A New Deal Waiting

On July 8, the finance minister promised us a roadmap for investment and employment growth within 90 days. Five months have passed almost to the day, and the roadmap has yet to be published. Time is passing and the honeymoon period that the public gives to all new governments will soon be over. Soon the discontent will begin to mount. That, and not the nitpicking context of economic orthodoxy and risk avoidance, is the concern that should be the driving consideration of his proposal to use forex reserves to boost infrastructure investment. Montek Singh Ahluwalia is a most cautious and responsible civil servant. That's why when he starts advocating Keynesian deficit financing in polite economic circles, it is time to sit up and really listen.

In essence, the scheme he has proposed is to increase the fiscal deficit by Rs 23,500 crore a year for the next few years, but not finance it by raising loans in the Indian money markets as all governments have been doing since 1991. Instead, the Reserve Bank will buy the government's treasury bills and 'monetise' the deficit, ie, increase money supply to the same extent. This will meet the cost of infrastructure projects, many of which will, hopefully, be implemented by public-private tie-ups (made possible through special purpose vehicles) to speed up implementation and reduce the burden on the exchequer. To neutralise the additional money supply, the Reserve Bank will sell $5 billion of foreign exchange in exchange for rupees every year. That will pull the money back in, leaving no residual effect on prices.

In practice, the scheme would be a little more complicated. No project can be 100 per cent foreign-financed. So some of the money will go into the bloodstream of the economy. But its impact will be neutralised when the RBI reduces the money supply in the economy by selling dollars in the open market.

Ever since the proposal leaked out about two months ago, it has become mired in controversy of a sterile and nitpicking kind that only professional economists are capable of. Will increasing the fiscal deficit not crowd out private borrowing yet again from the money markets, raise interest rates and nip the current private investment boom in the bud? Will this deficit financing not turn the Fiscal Responsibility and Budget Management bill on its head? If some of the forex is sold in the money market, will it not make the rupee appreciate? And finally, are our reserves really sufficiently strong to permit drawing down at the rate Dr Singh envisages? Isn't a lot of it actually borrowed money?

There are sound answers to all of these concerns. For instance, it is true that no single project can be 100 per cent foreign-financed. But if the foreign exchange component is, say, a third, then releasing $5 billion a year will permit $15 billion worth of projects to be completed or implemented. The balance of the money will have to come from the planned investment component of the capital budget, or from private partners, but the foreign exchange would make the difference between completing them quickly and allowing them to linger on as they have been doing for 20 to 30 years.

What almost no one is asking is why has Montek stepped so far out of the box of conventional thinking? The answer is that India is facing an infrastructure crisis that will, in as little as two or three years, turn our dreams of achieving a seven to eight per cent rate of growth into fairy tales. Take just two critical inputs—power and road transport. Between 1991 and 2004, total generating capacity has grown at an average of a measly 4.1 per cent. This has been able to sustain a 4.95 per cent rate of growth of power supply and a 6 per cent growth rate in GDP only because of rapid improvements in the utlilisation of existing power plants and because, more recently, most of the GDP growth has been in services. But the scope for the former has ended. The plant load factor of thermal plants has gone up from the low sixties in 1991 to 72.7 per cent in 2003-4. This means not only that the plants are being run better, but that they are being run all the time. There is no backup left. That is one reason why power breakdowns and load-shedding have become more and more frequent and industry has been forced to generate its own captive power.

What is worse, the rate of growth of thermal generating capacity has been dropping and is now a mere 3 per cent. The growth of hydel generation in the past five years has been zero. The country is therefore about to hit a brick wall.

The roads crisis is equally serious. Roads now meet 85 per cent of India's passenger transport and 70 per cent of its goods haulage needs. But highways make up only 2 per cent of our roads. These carry 40 per cent of the traffic and are excruciatingly slow. The Vajpayee government decided to remedy this by building 13,146 km of four-lane highways, but in five years completed only 3,200 km. Every other sector, except for telecommunications, is in the same plight. At the present rate of investment, Montek has calculated that the already sanctioned projects will take 30 to 40 years to complete. That will make an utter joke of planning and development.

In his budget speech, finance minister P. Chidambaram had promised that the government would tackle the infrastructure bottleneck by completing incomplete 'last mile' projects first. At an economic editors' conference last week, he announced that out of 181 incomplete medium and large irrigation and hydel projects, 37 would be finished this year and 46 in the next two years. But that leaves 98 projects for which the money is not in sight. That is one of the places where Montek's plan could spell the difference between success and failure. Just think of the number of jobs that all that much more power and water would create!