-2000s, when the government decided to give infrastructure a large push, it did so depending mainly on the banking system to provide most of the money. This led to one of the worst banking sector crisis and credit slowdowns India has seen. Not only did infrastructure investment get stuck, because the banking sector tried to do what it was most unsuitable for – lend short-term money for long term projects that it had neither the capacity nor the mandate to assess and monitor – the whole economy witnessed the effects of an unhealthy banking system. This mistake should not be repeated. India needs bond market reforms, including setting up of a public debt management agency, regulatory and market infrastructure reforms, before the large step up in financing of infrastructure takes place. Today, it may not even be feasible, but even if it is, then it is a recipe for disaster again.
Only a part of the additional investment can come from the new sources like asset monetisation and user charges. Neither will a lot come from the current levels of savings in insurance and pension funds, even if norms for insurance and pension regulators are changed as the report suggests. Insurance premiums are a little over 3 per cent of India’s GDP and pension funds at a little over 1 per cent. The pool of long-term savings in India is just not enough to support the savings required for the investment.
Reforms are required in tax incentives that are provided for long-term savings by households. Instead of being limited to specific instruments, tax breaks for long term savings need to be given to a much broader category of savings to encourage households to save more in pensions. For example, in order to save on the capital gains tax on house sales, individuals are allowed to buy a small defined set of infrastructure bonds. This category of bonds is usually very restricted. If the Modi government plans huge increase in infrastructure, it has to look beyond these. In a study with my co-authors Radhika Pandey and Renuka Sane on the impact of tax incentives on household saving patterns, we find that savings strongly respond to tax breaks. Savings instruments for which tax breaks are given, in the years when they are given, see an increase in household savings.
The current structure of tax rebates will not be able to incentivise the additional Rs 7 lakh crore of long-term savings required for the projects in the NIP. The framework for tax incentives needs to be reviewed and changes brought in the Budget next month for the Modi government to be able to put infrastructure investment on a sustainable track.
The author is an economist and a professor at the National Institute of Public Finance and Policy. Views are personal.