Investment failure is showing

The spectacular electricity grid failures in late July 2012 focused global attention on India's infrastructure woes. On the surface, the grid failure was the result of large-scale unauthorised excess drawal of power by Haryana, UP and other states that had experienced till then, a deficient monsoon. At a deeper level, the excess drawal was unavoidable, given the shortfalls in generation capacity and investments in coal mines, railways and transmission & distribution facilities. At the deepest level, however, the failures laid bare the shortcomings of the Indian political economy.

In virtually all key infrastructure sectors, power, highways, railways, irrigation, urban water supply, sanitation and municipal waste disposal-about the only exceptions being telecom and real estate for the non-poor-failures of investment have seriously constrained growth. In each case, while the proximate causes vary, the deeper failures of the political economy leading to inadequate investment remain the same.

In respect of highways, a deliberately flawed PPP bidding model, for a number of years, led to gridlock in assignment of contracts to developers, the bidding effort being deflected to a different end. In the case of railways, cross-subsidisation of passenger fares by freight has led to loss of freight traffic to roadways and consequent insufficient revenues, and thus to insufficient investments.

Irrigation tariffs throughout the country are way too low for meeting operational & maintenance costs, let alone new investment. In urban infrastructure, political reluctance to recover costs through realistic property taxation or user fees has constrained investible funds with the municipalities.

In ports, powerful longshoremen unions resist investments in modernisation, even though there are fewer constraints, in principle, on raising tariffs. In respect of coal, apart from the faulty mode of allocation of mines pointed out by the CAG, inadequate transportation connectivity means that sufficient coal cannot be taken out.

And finally, in the case of power, apart from insufficient coal availability, hugely subsidised tariffs for farmers have led to state utilities becoming near-bankrupt, leading to inadequate investment in transmission & distribution, and perception of high risks for payments to generators.

Common to all these sectors are two features of the Indian electoral system. The five-year cycle of elections and their high cost for parties and candidates place constant pressure on parties to raise resources for future elections. But money alone is not enough. Voters need to be placated through free or highly subsidised public, or publicly provided goods and services (which may go well beyond infrastructure services). The consequent breakdown of the fisc, and thus of the machinery that provides these goods and services, is of little consequence, as long as it is NIMTO (not in my turn at office).

These considerations may, however, be largely based on myths. Numerous individual elections have shown that beyond a relatively small critical mass, money matters little for electoral outcomes. Repeatedly, state elections-Gujarat, Odisha, Madhya Pradesh, Bihar, and the central elections in 2009-have shown that what really drives the voters are growth and good governance.

Nevertheless, since the myths are widely believed, they are competitively pursued by the political class. The short-term political economy thus undermines the country's long-term interests in growth, creation of employment and improving governance, themselves the actual guarantor of continued electoral success, as shown by recent experience.

What is to be done? A consensus among major political formations on a key set of reforms is necessary. Good governance practices in allocations of natural resources and contracts, raising tariffs to sustainable levels-not perhaps in a big bang but gradual and sustained-streamlining and rationalising regulatory systems, and perhaps state funding of political parties to reduce the necessity of rent-seeking by politicians, would seem to constitute a core set.

What are the prospects that such a consensus will happen? During the NDA regime, a then young, and even now hirsute and rising, star in the then major opposition party suggested to the Prime Minister that a national conclave be convened, involving all major parties at the Centre and the states, to discuss and agree on a set of reforms that all would pursue, and not criticise. The Prime Minister seized upon the idea with alacrity and instructed a reform-driving cabinet minister, and his own staff, to organise the event at the Infosys campus in Bengaluru.

Alas, the event was not to be. The prospect of a partial détente with the perceived enemy was too much for the leadership of the then major opposition party.

Tags: fuel pricing, TERI, UPA, NDA, railway, transmission, coal, CAG