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Modi’s $5-trillion goal blocked not by lack of infrastructure but delayed regulatory reform

It is targets such as long-standing electricity dues and low capacity of our thermal power plants that the Modi government needs to aim at.

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Prime Minister Narendra Modi had announced in August 2019 that Rs 100 lakh crore would be invested in infrastructure over the next five years. Earlier, he had captured the global imagination by announcing that India would install 175 GW of renewable capacity by 2022. What is the role of such announcements? Do they provide direction to the public sector and help to coordinate efforts across departments? Do they provide reassurance to the private sector and give it the confidence to put its own investment plans into action? Or do excessively aspirational goals reduce the credibility of government announcements and sour the public-private relationship?

Of course, what is excessively aspirational is a matter of judgment. In 1998 and 2000, when then-Prime Minister Atal Bihari Vajpayee announced the National Highway Development Programme and the Pradhan Mantri Gram Sadak Yojana, there were many sceptics. Twenty years later, India has built nearly 35,000 km of four-lane highways, and has six lakh kilometre of all-weather rural roads.

Also read: Power to water: If India wants to fulfil economic goals, it needs better infrastructure

Misguided aspirations

Notwithstanding this caveat, targets like “Rs 100 lakh crore” can be misguidedly aspirational. Following the announcement, the Modi government issued a ‘Report of the Task Force on the National Infrastructure Pipeline’ (NIP) for 2019-2025. But, instead of reassurance, it may increase the apprehensiveness of private investors.

Consider power. We are barely consuming 100 billion units of energy a month – no increase from last year. The plant load factor (excluding gas) for thermal power plants – a measure of capacity utilisation – was barely 54 per cent in December 2019, down from 59 per cent in December 2018. And yet, the intent in the NIP is to increase installed capacity from 356 GW to 619 GW by 2025 through an investment of Rs 11.8 lakh crore. Why? This is like increasing production when your godown is full of unsold inventory.

In fact, our existing capacity can power our transformation from a 3 to a 5 trillion-dollar economy and beyond – indeed, tweaking just the thermal and nuclear capacity of around 240 MW (not including the 55GW of captive power) would suffice. Installed capacity is not our binding constraint now, rather it is the industry’s inability to access competitively priced power on a 24/7 basis from the grid. Fixing this may require some incremental investment in transmission, but most importantly, it needs regulatory reform in our states – to enable effective open access with reasonable access charges. But this could also drive some of our DISCOMs close to bankruptcy. NITI Aayog’s 2019 diagnostic study of power distribution provides a good starting point to think about this problem.

Similarly, the 175GW goal, or as NIP mentions, the “450 GW target visibility”, is expected to catalyse Rs 9.3 lakh crore of private investment in the renewable sector. Not only are private investors facing a collapse of their shadow-bank financiers, being unable to invest, they may also be unwilling, in a scenario where overall power demand is sluggish, where states — responding to poor DISCOM finances — are renegotiating existing contracts, and the Centre is capping tariffs and imposing import duties on equipment. As for the larger climate goal, even as renewable capacity grew nearly eightfold since 2008, the share of thermal sources in energy barely changed.

Also read: Agri to infra, Budget 2020 takes a calculated path to revive demand, boost economic growth

Lack of infrastructure is not the real problem

What is true for power is also applicable to a variety of other investments in the NIP – India’s GDP is not being held back by the lack of high-speed trains or the absence of metro rails in smaller cities. Investing in these to meet the Rs 100 lakh crore goal is likely to be a waste of resources, especially when public funds are scarce. Adding to the confusion are differences between public investments proposed in the NIP and the recent Union Budget, e.g., the allocations for sectors such as Railways and Urban are both at about half the proposed NIP levels for FY20 and FY21.

At some time, the plant may outgrow the pot, but transplanting a seedling from a small pot to a larger pot will not make it grow faster. Rather, a little water and scarce manure may be the need of the moment.

More broadly, the goal of enthusing private engagement in infrastructure needs a stable regulatory environment to test and grow viable business models. The collapse of India’s telecom sector, which is rapidly moving a single provider model, albeit private rather than public, gives no joy to potential investors. The transparency of electronic toll collection could be used to monetise existing highways using the Toll Operate Transfer (TOT model), but the FASTag roll out appears hurried and amateurish, again damping confidence.

India’s path to a five trillion-dollar economy is not blocked by the gross lack of infrastructure. Rather, it needs attention to regulatory reform, enabling industry to access competitively priced power, benefit from improved predictability of multi-modal logistics and borrow from bankers whose decisions are not constantly questioned.

Also read: This is how Modi govt plans to meet its $5-trillion economy target by 2024

These are not simple. Problems like unpaid electricity dues are long-standing. They featured in economist Montek Singh Ahluwalia’s famous reform agenda in 1990, the ‘M document’, and continue to plague us today. Fixing t is possibly a tougher task than diluting Article 370, but it is such targets that the Modi government must aim at, rather than fixate on its Rs 100 lakh crore infrastructure push or 450 GW renewable energy capacity target.

The author is senior fellow at the Centre for Policy Research, Delhi. Views are personal.

This series of articles is a curtain-raiser to the CPR Dialogues, an international conference on public policy, to be hosted by the Centre for Policy Research on 2 and 3 March in New Delhi. is the digital partner for the conference. Read all the articles in the series here.

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  1. True legacy of Modi would be his economic reforms and not the achievements of BJP’s political agenda, however important they are. And Modi must understand this. That said, Modi is shying away from many structural reforms and many of them have no revenue implications as well but will improve easy of doing business and lower cost of doing business. The article makes us sound that additional investment are not really required to become 5 trillion dollar economy but indicates many reforms which Modi should immediately undertake. These are sensible suggestions. Modi must talk politics of economics now and take the economy to higher levels. Precise numbers may not be very relevant but direction and speed is.

  2. unless a researcher shows 14.4% per annum growth, this 5 trillion $ BS needs a whole lot of more study and research.

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