Cover Story: Development; Back to Basics

India's economy is liberalising and its companies are globalising, but for living standards to improve, the fundamentals must be addressed first.

INDIA'S PRIDE: 2,765 models of televisions; 183 types of washing machines; 233 kinds of refrigerators; 74 models of cars; over 50 satellite and cable channels; an expanding cell-phone net work.
INDIA'S SHAME: 100 million families without water at home; 150 million household without electricity; 2.8 million people waiting for telephone connections; 40 per cent villages without road connectivity; clogged sea ports; crammed urban roads.

There are two Indias. One is teeming with choices; the other is mired in monopoly. One is riding on rising urban incomes; the other is bogged down by falling investments. One is characterised by wealth-creating industries such as software and telecom; the other is beset with loss-laden outfits like state electricity boards.

FACTOIDS

ť India spends Rs 60,000 crore every year on infrastructure.

ť In the next five years investment must rise to Rs 1,80,000 crore a year.

ť Poor infrastructure costs India 3% of GDP every year, or about Rs 45,000 crore.

ť Private ownership of infrastructure is less than 5%.

ť Government investment in infrastructure has fallen from 4 % of national income in 1991 to 3% in 1998.

The contrast between infrastructure (the other India) and the rest of the economy has already begun to skew development. More Indian homes have televisions than toilets. A fifth of metropolitan houses have parallel and independent sources of water and power. On the national-level, inefficient and insufficient infrastructure has become the heaviest drag on the country's prosperity. Experts estimate the cost of poor infrastructure to be worth 3 per cent of India's national income. That's about Rs 45,000 crore a year -- or about two-thirds of the country's total infrastructure expenditure of Rs 60,000 crore.

"Underperforming infrastructure is the biggest crisis Indian economy ever faced", asserts Vinayak Chatterjee, chairman of consultancy firm Feedback Ventures and head of CII's committee on infrastructure: "But since it's a silent crisis, it does not command the attention it deserves." So it outrages no one that 12 per cent of Indians suffer from diseases and disabilities caused by inaccessibility to clean water. It means nothing if we lose Rs 30,000 crore annually as our roads allow commercial vehicles to run only 250-300 km a day, compared with vehicle speeds of 500-600 km a day in developed countries.

IDEAS

Build five world-class projects in two years to demonstrate the country's ability to support and run good infrastructure:
ť A modern, efficient sea port in Mumbai. The average turnover time for a cargo ship at the port should be less than 10 hours, against the current average of six days.
ť A six-lane expressway between Delhi and Mumbai, complete with shoulders on both sides of the road. Average vehicle speed on the highway should be 600 km a day, against the current average of 300 km.
ť A world-class airport in Delhi. Passengers should be able to come out of the airport in 15 minutes, against up to 90 minutes it takes at present.
ť Complete privatisation of power distribution in any one Union territory, say Chandigarh.
ť Handing over of a city's water, sanitation and street lighting to a municipality-community joint venture. Bangalore could be the city for such a pilot project.

Probably these are not crises in the conventional sense. They are lost opportunities. In a country long steeped in the belief of free-of-cost infrastructure provided exclusively by the government, such loss of opportunities is not recognised easily. But increasingly, a realisation is dawning in on some politicians and bureaucrats that the biceps and triceps of real economic power are good roads, efficient ports and abundant power. Claims Deepak Parekh, chairman of Infrastructure Development and Finance Corporation (IDFC): "There is a growing recognition in the Government that infrastructure has to be governed by the basic rules of economics.

To be sure, those rules are not as easily applicable to infrastructure as to the rest of the economy. Or else simply opening the floodgates of private investment -- both Indian and foreign -- would have made India's roads, ports, power and urban infrastructure world-class just as quickly as the invasion of global brands in consumer products had transformed that market in the '90s.

Economists would explain the difference between infrastructure and non-infrastructure services as the one between tradables and non-tradables. Most industrial products are tradable because they can be easily transferred from one country to the other. It took no time for competition to storm the markets for electronics, appliances and cars with quality improvement and price reduction. But infrastructure services are non-tradable. Which means the investor has to build, operate and sell the service (be it in road, power or water) within the country. That means huge investment, few investors and slow competition.

It also means more homework for the government before it sets out to seek private investment. That, of course, India didn't do -- and bore the brunt. In 1993 there were 240 proposals to set up private power plants all over India. By December 1999, only four private plants with 4,700 mw capacity were operational. In 1992 private operators were invited in 21 basic telephone circles, but only three are operational today. The track record in other infrastructure is distressingly dismal.

That breaks one fundamental myth about infrastructure reforms in India: private investment will rid existing inefficiencies in infrastructure. That won't happen simply because private investment will follow, not precede, the removal of inefficiencies in existing infrastructure. The condition of state electricity boards (SEBs) illustrates the point.

The SEBs today earn a negative return of 18 per cent on investment. That means on every Rs 100 invested in SEBs, the government loses Rs 18 every year. In 1998, the losses of all SEBs amounted to Rs 10,684 crore. Yet, under Indian laws only SEBs can sell power to consumers. Which means private producers must sell their electricity only to the SEBs. But since these boards have no money to pay for the power they buy, private investors would rather not set up power projects.

Clearly, the Centre and the states must put their house in order before inviting private investment. In theory there are three options.

End all subsidies on infrastructure in one stroke. That will alleviate, if not eliminate, the losses of public-sector infrastructure agencies, provide funds for new projects, and most importantly, make private investment viable and lucrative. For instance, abolition of power subsidy would generate Rs 15,000 crore which could fund 10,000 mw of electricity. But this at best is a utopian option that will never get political assent.

Privatise all public-sector infrastructure service providers. The ones that are efficient and profit-making such as Mahanagar Telephone Nigam Ltd will be easy to sell. But there may be no takers for the perpetually sick SEBs and water and sewage agencies. These could be handed over to local communities to manage, without actually selling government ownership. Such arrangements will obviously require a high level of government-industry-community co-operation seldom seen hitherto. More fundamentally, worker resistance will stall any bold privatisation move.

That leaves India with only one real solution, which actually is a combination of many. Commercialise public enterprises within a two-year framework by taking them out of the purview of the ministries concerned. Eliminate subsidies according to a pre-determined schedule. Eventually users or taxpayers must pay fully for all infrastructure services. Link each instalment of subsidy reduction with a tangible improvement in service quality.

Having done all this, raise investments. Not by a crawl, but by a gallop. Not entirely from public coffers, but via private channels. Most importantly, don't do any of these directly. Instead, have independent and transparent regulators devise and implement the agenda.

The task outlined is more relevant than radical. But then, infrastructure reforms have been scuttled not by any dearth of ideas but by the lack of will. Just four years ago, the India Infrastructure Report (IIR) commissioned by the Finance Ministry had outlined a detailed sector-wise roadmap for reforms. It had also, for the first time, calculated the exact investments needed in each sector (see Factoids and Agenda).

Partially because of the size of the agenda and largely due to the government's inaptitude, most of the roadmap remains uncovered. Why, for instance, can't there be a Infrastructure Investment Board which (like the Foreign Investment Promotion Board) could ensure speedy and one-time clearance of infrastructure projects? Experts like Chatterjee also suggest convening a conference of chief ministers to evolve an uniform national policy of pricing on infrastructure.

Yet, something has happened in the last two years that promises to end five decades of infrastructure inaction. It's as vague as the voter's voice. During the elections of 1998 and 1999, politicians found the demand of the voters weren't ideological but woefully basic: roads, power, water and drainage.

Says Pronab Sen, a senior adviser with the Planning Commission and a co-author of the IIR: "Critical economic issues like infrastructure have begun to influence political choice." He hopes that the day isn't far when populism will take a backseat and the politician's ability to deliver basic infrastructure to his electorate will determine his future.

That will be the day the Indian voter will demand good infrastructure as his consumer right. That will be the day India's infrastructure will be as competitive and abundant as electronics and home appliances are today. That will be the day India will be counted among the ranks of developed countries.

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