Even if a Budget lacks any wow factor, as in Arun Jaitley’s maiden effort, this hardly matters provided the government acts on the other 364 days of the year. The media are full of speculation of significant reforms on many fronts.
But everything will depend on execution, no matter how good the ideas.
Sonia Gandhi raised hopes when she made P Chidambaram finance minister and empowered him to accelerate growth. The Cabinet Committee on Investment cleared Rs 6 lakh crore worth of projects. Alas, these massive clearances did not translate into booms in capital goods or construction.
Land acquisition, state-level clearances, corporate insolvency and other issues stalled progress.
Can’t Paper Over Issues
Until these issues are resolved, infrastructure will not accelerate. And without infrastructure, the economy cannot grow fast again. We need a better understanding of why exactly Chidambaram’s acceleration failed, and how that can be remedied. Till that happens, don’t go cheering claims like Nitin Gadkari’s of having cleared another Rs 40,000 crore of road projects. The problem is not clearances, but the inability to translate clearances into mega-investment.
Jaitley’s Budget made several efforts to improve infrastructure financing.
He allowed banks to raise bonds for re-lending to infrastructure, waiving the usual obligations of statutory liquidity ratio (SLR), cash reserve ratio (CRR) and priority sector lending.
This relieves pressure on the balance sheets of both banks and infrastructure companies. But banks are already overexposed to infrastructure, with disastrous results, so the answer can’t be to expose them more.
The Name is Bond
India needs a vibrant bond market to finance infrastructure, cutting out banks as intermediaries. Infrastructure projects can take 25 years, while banks take deposits for no more than five years. Jaitley wants 25-year bonds with five-yearly resets. But these bonds should be held directly by investors, not banks. Most banks have suffered from a serious maturity mismatch, and this will worsen.
Besides, the key problem facing infrastructure is not financing. Lakhs of crores worth of cleared projects are stalled. The reasons include over-aggressive bidding for PPP deals that are unviable; lack of traffic growth after the slowing of the economy; lack of fuel and rail transport for power plants; government delays after financial closure, leading highly-leveraged companies to the edge of bankruptcy; land acquisition problems, especially after the passage of the land acquisition law; and delays in state-level clearances even after central clearances.
Throwing a financial lifeline to insolvent infrastructure companies will help them survive a bit longer, but is no kind of solution. Rather, the government must tackle the underlying problems. Only then will clearances translate into orders for equipment and construction.
The current Five-Year Plan calls for $1 trillion of infrastructure investment, of which half is to come from private companies, mostly through PPPs. This implies $100 billion a year, but A M Naik of L&T has declared that no more than $5 billion a year is possible. That leaves a yawning 95% gap in private funding. Instead of facing up to this giant problem, Jaitley’s Budget envisages an even bigger role for PPPs, as though unlimited private capital will flood in provided it is given clearance.
Sticking to Bad Law
Department of industrial policy and promotion secretary Amitabh Kant says virtually no land acquisition has occurred after passage of last year’s new land acquisition law. Gadkari convened a meeting of states to discuss this, and they had a series of objections to the law, while offering possible solutions. It’s extraordinary the states should be consulted afterpassing such a law. The BJP is guilty of having approved this stupid piece of legislation.
A new approach is needed from Narendra Modi himself. He needs to remedy an overall approach in which the BJP in central and state legislatures have got carried away with populist notions while ignoring practical issues. Standing committees of Parliament have become a device for tacking on evermore amendments to make new laws look politically correct, but also make execution difficult or impossible. Modi wants fast execution. So, he must also reflect on why his party has repeatedly gone astray on putting impractical clauses into legislation.
During the election campaign, Modi had said that for every new law, we should abolish 10 old laws. That reflected a deep insight into India’s current rot. Modi must prepare for a gigantic surgical operation.
A government having an absolute majority for the first time in 25 years has fuelled high expectations and a stock market boom. Yet, Mahesh Vyas, head of Centre for Monitoring Indian Economy, tells me that this has not yet translated into action in capital goods orders or construction.
Modi knows that even five years is not enough to clean up the mess he has inherited. His top three priorities should be execution, execution and execution.