Aspects of India's Economy No.s 39 & 40

The Budget includes one more type of capital expenditure: a “Special Purpose Vehicle” (SPV) for funding infrastructural projects that find difficulty in raising resources.¹ Chidambaram declared in his Budget speech: “The importance of infrastructure for rapid economic development cannot be overstated. The most glaring deficit in India is the infrastructure deficit.”

This is of course a rather distorted view: the deficits of food and employment are much more glaring. However, there is no doubt that investment in infrastructure is needed for economic activity to grow. The question is, what sort of infrastructure, for what sort of economic activity?

The notion of “infrastructure” being peddled nowadays by neoliberal economists, the media, and Chidambaram is reflected in the following fairly typical passage (from a newspaper editorial urging the rapid building of a Mysore-Bangalore expressway):

Note the complete disjunction between the first sentence and the next two. The first sentence describes the situation of the vast majority of Karnataka’s people – which in fact tells us of the lack of infrastructure. One then expects the writer to suggest that the government invest in irrigation, particularly minor irrigation; this would make a dent in those “high poverty levels”. But no: rural conditions are to be preserved untouched; all that can be done is to set up the infrastructure for IT (“high quality roads and telecom”).

This concept of “infrastructure”, then, is not linked to the requirements of productive activity, especially the productive activity of the majority of Indians. It is first and foremost a means to move in and out of India (physically or electronically), and from metropolis to metropolis in India.

This type of `infrastructure’ recalls the role of the railways under the British Raj, when route alignments and rate structures were such as to make it cheaper to transport goods from the ports to the interior and back rather than between points in the interior. (A.K. Bagchi, The Political Economy of Underdevelopment, p. 86) There are parallels today: Whereas during the last five years over Rs 240 billion has been spent on the National Highways Development Project (largely on the Golden Quadrilateral between the four metropolises), only Rs 115 billion has been spent on the Pradhan Mantri Gram Sadak Yojana, which aims to connect no less than 170,000 unconnected villages with roads.

Similarly, over the last decade telecommunications has seen large investments and rapid growth by private and public sector firms. Although this is concentrated overwhelmingly in the urban areas, the notion is being propagated that mere extension of telephony and internet services to a village brings economic activity and development. The Budget claims that 67,000 villages lack telephony, for which it allocates Rs 12 billion, but almost double the number of villages (125,000) lack electricity itself. The most recent National Sample Survey reveals that 46 per cent of rural households depend on kerosene lanterns as their source of lighting. That percentage is indeed set to grow with the impending breaking-up and privatisation of state electricity boards.

Private investment in infrastructure: against economic efficiency
Over the liberalisation era, infrastructure itself is being groomed as a source of private profiteering. This, too, recalls the railways under the Raj. The Raj guaranteed a rate of return to British private investment in the Indian railways; this encouraged investors to overstate the extent of their investments, and the railways became one of the principal avenues of drain from the country. During the post-1991 liberalisation, similar terms were offered to private investors in electricity generation, resulting in the Enron project, which virtually bankrupted the Maharashtra State Electricity Board.

For all the noise being made about the importance of infrastructure, important elements of infrastructure – electricity and coal, for example – have been starved of capital expenditure during liberalisation. The capital expenditure of the Ministry of Coal was Rs 9.33 billion in 1990-91; the corresponding figure for 2005-06 is zero. The capital expenditure of the Ministry of Power was Rs 24.94 billion in 1990-91; the corresponding figure for 2005-06 isRs 26.52 billion (a huge drop after discounting for inflation). Both these ministries have to raise almost all of their developmental expenditure by borrowing from the market.

Little surprise then that production of coal (including lignite) has grown at the rate of just 3.4 per cent during 1997-98 to 2003-04. Electricity generation (excluding captive units) grew at the rate of only 5.7 per cent per year during 1992-93 to 2003-04, as compared to 9 per cent during the 1980s.

Under-investment has led to shortages, which are in turn being made the excuse for privatisation: Maharashtra recently witnessed riots organised by the Shiv Sena after the electricity board resorted to severe load-shedding. The NCP leader and Union Minister Sharad Pawar, one of the chief culprits of the Enron deal, promptly claimed that the present shortage proved that the Enron project had been justified. The truth, however, was blurted out by the chairman of the Maharashtra State Electricity Board, namely, that there had be no investment by the state government for a decade: “Earlier the Government used to give up to 30 per cent for power in the budget. Now it gives nothing.” (Indian Express, 3/5/05) The situation nationwide is similar: in order to create the environment for private investors in the power sector, public sector investment has been stifled. When, in the wake of the Enron fiasco, private investors held back, overall generation targets were missed.

Infrastructural projects generally require large sums and take a long time to complete. Moreover, it is important to keep the price of infrastructure as low as possible, since the price of infrastructure enters the costs of other firms (for example, the prices of electricity and transport become part of production costs): expensive infrastructure raises prices all round and slows the growth of other sectors. On the other hand, if properly planned, infrastructure will receive a steady stream of revenue. For all these reasons it makes obvious sense to keep infrastructure in the public sector. No private sector firm would be interested in investing large sums and waiting a long time for low returns, however steady they may be.

Yet there is an explicit drive today to attract private investment, including foreign investment, in infrastructure – in power, roads, telecom, oil and now coal. In order to attract such investments, guaranteed rates of return are being provided in some cases (electricity, roads). Potentially very productive oil/gas blocks that could have been developed by ONGC are being handed over to private interests; the oil/gas then are purchased at international prices from the private firm. All these price hikes of infrastructure get passed on to industry and agriculture. Could there be clearer evidence of how the present policies do not aim at greater efficiency of the economy and the promotion of production, but at private profit at the cost of the economy?

Budget 2005-06, like its predecessors, follows this path of neo-liberalism, antagonistic to national interests and the productive activity and well-being of the vast majority. The hike in the Centre’s social services spending is merely a way of prettifying that reality, and facilitating further progress down that path.

“Bharat Nirman” (“Construction of India”) by 2009? Chidambaram has announced with much pomp a five-point programme for Bharat Nirman. Below are the promises and brief comments.
PROMISE	COMMENT
Ten million hectares under assured irrigation	Negligible increase in Ministry of Water Resources, even after underspending last year’s allocation. Increase announced in Accelerated Irrigation Benefit Programme, but zero budgetary allocation made for it.
Connect all villages that have a population of 1,000 (or 500 in hilly/tribal areas) with a road	Official estimate of required funds: Rs 1320 billion. Allocation in 2005-06: 38.1 billion, or less than three per cent.
Construct six million additional houses for the poor	The allocation for Rural Housing is reduced from Rs 26.07 billion (2004-05 Revised Estimates) to Rs 24.98 billion (2005-06 Budget). Most houses in the rural areas are still kaccha, i.e., made of materials such as mud, reeds, bamboo or grass.
Drinking water to remaining 74,000 habitations that are uncovered	Coverage of “habitation” does not mean coverage of all households within that. The rural population is 800 million, but there are only 3.7 million hand pumps and 173,000 piped water schemes in the rural areas. Seventy-one per cent of rural dwellers and 30 per cent of urban dwellers do not have access to piped water (National Sample Survey 1998).
Reach electricity to remaining 125,000 villages and offer electricity connection to 23 million households	In the 2005-06 Budget Rs 11 billion is allocated for a new scheme of Household Electrification; but Rs 10.5 billion is cut from various heads of Rural Electrification (Rs six billion from assistance to the states for rural electrification; Rs two billion from Interest Subsidy on Rural Electrification; and Rs 2.5 billion from Rural Electrification Corporation). Moreover, the Electricity Act and impending privatisation of electricity boards (promoted by the Centre) will actually reduce the reach of electricity to rural areas.
Give telephone connectivity to the remaining 66,822 villages	Perhaps one person in 100 in the rural areas has telephone services, compared to five or six nationwide. The 2005-06 Budget has allocated Rs 12 billion for rural telephony from the special USO fund, collected from telecom firms specifically to subsidise rural telephony. But the Government is sitting on an additional Rs 51 billion lying in this fund.

1.The SPV is merely another form of government borrowing. The Finance Minister has chosen this form in order to exclude it from the calculation of total government borrowing -- what is known as the “fiscal deficit” -- which international financial institutions and foreign investors demand be reduced. (back)


No.s 39 & 40, June 2005