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Structural Bottlenecks

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Keynesian theory says that government spending, especially in infrastructure, is one way to get out of a severe economic downturn. The UPA government embraced this theory to counter global recession and a slowing domestic economy. The logic is simple: spending on infrastructure projects such as road construction, power, ports and urban infrastructure would trigger economic activity in other sectors and provide employment. While the ‘trigger’ for this spending was the stimulus packages announced a couple of months ago, the real bottlenecks for the infrastructure takeoff rest elsewhere, and the stimulus packages can do little to reverse this trend. In November 2008, Prime Minister Manmohan Singh chaired a series of meetings with officials from the Centre and the Reserve Bank of India (RBI) to chart a path to weather the global economic crisis. The meetings resulted in two stimulus packages — one was announced on 7 December 2008 and the other on 2 January this year. As part of the stimulus packages, the government increased plan expenditure by Rs 20,000 crore to propel ‘rural infrastructure’ as well as increase funding for social security schemes such as the National Rural Employment Guarantee Scheme (NREGS). Simultaneously, the RBI also took monetary steps in the form of rate cuts. The packages also detailed fiscal and administrative steps to kick-start infrastructure development — be it in roads, urban infrastructure, power, housing or irrigation. The fiscal steps include cutting of duties, while monetary steps constituted easing of external commercial borrowing (ECB) guidelines as well as opening of a refinance window with India Infrastructure Finance Company (IIFCL). It was announced that this will support “a PPP (public private partnership) programme of Rs 1,00,000 crore in the highways sector”. Is It Working? The stimulus package announced by Planning Commission’s Montek Singh Ahluwalia is unlikely to trigger an infrastructure boost (Pic By Bivash Banerjee) Reality Bites In mid-January, the PM put in place a mechanism under which the cabinet secretary would regularly coordinate with states to ensure that the initiatives taken under the packages are implemented at the state level. About 91 per cent of the enhanced spending (over Rs 25,000 crore in all schemes including those identified under the stimulus package) under the rural development ministry has already been allocated to states. But has this resulted in increased spending on infrastructure at the ground level? A quick check on ground realities reveals that there are several issues at the state level that have held back the big boost in infrastructure spending over the past few years. And even the series of steps taken by the government through stimulus packages can do little to reverse this trend. Take national highway construction. According to official records, the major reasons behind incomplete projects are: non-availability of land, difficulty in shifting utilities and religious sites as well as delays in forest clearances. Official documents of many states have thrown up at least 45-50 instances where these factors have hampered ongoing projects. {mospagebreak} In Uttar Pradesh, for instance, national highway projects have been stalled for the past four years because the state government has not allowed trees to be cut for highway construction and has insisted that National Highway Authority of India (NHAI) provides a 10-metre strip of land along the highway to plant trees. But, according to NHAI, “this condition has not been imposed by any other state and is difficult to fulfil in practical terms”. In yet another instance, construction of rail over bridges (RoBs) has been held up because of the inability to resolve toll issues. ROBs fall within the domain of railways and the state government. As a result, over 2,000 such bridges are yet to be constructed while the annual construction pace of railways is a paltry 25-30, say Planning Commission officials. There is now a proposal to readjust the cost-sharing ratio of such bridges from the existing 50:50 (between railways and state) to 80:20. The additional funds from the stimulus packages might make a difference in such cases, but it is worth noting that between end of 2007 and end of 2008, NHAI did not award any new road contract because of differences with firms on qualification norms. As many as 60 projects totalling an investment of over Rs 60,000 crore were held up. And when the issue was resolved, the financial crisis started taking effect and banks became risk averse. That is why M. Murali, director-general of National Highways Builders Federation (NHBF), describes the stimulus package as “too little, too late”. Even though the PM, in his letters to chief ministers in January, said public sector banks are being “encouraged to avoid excessive risk aversion”, Murali told BW that banks are now scrutinising projects more carefully and believes that not more than nine projects can achieve financial closure. It is not just national highways. Even rural roads programme in many states are stalled because of inadequate land acquisition and inefficient programme implementation. Power Woes In power projects too, implementation is delayed because of issues such as land acquisition, forest clearances and non-allocation of water. Besides, states have raised some specific issues that would delay implementation of schemes such as the Accelerated Power Development And Reform Programme (APDRP), a programme that offers subsidised funds to states for undertaking utility works. Under the revised APDRP, states such as Gujarat and Andhra Pradesh want the Centre to reduce the loss reduction target (while APDRP scheme requires states with aggregate technical and commercial (AT&C) losses above 30 per cent to reduce losses by 3 per cent each year, while those below 30 per cent would need to reduce by 1.5 per cent each year). Being a central government scheme, the Centre has not changed its stance on the targets and insists that this is a Cabinet decision. For states on the other hand, as losses get lowered, the incremental reduction in losses gets that much tougher. Long Haul Since 31 January the cabinet secretary held four meetings with officials from states. Committees have already been formed to fast track land acquisition and even provide other clearances. However, new issues are bound to come up while implementing the stimulus packages. Take the NREGS that guarantees some minimum wages for works undertaken to build small water reservoirs in villages or even laying small village roads. Since this involves construction work (40 per cent of the NREGS funds go towards material and 60 per cent towards wages), this scheme has witnessed the largest increase in plan funds (Rs 14,000 crore between budget estimates of 2008-09 and revised estimates of 2008-09). Arvind Mayaram, financial advisor in the rural development ministry, points to a potential problem — he explains that NREGS is a demand-driven scheme and that there are a large number of people that have been laid off due to the economic downturn. He said these people, in turn, are looking for jobs in their native villages. Here, he said, one is not sure whether there is a “credible shelf of projects to employ this surplus manpower under the NREGS scheme”. So has the UPA offered too little, too late? Administrative bottlenecks, it seems, may have already trounced all good intentions behind the central schemes. kandula dot subrmaniam at abp dot in (Businessworld Issue Dated 17-23 March 2009)