GS Paper 3
Syllabus: Infrastructure: Energy, Ports, Roads, Airports, Railways etc./Investment models
Source: IE
Context: Infrastructure in emerging economies like India has seemingly become both a demonstration of good and a necessity.
Importance of Infrastructure in emerging economies:
- Simultaneously works as a national aspiration good,
- A barometer of national progress,
- A mechanism for job creation,
- A vehicle for crowding in private investment, etc.
Constraints on infrastructure provision are:
- Expensive, because it needs to be built to a minimum scale.
- Often has a public good component, which makes the social value of infrastructure higher than its private value to individual users → making it relatively unprofitable for private investors.
- The traditional approach to financing infrastructure → tax revenues or government borrowing.
- Vicious trap → poorer economies generate less tax revenue → increasing public borrowing domestically → crowd out private investment → limits infrastructure investment, growth of the economy → keep the country poor.
Indian government’s efforts to come out of this vicious trap?
- Incentivise private sector participation by providing targeted subsidies for infrastructure investments.
- In the early 2000s, the Public-Private-Partnership (PPP) model was introduced.
- While the program did result in the construction of a lot of infrastructure, it ended in an avalanche of non-performing assets with public sector banks → widespread corruption → change in government in 2014.
- The “national champions” model: It modified the PPP approach by assigning the bulk of the infrastructure provisioning for roads, ports, airports, energy, and communications to a few chosen industrial houses.
How does this model overcome the difficulty of financing infrastructure?
- Incentivising national champions to build the projects identified by the government.
- New aspects of the national champions model:
- Champions given control over existing projects with strong cash flows → helps them to achieve targeted returns and borrow from external credit markets → lowers the cost of finance, freeing up domestic savings for private investment
- The public association of the champions with the government’s national development policy → generates a competitive advantage in getting domestic and foreign contracts.
Issues with the national champions model:
- The direct association of conglomerates with government policies → markets, regulators treat them as too big to fail → delayed discovery of problems, spillovers.
- The longer it takes for projects to generate large cash flows, the greater will be the need for the state to provide access to additional cash flows.
- This risks turning the country into an industrial oligarchy.
- An uneven playing field in terms of market access, regulatory relaxations → a significant deterrent for foreign investors → bad for efficiency and productivity at the economy-wide level
Dilemma India is facing:
- Can infrastructure provision be the solution to India’s growth aspirations?
- India is at an inflection point in its development path.
Way ahead: A development model based on a domestic demand-driven production structure, powered by soft and hard infrastructure.
Insta Links:
Mains Links:
Explain how private-public partnership agreements, in longer gestation infrastructure projects, can transfer unsuitable liabilities to the future. What arrangements need to be put in place to ensure that successive generations’ capacities are not compromised? (UPSC 2014)
