In her maiden budget presented to the Parliament on July 5, 2019, the finance minister, Nirmala Sitharaman laid a road-map for catapulting the Indian economy to US$ 5 trillion by 2024-25. The most crucial component of this road-map is investment in infrastructure to the tune of a mammoth Rs 100,00,000 crore or US$ 1.4 trillion. In the follow through, in an interactive session with the media held on August 24, 2019, she announced setting up of a high level inter-ministerial committee to work out a detailed action plan, operational details including identification of projects.
During its first term also, Modi – government gave overriding importance to building infrastructure. Indeed, it achieved a fair amount of success with a cumulative investment of about Rs 20,00,000 crore and commensurate output in terms of roads and highways built. This was commendable especially in the backdrop of virtual drying up of private investment in the highway sector towards the end of erstwhile UPA – II between 2012 and 2014 [private companies were hamstrung due to lack of internal generation and liquidity crunch aggravated by banks’ unwillingness to give loans to them].
It took up project implementation mostly under EPC [engineering procurement and construction] mode wherein funding was done overwhelmingly by the government itself by way of budgetary support supplemented by borrowings by National Highways Authority of India [NHAI] on its behalf. Then, it was helped by unprecedented surge in direct tax revenue [especially in personal income tax] during 2016-17 and 2017-18, courtesy demonetization which forced hoarders to bring unaccounted cash to banks as also savings from plugging leakages in welfare schemes.
From here onward, the scenario does not look promising. Even as the proposed investment is of a much larger magnitude than made during Modi 1.0, there is a question mark over the ability of the government to fund it. There are inherent vulnerabilities in all the three possible modes viz. budget support, borrowings from banks and financial institutions [FIs] and private sector to invest.
First, the budgetary support is predicated on the ability of the government to achieve the projected increase in tax revenue. In this regard, the trend of collection during 2018-19 does not offer much hope.
During 2018-19, the total tax collection of Rs 1310,000 crore was a mere 6% higher than in the previous year. Further, this was a whopping Rs 170,000 crore less than even the revised estimate Rs 1480,000 crore as per interim budget. The target for the current year is put at Rs 1640,000 crore [down from a high of Rs 1700,000 crore proposed in the interim budget] which is Rs 330,000 crore or 25% higher than the actual of previous year. This is well nigh impossible when seen in the backdrop of a pittance 6% increase during 2018-19.
As regards borrowings from banks and FIs, these institutions are still to come out of their precarious financial state notwithstanding major reforms such as Insolvency and Bankruptcy Code [IBC] and a heavy dose of recapitalization by the union government. Further, the bank managements have become extremely circumspect in sanctioning new loans due to the fear of facing action from investigation/prosecution agencies under the current environment of high standard of accountability.
Coming to the third mode, in the past, private entities didn’t show interest in building projects albeit under BOT [build, operate and transfer] despite getting viability gap funding from the union government. As a result, the latter was forced to bear the brunt. Currently, over 90% of the projects are being bid out on centre’s funding or hybrid annuity mode [under it, the NHAI pays a good slice of project cost upfront]. In this backdrop, to expect private sector invest looks far-fetched.
The government could also explore the possibility of overseas sovereign borrowings [a proposal in this regard was mooted in this years’ budget speech; in the follow through, officials hinted at borrowing US$ 10 billion or about 10% of total borrowings from this route]. But, that is contingent upon India strictly adhering to fiscal discipline and may be fraught with serious risk. So, too much of reliance on this source of funding infrastructure projects is ruled out.
What then, is the way forward? How can the government maintain the momentum of investment in infrastructure; in fact, scale it up to achieve the target?
The Prime Minister’s office [PMO] is reported to have suggested that NHAI should stop construction; instead, focus on management of assets under it. As a step forward, it may auction all completed projects under the so called toll operate and transfer [TOT] model. Under TOT, private companies will take over completed roads for 10 to 20 years and make upfront payment to the NHAI. They will be allowed to collect toll and also maintain the stretch for the agreed period. This way, the NHAI will be able to unlock value, generate resources and leverage the same for supporting further investment.
The idea is anomalous. A private entity which has no money to contribute to promoters’ share and is therefore, unwilling to take up a green-field project, how can it be expected to pay for the full cost of a completed project upfront? A related factor is the cost which has got unduly inflated due to heavy compensation paid for acquisition of land [mostly from farmers] under extremely liberal laws on the one hand and increasing cost of raw materials and other inputs on the other. This will act as a further deterrent.
Another idea mooted by PMO purportedly to give a fillip to fresh construction is ‘to consider each road stretch as a project and set up a special purpose vehicle [SPV] to assess its financial viability and invite bids from private entities with ‘viability gap’ funding to make it financially sustainable’. This is old wine in a new bottle. It evoked little response in the past and is most unlikely to happen in the current scenario either.
Mere coming up with ideas or models won’t be of much help. There is an urgent need to address ‘structural’ issues viz. high cost of executing projects [esp. high cost of acquiring land], highly leveraged and stressed construction companies, weak balance sheet of banks/FIs and not so healthy state of union’s budget. Until these are sorted out, realizing investment of US$ 1.4 trillion in infrastructure – to catapult India to US$ 5 trillion economy – will remain a pipe-dream.