Clearing projects is not the Cabinet’s job

The rupee has bounced back, the stock market has soared, and finance minister Chidambaram is smiling again. This will not last, because there’s no clear strategy to remedy the economy’s structural weaknesses.

One big structural problem is the creation of ever more laws, rules and regulations. Every new rule has admirable aims like inclusivity, environmental preservation and fair land acquisition. But no law ever provides finance for staff and expertise required to implement the new regulations effectively. This overloads a bureaucracy already collapsing under old commitments. Some district collectors say they have to oversee 3,000 schemes.

No new law does cost-benefit analysis. Yet good governance requires laws that provide enough financial and administrative resources to actually work. Otherwise, we get unending delay, cynicism and corruption.

Don’t confuse this with policy paralysis: that’s a separate problem. Even when policymakers want to proceed, rules and regulations produce delays that are not merely long but cannot even be quantified or provided for. For example, the POSCO steel project in Odisha has not started despite a dozen years of effort backed fully by the chief minister. An NTPC official recently said it now took 12 years to clear and acquire land for a new coal mine. This is why, despite having the third largest coal reserves in the world, India has become a massive coal importer.

Yes, we need rules sensitive to inclusion and the environment. But they must also be designed for clearance within reasonable, predictable periods. Alas, we see no sign of this.

Chidambaram said in a recent interview with the Financial Times, “What is keeping investors out is the experience and the fear that we cannot implement a project on time… The Japanese, for example, if they have a start date, they also have a finish date… But in India they run into delays of months or years… the foreign investor is frightened by that kind of delay.”

This frightens the Indian investor no less than the foreigner. The most frightening phenomenon is that of Indian investors saying that they would rather invest abroad than in India.

I recently met a medium-scale businessman who said that earlier too, rules and regulations made honest clearances impossibly long. But quick clearances were possible through bribes. However, the recent anti-corruption mood and fear of the courts and CAG meant that, even after making payoffs, clearances did not come. The businessman said he was switching to Africa, which was highly corrupt but allowed investment to go ahead after payoffs.

To end the investment drought, the Cabinet has often met to clear projects worth lakhs of crores. Do not cheer. The very fact that projects galore cannot proceed without Cabinet intervention is a serious structural failure.

In any good system, the Cabinet makes policy, and project-by-project implementation is done by the ministries. If rules and regulations make it impossible for ministries to clear projects, the answer cannot be Cabinet meetings that guillotine the scrutiny process. Rather, the scrutiny process must be overhauled thoroughly so that clearances occur predictably within a fixed time frame, without Cabinet rescues.

RBI Governor Raghuram Rajan says repeatedly that we must slash red tape and unnecessary regulation. But where is the action? The government keeps coming out with more new laws, rules and regulations. Not a single legislative or administrative effort aims to ruthlessly prune red tape.

The problem is worst in infrastructure, without which the rest of the economy simply cannot grow sustainably. Historically, infrastructure was funded almost entirely by the government. A decade ago, the government ran out of money because it has so many other commitments. The private sector and public-private partnerships were seen as the solution. The boom in such deals was accompanied by accusations of crony capitalism.

However, constant delays have converted those crony deals into financial quicksand. Many supposedly top cronies are going bust. The stock market price of Reliance Infrastructure is down from a peak of Rs 2,584 to Rs 396 today, GMR from a peak of Rs 131 to Rs 21, GVK from Rs 85 to Rs 7, Lanco Industries from Rs 113 to Rs 18, and Lanco Infratech from Rs 84 to Rs 6. Several of these companies are sick, on life support from banks.

Historically, the government built infrastructure with long delays. The government met the resultant cost escalation through tax revenue. But when the private sector entered big infrastructure, after taking large loans, it found that even modest delays made projects unviable, and long delays could bust a company. This structural problem cannot be overcome by emergency Cabinet clearances. It needs a totally new system of predictable, reasonably rapid clearances that make Cabinet rescues completely unnecessary.

3 thoughts on “Clearing projects is not the Cabinet’s job

  • 2013.Oct.07 at 13:43
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    Cabinet instead of acting as a mediator delays the projects which in turn affect the whole cycle of project completion and ultimately economy of India is affected.
    POSCO and NTPC analysis are clear indicator of the action token by Indian ministers.
    It is a huge disgrace after knowing the purpose of a businessman shifting to Africa.

    Polices can’t be changed overnight. Taj Mahal was not built in one day. Through scrutinizing the weakest portions in our own government operation handling process it can be made better

    Reply
  • 2013.Sep.30 at 09:57
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    Sir,

    This is so illuminating. Thank you for this article!

    Reply
  • 2013.Sep.26 at 15:52
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    If the crony deals in infrastructure has turned into financial quicksand, the CAG report on spectrum allocation has created a similar situation for the telecom companies. The Telecom industry debt is supposed to be over 2.5 lac crores, a cool one lac crore more than the notional loss reported by CAG.

    Reply

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