Dr Bharat Jhunjhunwala
Finance Minister Arun Jaitley has been traveling across the globe seeking foreign investment in the National Investment and Infrastructure Fund (NIIF) established by India to jumpstart investments in the infrastructure sector. The United Arab Emirates has agreed to make investment of unspecified amounts in the NIIF. But American and Australian investors have not made any commitments. It seems they do not find investments in India’s infrastructure sector to be commercially viable.
Indeed large numbers of infrastructure projects have become commercially unviable. As per one report, the infrastructure sector is doing very poorly. Our banking sector is groaning under the dead weight of this sector. The Non Performing Assets (NPAs) of the banks constituted about 16 percent of the loans given out by them. However, the infrastructure sector is contributing 30 percent to the growth of NPAs. The infrastructure sector is under much greater stress than the other sectors. Why would investors put their money in a Fund aimed at increasing investments in a stressed sector? That would be like betting on a sick race horse.
Investment in infrastructure will increase only when the underlying problems will be sorted out. The main problem is padding of expenses by infrastructure companies. A hydroelectric project was approved by the Central Electricity Authority with a capital cost of Rs 1800 crores. The Project Proponent increased the cost gradually to Rs 5300 crores while the capacity remained unchanged. Money was bled from the accounts of the Company. Actual investment was less while the burden of loan increased. As a result the loan became NPA. The anxiety on the part of the Government to encourage private businessmen to invest in infrastructure has led to the regulators such as the Central Electricity Authority and Electricity Regulatory Commissions looking the other way at such misdoings. That has boomeranged. The misdoings have led to the loans becoming NPAs and now the investors are shunning the entire infrastructure sector. The Government has killed the infrastructure sector by allowing padding of accounts and bleeding of companies.
In this situation, increasing investments in infrastructure sector requires action at two levels. One, the infrastructure projects have to be made bankable. The padding of accounts and bleeding of companies has to stop. The Government must institute a thorough audit of all stressed infrastructure accounts and recover the money that has been bled by the promoters. That will bring down the capital cost of the projects and make the companies profitable. New investments will flow once investors see that existing companies are making profits.
The second level of action is at making the money available for investments. The problem is that the Government itself is not able to invest monies in this sector. The quality of government expenditures remains poor. The Government continues to spend large amounts on consumption such as paying hefty salaries to the Government Servants. Corruption too remains rampant at operational level. A senior Government official confided that the Ministers were making money under the UPA Government; the officials are making money under the NDA Government. The investors are seeing that the Government is squandering its revenues in this manner. They foresee that the economy will come under stress because of this financial bad governance just as health of a family comes under stress if the homemaker spends money in kitty parties. As a result they are not willing to invest in India. Thus Foreign Institutional Investors have sold large amounts of their holdings in the recent period. They have liquidated their investments in India to raise funds for their requirements instead of liquidating their investments in the United States.
The Government can take the following steps to improve the quality of Government expenditures. A separate proactive vigilance system should be established to trap corrupt officials. The present system of Central Vigilance Commissioner comes into operation only when a complaint is made. Most corruption is undertaken with the consent of both parties. This does not come under the scrutiny of these vigilance organizations. Kautilya had advised the King to establish a spy system to trap corrupt officials and another spy system to trap the corrupt among the spies.
The present Government audit system examines whether the money has been spent correctly. It does not examine whether the expenditures have led to the targeted results. For example, audit of a health department will examine whether the drugs have been bought after following a proper tendering process. The audit will not examine whether health of the people in the catchment of a Primary Health Centre has improved. The Government must establish an “Impact Audit” department that will assess the impacts of the expenditures. This will enable the Government to close the taps of ineffective programs and improve the quality of its expenditures.
The Government must itself make more money available for investment in the infrastructure sector. An increase in Government investment will provide confidence to private investors to follow suit. The proposed increase of salaries of Government Servants goes in the opposite direction. It gives a message that the Government will continue to squander its monies in consumption. The investors will hardly make investments in this situation. But the stranglehold of Government Servants on the politicians is so complete that no politician is in a position to deny them increase in salary. One way out of the impasse is to provide the increased salaries due to the Seventh Pay Commission in form of long term bonds. The Government could even give out the increases in form of shares of the NIIF. It will be like a deferred payment of salaries. This will reduce the immediate financial burden on the Government. The money could then be used for investments.
The Government could make strategic sale of PSUs as was done under NDA-I. The present policy of raising monies by selling minority shares in the PSUs will not go far because the money that can be raised by selling minority stake is much less that can be raised by selling the majority stake. Secondly, the management remains with the Government in the sale of minority stake. The basic problem of inefficiency, nepotism, overstaffing and corruption in the PSUs remains intact. The existing PSUs like the State Bank of India should be privatized and the money used to make Bullet Trains.
The Government must realize that the global economic environment is hugely negative. It will be nearly impossible to attract foreign investment in NIIF or other infrastructure projects. The only solution is to set one’s own house in order and redirect national resources to investment. Foreign investment will only follow if India puts her own money in the infrastructure sector.
(The Author was formerly Professor of Economics at IIM Bengaluru)
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