India’s Infrastructure Push Qualitatively Different From China’s

During his post-Budget tour to different parts of the country (six in all, the last being to Sikkim), Union Finance Secretary T.V. Somanathan heard one constant refrain: “When the government is accelerating capital expenditure rapidly, why is the private sector investment not keeping pace?”

Somanthan, the chief architect to have assisted Union Finance Minister Nirmala Sitharaman in preparing the Union Budget, and whose team is working overtime to consolidate the gains made by the Indian economy post-pandemic, recently interacted with BW Businessworld, where he answered a range of questions on the economy and policy.

Asked if infrastructure has been the centrepiece of the Narendra Modi government, and not just this year’s Budget, he said: “In the first four or five years, between 2014 to 2019, there was a push on infrastructure, but there was an even greater thrust on essential items of consumption for the poor -- such as toilets, cooking gas, access to electricity, access to healthcare for the poor. Those were the first set and the accent on infrastructure was always there. But (the thrust on infrastructure) has become more pronounced in the last three years.”

Focus on Biggest Deficit Areas
When asked why there is no corresponding thrust on social infrastructure and social sectors, with the debate on MNREGA in the recent Budget being a prime example, and cuts in food, fertiliser subsidies, too, being hotly debated, he answered: “The greatest increases (in the Budget) have come where we have the greatest deficits in terms of service problems. It's widely acknowledged that we have a serious infrastructure deficit, and it is holding up India's competitiveness as an economy. If India is to prosper and create jobs for the youth, we have to increase our global competitiveness as a source of both manufactured goods, primary goods and services”

He added: “If demand for MNREGA goes up, there is always a revised estimate. It's a programme which is expected to meet demand as a safety net. We think that is a reasonable starting figure and it can be revised. Secondly, we have huge increases in other rural schemes like the Pradhan Mantri Awas Yojna – Rural and the Jal Jeevan Mission. Coming to other social sectors, whether it’s in education or health or other (social sectors), the budget has gone up.”

On India, China Growth Stories
When BW Businessworld asked the Secretary if there are parallels between today’s India Story and the China story of a decade or two ago, with infra-led expansion being the common theme, he replied: “I think there are definite parallels, but India is a very different country. There are two things that we should do differently. Firstly, India is a democracy. The way we select and build our infrastructure, we'll have to take into account many more social and other concerns, which perhaps were not given that much importance in China's infrastructure push. The way we build infrastructure is therefore both more complicated, but also more sensitive. This is a difference when compared with China.”

Somanathan added: “Secondly, I think the world has moved from the time that China was in this phase of its economy. And the requirements of tomorrow's infrastructure are far greener. And perhaps configured differently from the kind of infrastructure that China was building. Also, China's infrastructure push was quick, but it also led to a lot of over-building and creation of over-capacity. India should aim to be more efficient in the way we build infrastructure. India should be very careful about efficiency in building infrastructure, not overbuild. Don't build what is not required, build what is productive, efficient, and required.”

Roadmap for Employment Creation
Asked to spell out the government’s roadmap for jobs, the Finance Secretary said: “In the short run, the mere additionality in capital expenditure is itself a big creator of jobs. The construction sector, the infrastructure is highly labour intensive… In the long run, if we build world-class infrastructure, it improves our manufacturing competitiveness, it improves our logistics. It improves our service competitiveness as well. And that means that we will be able to become a more competitive in exporting and more competitive in the domestic market. We'll produce more of these things for the domestic market locally. That is a long term sustainable way of creating productive jobs.” Somanathan also talked about the ongoing drive to fill government jobs.

He further added: “We don't link our incentives to capital investment anymore. This tends to promote a more neutral approach where people hire labour rather than investing in greater automation, because there used to be a time when capital was the one that received the subsidies.”

Somanathan also stressed on skilling, something that has received a lot of attention in this year’s Budget. He said: “There's a lot in this Budget about preparing the youth for the skills of tomorrow. And the skills required outside India. So we have these international skilling centres. We have a whole new approach to skilling, which is focused on the skills of the future. This is the other way that we intend to make sure that our young graduates and people coming out of schools are in possession of those skills, which we need for the economy of tomorrow.”

Adani Saga & Leverage
Asked if the Adani episode was the biggest challenge till date for the government, the Finance Secretary said: “I repeat that it does not pose a challenge for the macro economy. The exposures of our public sector banks are not at levels where it can create any kind of impact on the public sector financials. I stand by what I said in that sense (‘it’s a storm in a teacup’). Sure, just as there are companies which do well, companies will do badly. Some go up, some go down. That's a matter for individual regulatory institutions to handle, and I think the regulators are quite capable of doing their job.”

On his views on if monopolies or duopolies are desirable in an economy, he said: “Wherever possible competition is good and monopolies and duopolies are not desirable. But there are some industries which are natural monopolies. And economics will also show you that there are industries where the marginal cost keeps falling. So in those cases, we have regulated monopolies… I wouldn't want to make a general statement on it, but yes, an artificial or a monopoly that's not a natural monopoly is something to be discouraged wherever possible.”

Drain of Wealth
To a question on why many high-net-worth individuals (HNIs) were leaving India, he said: “I'm not aware of the figures that you are talking about. I think India aims to be a very competitive and welcoming place to do business. We have a lot to offer to high-net-worth individuals. But, we will not indulge in a competition with tax havens to retain anyone. We are in competition only with other large economic jurisdictions which do tax their citizens. We are not in competition with city states. So there is a limit to how much we can compete on taxation because we will not be a tax haven.”

Asked to put a date on when India would become a $5-trillion economy, and whether India was on course towards becoming a high-income country by 2047, he said: “I don't want to pick (a) date for the $5-trillion figure. I think the three years (of the pandemic and then the Ukraine War) make it very difficult to hazard guesses about what the future will hold. But, hopefully it'll happen pretty soon. Also, I'm pretty confident that by 2047, India will be in the ranks of high-income economies. It's a challenging goal, but an attainable one.”