Infra Investment

Context: Ministry of statistics and programme implementation (MOSPI) has released its latest report incomplete infrastructure projects.

What were the problems highlighted in the MOSPI report?

• Inadequate data: The latest report showed that of a current total of 1,661 incomplete infrastructure projects, each costing above ₹150 crore, delays were assessable only for 754 projects on which timing data were available.
• 70% were delayed (539 projects), with an average delay of three-and-a-half years.
• Stated reasons for delay:  Reasons include land acquisition and green clearance.
• Projects are expected to stimulate both supply and demand through wages paid to construction labour.
• Delayed payments: Payments by governments (both Centre and states) to vendors of all types, not just construction contractors, are delayed.  It is commonly estimated that these dues amount to ₹2 trillion at a minimum.
• Domino effect: Fiscal failure to pay on time has a domino effect on the financial sector. The unpaid vendor has to borrow more to cover enhanced working capital requirements.
• For instance, the default of Infrastructure Leasing and Financial Services (ILFS) in September 2018, when the Reserve Bank of India (RBI) had to move quickly to prevent a financial meltdown.
• Poor reporting: The MOSPI report mentions the repeated failure of projects to report milestones, which would have helped reveal the true cause of delay.
• Overall effect:
  • The medium-term fiscal plan required under the Fiscal Responsibility and Budget Management (FRBM) legislation has become a mere statement where the fiscal shortage is not the true left over.
  • Governments take on more expenditure commitments for future years than they know can be put up within the fiscal deficit path committed to. If payment dues exceed, they are simply delayed.
  • Many infrastructure companies are unwilling to engage with governments because of payment delays.

What are the steps to be taken?

• The fiscal system is deeply in need of reform, towards multi-year budgeting of committed expenditures, and calculation of deficits as a serious remaining rather than as a priority in itself to which expenditures will be shaped.
• Former RBI governor Raghuram Rajan has warned that without “relief” payments the potential growth rate of the economy would be seriously reduced. Hence relief payments are required.

Way forward

• Nothing would raise the potential growth rate of the Indian economy as much as a one-time payment of all past dues, and a credible commitment to future payments on time.
• The Centre should give interest-free loans to states with bullet payment after 50 years. The funds “are to be used for new or ongoing capital projects needing funds and / or settling contractors’/ suppliers’ bills on such projects”.