Feb 22, 1999

Private investors are keeping away from the sector because populist governments are reluctant to charge consumers the market price for infrastructural services.

By Shefali Rekhi

Now it's beginning to hit the budget as well. The neglect of the infrastructure sector had constrained growth all these years. This year it will tell on the deficit as well. Though many telecom firms had paid their licence fee dues last year, they are reluctant to shell out the Rs 3,700 crore they owe to the Government as licence fee for 1998-99. They are hoping that the Government will ease the payment terms.

The reluctance of telecom companies to pay up spells fresh trouble for Finance Minister Yashwant Sinha who is already grappling with rising expenditures, dwindling revenues and far lower than targeted disinvestment receipts.

Given the lack in clarity on infrastructure policy and limited efforts by the BJP-led Government in the first year of its rule, the development is not really unexpected. But unless the Government gets its act together and Sinha takes some tough initiatives in the forthcoming budget, there is reason to believe that problems could well compound.

That's because investments in the infrastructure sector are just not flowing in at the required pace while demand-supply gaps are mounting (see box). Peak energy shortfalls have averaged 15-20 per cent for the past five years while the country continues to suffer economic losses of Rs 30,000 crore a year because of bad roads. Many of the private players who wanted to invest in the infrastructure sector are not convinced if their investments would yield returns. Others are strapped for resources.

As a result, projects are being abandoned at a fast pace. Data compiled by the Centre for Monitoring Indian Economy shows that projects entailing an investment of Rs 4,382 crore were abandoned in 1996-97. Next year, investors dumped projects worth Rs 7,474 crore. And in the first six months of 1998-99, projects worth Rs 9,994 crore have been shelved.

This could be partly due to the mad rush that follows the opening of any sector. But in the graveyard are also cases of disillusioned investors. Perhaps the Tatas would not have withdrawn their airlines proposal if the Government had speeded with clearances. Reasons vary, but experts agree that India has messed up its courtship of investment for infrastructure. Says Montek Singh Ahluwalia, former finance secretary and now member with the Planning Commission: "Had we studied the international experience more closely, got consultants with international experience to help draft policy, been willing to modify policy as problems emerged, and explained the ratinale publicly we might have saved a couple of problem-solving years."

Instead, the Government doctored its approach to suit its political interests. Worse, it cut back on public spending in infrastructure (see box). Not surprisingly, infrastructure bottlenecks are constraining growth and upsetting budget projections. Says Amitava Basu, executive director, PriceWaterhouse Coopers: "The economy would have been doing 50 per cent better if the pace of infrastructure development was faster."

There are many stumbling blocks to dissuade investors. But the core problem is that India has not resolved the tariff issue and is still unwilling to recover costs from users. So investors are not sure if they can recover their investments. Says Rakesh Mohan, director-general of the National Council of Applied Economic Research and chairman of the expert committee on infrastructure constituted by the Narasimha Rao government: "Why continue with subsidies? Research has clearly proved incorrect the assumption that the benefits are going to the poor."

Indeed, low user charges have led to rampant misuse of subsidised amenities like power. Transmission and distribution losses in the power sector are a disturbing 20 per cent of the energy fed into the system. Similarly, with the government unwilling to recover costs from water users, wastage is widespread. Leakages claim up to 30-40 per cent of the water supplied.

But instead of working on long-term solutions, the government chose quicker alternatives. In the power sector for instance, it decided to extend counter-guarantees to eight projects. It took six years for these guarantees to be extended (one project has yet to get it) because the Finance Ministry didn't want to take on this liability.

However, this is not the solution to the power problem. There has been little progress on most of the 200-odd offers pending with the government because the investors feel they will not be able to recoup their investments.

In the telecom sector, problems have got too knotty. The government privatised to raise money to plug the budgetary deficit. Hence it chose to licence out circles for a fee instead of waiting for the projects to take-off and then share the revenue with the operators. The private sector complicated matters further by unrealistic bids. Of the 21 basic telecom circles for which bids were invited, just six licence agreements have been signed and only two are operational.

Consequently, telephone density in India is still amongst the lowest in the world though the privatisation talk began way back in 1993. If the approach had been right, the economy would have been cruising today. A study by the International Telecom Union says that a 1 per cent increase in telephone density can push up the GDP by 3 per cent.

PriceWaterhouse Coopers estimates that Rs 80,000 crore is needed over the next five years to improve infrastructure by 50-75 per cent. With the fiscal deficit heading skywards, Sinha must announce tough measures on 27 February. Or present his last budget.

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