Feb 22, 1999

Remove subsidies and charge the rich appropriate fees for the infrastructure services they use.

By Kirit Parikh and Jyoti Parikh

The Indian economy is plagued by inadequate infrastructure. Power breakdowns hamper activities everywhere. The ports are congested. Roads are overcrowded and in poor condition. Traffic in large metros crawls at around 15 kmph compared to 40 kmph 30 years ago, adding to air pollution. Almost all our rivers are so polluted that water is not suitable for bathing, let alone for drinking.

The economic costs of this are huge. Poor roads cost an estimated Rs 12,000 crore a year in vehicle maintenance. The main problem is that infrastructure, so far mainly in the public sector, has been subsidised. The non-merit subsidies on infrastructure amount to Rs 28,000 crore per year.

It must be recognised that such subsidies are no longer tenable. While the rich can pay appropriate user fees for infrastructure services, the poor should be provided with direct income support instead of subsidies. With reasonable user charges, the infrastructure sector can be profitable and would attract investment from private companies. However, they would need long-term soft loans because infrastructure projects have very long gestation periods. Interest rates must be brought down to a real rate (net of inflation rate) of 3 per cent by drastically reducing the fiscal deficit and government borrowings.

POWER: The annual subsidy to the agricultural sector by all SEBs is Rs 7,000 crore. If farmers are charged only the average cost of power, the SEBs would earn Rs 7,000 crore more annually. When leveraged into the capital markets, that would become Rs 35,000 crore, enough to install 9,000 MW of capacity a year. And power shortages would disappear even without private capital flowing in.

A study by the Indira Gandhi Institute of Development Research shows that demand side management (DSM) can reduce energy demand quickly and at low cost. There is a potential to reduce peak demand by 17,000 MW over 10 years at a total cost of Rs 10,000 crore. At Rs 6,000 per KW at 1995 prices that is less than a sixth of the capital cost of a power plant. This does need investments in efficient motors, compact fluorescent lighting, variable speed drives, cogeneration and so on but can save up to 20 per cent of the new capacity required. The combined contribution of nuclear, wind and solar power over the 10-year period may be half as much.

In addition to DSM, we will also need to rely on private power. After the first Enron deal was signed in 1993 some 240 offers were received by various SEBs from private companies willing to set up power plants. Yet today, only three plants with an installed capacity of 1,070 MW are operating.

An independent power producer (IPP) required to sell electricity only to a financially sick SEB will want a counterguarantee from the Central Government that its bills would be paid. But that route is dangerous because if the Central Government gives counter-guarantees for 20,000 MW and the SEBs default, it would have to fork out Rs 25,000 crore a year. If IPPs were allowed to sell electricity directly to consumers, they would not need counter-guarantees. However, as they would take away the best industrial customers, the SEBs' financial sickness would worsen.

To avoid this, an IPP selling to industrial consumers should pay a cess to the SEB to help it subsidise poor agricultural and domestic consumers. Alternatively, the IPPs may be required to serve a prescribed mix of industrial, commercial, domestic and agricultural consumers.

ROADS: The congestion in urban roads is reflected in the average speed of vehicles. All weather roads connect only 45 per cent of the villages and 30 per cent of the villages are still without a road link. It is estimated that India needs Rs 60,000 crore over the next 20 years for roads.

Industrialised countries finance the construction of roads by taxes on vehicles, spares and fuel. We, however, spend only 40 per cent of similar taxes on roads. The Government should impose a differential excise on diesel cars to absorb the difference between taxes on diesel and petrol. If petrol is taxed, so should the diesel used for cars. A 50 paise per litre cess on diesel can collect Rs 2,500 crore per year. This can be used for roads.

Much of the funds needed for roads can be collected through such a cess and private participation in BOT projects. For bridges, urban bypasses and other toll roads, private parties will be willing to come on a BOT basis. For an open access road where toll is not to be charged we can attract private builders in some cases. A road generates value in higher land prices. So the Government can offer a private builder vacant land for real estate development or allow him to extend existing properties in return.

TELECOM: There has been a considerable improvement in the quality and level of service provided. Even so, the improvement is only when compared to the situation in India a few years ago. Compared to foreign countries, Indian consumers are paying far too much and the access and quality is too low. For global competitiveness of the Indian industry and to fully exploit India's comparative advantage in software development, we must provide the cheapest possible information infrastructure.

We should completely deregulate the sector to allow investment to flow in. Any one who wants to provide service should be allowed to enter. The BJP-led Government has moved in this direction and has opened up internet services to anyone with a token licence fee of Re 1. It must now eliminate the token and the need to get a licence. For competition to flourish, it should break up the monopolies of the dot, MTNL and VSNL. The only scarce commodity is the frequency spectrum needed for cellular phones, radio and TV broadcasts. The Government should lease them out on a long-term basis at globally comparable rates.

WATER AND SANITATION: Mohenjodaro had water supply and sanitation systems. But till March 1993, 22 per cent of rural and 15 per cent of urban Indians did not have access to safe potable water. Sanitation services were available to only 48 per cent of the urban and 3 per cent of the rural population. The World Bank has estimated that more than 30 million life years are wasted annually due to water-related diseases. Valued at the per capita income of Rs 12,000, this amounts to an annual loss of Rs 36,000 crore. In a sense, this is what we should be willing to spend for clean water and sanitation. A sizeable part of the investment needed for drinking water and sewage treatment has to come from the Central and state governments. But with proper user fees, much of the cost can be recovered over time.

Given its importance for human welfare, this sector requires a goal-oriented strategy and a target date should be announced for 100 per cent coverage. Sewage treatment plants of adequate capacities should be mandatory for every town by the year 2001.

All these measures are easier to implement in urban areas. However, the rural population also needs electricity, water and telephones to increase their productivity. Unfortunately, the costs to reach them is higher, collecting payment is more difficult and their ability or willingness to pay is much lower. Windmills and solar energy units are more expensive than conventional technologies. Also, it is harder to provide schools, hospitals and financial institutions in rural areas. But their absence could widen the urban-rural divide and hasten migration to cities.

Kirit Parikh is the vice-chancellor and Jyoti Parikh is senior professor at
the Indira Gandhi Institute of Development Research, Mumbai

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