The Structural Reforms we need for Infrastructure Investment

Context: India needs to focus on the structural obstacles in infrastructure in order to make the second fiscal stimulus a success.

Features of government support:

• Capital expenditure: by the Centre ( ?25,000 crores) and by states ( ?12,000 crores).
• Interest-free loans to the states: with one-time payment after 50 years.
• Allocation: To be used for new or ongoing capital projects in need of funds and/or settling payment to the contractors.

Structural Issues in Infrastructure sector: as identified by the Ministry of Statistics and Programme Implementation (MOSPI).

• Project Delays: About 539 projects were delayed with an average delay of three and a half years. Reasons for it include land acquisition and green clearances (which denotes governance deficit).

• Delayed Payment to vendors: Payments amounting to ?2 trillion by governments (both Centre and states) to vendors are delayed which has following consequences:
• Dents government’s credibility: and make new contractors disinterested.
• A domino effect on the financial sector: since the unpaid vendor has to borrow more for working capital requirement For, E.g. as seen in the case of Infrastructure Leasing and Financial Services .
• In-sufficient Data: The MOSPI report mentions the repeated failure of projects to report milestones, which would have helped reveal the true cause of delay.

• Budgeting issues: Governments take on more expenditure commitments for future years than can be accommodated within a fiscal deficit path committed to under Fiscal Responsibility and Budget Management (FRBM).

Way Forward: 

• One Time Payment: A one-time settlement of dues to private vendors is essential to restore the credibility of the fiscal system.
• Fast Tracking Projects: Delayed projects to be fast-tracked since, in corona times, these projects are expected to stimulate both supply and demand through wages paid to construction labour.
• Reform towards Multi-year Budgeting: of committed expenditures, and calculation of deficits as a serious residual rather than as a priority in itself to which expenditures will be shaped.