The cost and reliability of electricity and logistics is a major drag on India’s manufacturing ambitions. Sewage from our cities is killing our rivers. Yet, infrastructure has fallen off the policy radar. We outline the key actions that need to be taken in the major sectors to make the sector financially viable and support our economic goals.
What’s stopping India from supplying 24X7 power to consumers – even when it has the generation capacity?
There is one root cause: discoms (distribution companies) that do not collect money for the power they sell.
Given the complicated mess that our power sector has been in over the past many years, spanning all governments, transcending it will need a number of actions. I advocate three, focused on tariffs.
– First, industrial and commercial tariffs of electricity need to fall, leading, hopefully, to a spurt in jobs. We cannot kill industries to keep discoms alive.
– Second, residential and agricultural tariffs can be rationalised, and in some segments, raised. In the era of direct benefit transfers and income support schemes, price subsidies have outlived their utility.
– Third, we need to extensively expand time-of-day pricing and adopt more flexible power purchase agreements.
These tariff actions will ensure our grid is no longer bankrupt.
The telecom sector seems to be struggling despite increasing use. Despite rapid growth and the spread of smartphones, we are yet to ensure a seamless network across our country.
One major reason for that is that spectrum is mispriced. It should be virtually free in sparsely populated rural areas. Unless there is congestion, there is no reason to price it. Yet, our current spectrum pricing model makes rural spectrum as expensive as that in cities. This is because Licensed Service Areas (LSAs) are congruent with telecom circles. This does not allow rural spectrum to be separated and affects spectrum availability across the LSA. Instead, spectrum needs to be defined in much smaller geographical units.
Another reason is that telecom services may be priced below economic cost, an issue for the sector regulator and Competition Commission of India to examine. No firm appears to be running surpluses. As 5G becomes the standard, whether Huawei’s or Qualcomm’s – we may find that Indian telecom sector is too under-resourced to adopt the new technology. Cheap prices now are too high a price to pay for outdated technology later.
Finally, our Universal Service Obligation Fund needs to transform rural access to digital education and health.
Twenty years ago, the government levied a Re 1 cess on petrol and diesel to fund national highways, rural roads and rail over bridges. The humble but path-breaking cess of 1999 is now the monster Rs 8 road and infrastructure cess that no one protests paying. Why, then, is our logistics still so outmoded?
There has been substantial investment in highways in the last Narendra Modi administration. However, the sector still needs to solve three challenges:
– Barrier-free movement for freight road traffic – trains, after all, are not stopped at state borders
– Ensuring maintenance of the national highway network
– Avoiding white elephant highways, while retaining an appropriate risk-reward framework
We must leverage VAHAAN to remove toll plazas and move to open road tolling, beginning with high traffic routes.
As the highway network expands and begins to age, a transparent mechanism to monitor and maintain the quality of roads needs to be rolled out.
Finally, we should switch to LPVR concession models that limit the transfer of periodic traffic risk, but still retain transfer of lifetime traffic risk.
PMGSY: Rural Roads
The construction of 600,000 plus kilometres of rural roads, over the last 20 years, by different governments is testimony to the consensus over rural connectivity. It has undoubtedly played a major role in moving our workers off the farm, to new activities and locations. The maintenance of this network should now be our primary concern. The initial Pradhan Mantri Gram Sadak Yojana (PMGSY) contracts had a built-in maintenance period, many of which have now ended. A credible institutional mechanism to maintain the PMGSY network needs to be put in place.
Even the lowest tariff freight train makes more money than the Rajdhani. We need to shift the conversation around railways from passenger to freight – a critical logistics function essential to support manufacturing. Currently, track capacity is exhausted running passenger trains. In the short term, it is necessary to (a) expand capacity and (b) rationalise passenger trains, by combining capacity and retiring trains.
In order to determine which trains to retire, the Indian Railways needs to develop the ability to cost each train, which it currently does not do.
Dedicated freight corridors should also free up capacity by taking traffic away from existing lines. The transport of coal, which still makes up about half of the Indian Railway’s traffic, will decline as coal power is reduced. Can Railways fill this freed-up capacity with other cargo and revenue-generating passengers? Can it become a multi-modal logistics firm? These are necessary actions for its survival.
Suburban passenger services are urban public service obligations. It needs to be separated and costed, and then funded separately, like with Metro projects.
Finally, Indian Railways needs financial re-engineering. Today, a huge portion of its revenue is spent on pension for its retirees. Railways can restructure this predictable liability to reduce expenditure and free up resources for investment today.
Private ports like Adani-owned Mundhra are closing in on the container capacity of Jawaharlal Nehru Port Trust (JNPT).
Mundhra has an unfair advantage – it can decide its prices, JNPT cannot. The tariffs at our major public ports are determined by the Tariff Authority for Major Ports (TAMP), an anachronistic holdover in a competitive sector.
Not only are the tariffs rigidly determined, but the structure of our major port concessions is also designed to make it costly for our traders to transport. Like spectrum, this is again an instance where the urge to raise fiscal resources prevailed over the need to ensure competitive logistics costs for our industry. It is time to take three actions.
– Disband institutions like TAMP, treat ports as a competitive sector, with tariff freedom for operators and improved competition oversight.
– Invest in port connectivity to spur inter-port and intra-port competition.
– Re-examine our approach to coastal shipping. Our eastern ports can act as a sea-bridge to the northeast and integrate our industry with Southeast Asian value chains.
Taken together, these actions across sectors will reduce our logistics costs and make the industry more competitive.
Every major city in India kills at least one river. Yet, with the possible exception of the National Mission for Clean Ganga, there is little programmatic effort to preserve our rivers and water bodies.
This is not just a matter of building sewers and sewerage treatment plants – a significant portion of such treatment capacity anyway lies unused. We also need to consider the reckless destruction of even groundwater resources and the damage caused by chemical run-off from farms.
More than inland waterways, river inter-linking and large dams, we need focus on handling wastewater.
The digital future
Even as we address these basic issues, digital technologies are changing the way infrastructure is provided, operated, charged for and maintained across sectors. These technologies permit services to be delivered more efficiently, less expensively, use less resources, cause less damage to the environment and reach a wider user base.
The availability of funds is not the constraint that digitally-enabled infrastructure faces. The challenge is to design projects to balance risk and reward in a way that providers are incentivised to serve users well, while financiers are insured from uncontrollable risks. Fast-obsolescing technology means yesterday’s cutting edge is tomorrow’s discard.
Our infrastructure models are still operationally inefficient, financially fragile and future-unready, both in terms of technology and the environment. For too long – across governments – we have focused on making money from infrastructure rather than seeing it as a service that can power growth and enable the transformation of India. We cannot do so any longer.
Partha Mukhopadhyay is a senior fellow at CPR.
This is the twenty-seventh in a series of articles titled “Policy Challenges 2019-2024” under ThePrint-Centre for Policy Research (CPR) collaboration. A longer version of this piece is available on the CPR website at www.cprindia.org. The full policy document on a range of issues addressed in this series is available on CPR’s website.