According to Sanjeev Sanyal, Principal Economic Adviser, Ministry of Finance, India could leverage significant reduction in inflation to lower the cost of capital for infrastructure projects over the next five years. Speaking exclusively to INFRASTRUCTURE TODAY at his North Block office in New Delhi, Sanyal informed that the government was working to stablise the sovereign yield curve to ease funding of projects and also urged revamping of the country's legal infrastructure to ensure effective enforcement of terms in project contracts.
Does India have the wherewithal to support its infrastructure sector through public financing over the next five years?
Yes, public financing is a very important part of supporting infrastructure. Simultaneously, the private sector also has a significant part to play. However, whether it is public or private, there is a need to reduce the real cost of capital in the long run. And that is an important part of being able to maintain and sustain a high level of investment especially in infrastructure, since it tends to have a very high gestation lag. Even the smallest change in the cost of capital, compounded over a long period of time, has major implications. In this context, the government has put in a lot of effort in not only lowering but also anchoring structural inflation by giving fixed targets to the Monetary Policy Committee of India. The strategy has been fairly successful, as we have genuinely been able to reduce inflation to markedly lower levels than ever before. With the transition done, the opportunity is there to take advantage of a lower inflation rate by bringing down interest rates on a structured basis. Given their cyclical nature, the interest rates are bound to go up and down, but in the long-term, we can lower the cost of capital. That is something we can take advantage of in the next five years to deploy capital in infrastructure development, while also ensuring the viability of many projects.
Although the infrastructure spending in the last five years is unparalleled, was the government able to successfully achieve its capex targets?
Huge investments were made in highways, ports, airports, and inland waterways. The Northeast region of the country, Indian Railways, and metro rail projects have also been big beneficiaries of our efforts. We have invested a large amount in backend infrastructure. Looking ahead, where else can we put in more infrastructure? I would say, the inter-city connectivity has dramatically improved over the last 20 years as successive governments have invested there. The next 20 years are going to be about upgrading our cities, particularly those in the tier-2 category. We need to invest a lot in sanitation, drainage, wastewater, and solid waste management. We also need to widen the idea of public infrastructure, since intra-city infrastructure tends to have many soft aspects as well. We need to start thinking in terms of investing in museums, heritage preservation, and other such social infrastructure. The government has created a draft of the National Urban Policy Framework (NUPF), 2018 for comments in this regard.
India witnessed the rollout of GST in July 2017. But, as far as the observable trends in direct and indirect tax collections are concerned, do you think they have the potential to create an impact on the sector?
A shift like GST happens once in a generation, and benefits show over a long period of time. We replaced a very complicated system with one that is simpler and far better.
It might not be a perfect system and we can keep on improving it, but we have already made the transition to a system that works. We can now hope to reap its benefits over the next several years. The same holds true for other reforms, like the Insolvency and Bankruptcy Code (IBC), 2016. Such fundamental reforms can sometimes be disruptive and have unintended consequences, as they need time to smoothen out.
But there is also the criticism of the shortfall in tax collection targets?
There may have been some slips, but as you might have also noticed, the numbers for March were quite good. Remember, we are also lowering many rates. There are specific issues related to procedures and processes, and we continue to work on them.
Although there has been considerable discussion on new instruments such as bonds and InvITs, market capitalisation continues to remain a challenge. What should, therefore, be the role of both the government and the private sector in this area?
The government funds several kinds of infrastructure projects, and also encourages the private sector to participate in various areas. But there are a few things that need to be worked upon. One of them is that we may need specialised institutions that do these kinds of long-term infrastructure projects. We know from experience that banks may not always be capable of being the driving force for many of these projects. Now, we have a new institution in the National Investment and Infrastructure Fund (NIIF). It's getting into its stride and maybe we can create more as well. The second issue is that as far as raising money is concerned, India needs a stable yield curve, and that has been an issue for a while. For multiple reasons, the sovereign yield curve, on which much of this funding needs to be priced, is neither smooth nor stable. We are spending some thought on its various aspects, such as market microstructures, the kind of instruments issued, etc.
There has been some criticism of the way the GDP data is compiled. Therefore, what is the best way to measure growth indicators?
GDP is clearly one way of measuring economic expansion. It is a standard practice that after a period of time, the base year on which it is measured is changed, because the structure of the economy keeps evolving. The question is whether internationally-accepted practices are being used in India. It is indeed the case that it is being done. In fact, change in the base to 2011-12 is entirely within the internationally-accepted practice. Ironically, when it was first introduced, those who are now critical of it were very ecstatic back then, because it increased the growth rates for the years 2012-13 and 2013-14. But when it was subsequently backdated, it reduced the growth rates for previous years. Now, one cannot praise the measure when it increases growth rate and criticise when it lowers it. Therefore, the point is about having a consistent method in place.
If you took a medium and long-term view, what sense do you get of the Indian infrastructure space?
Looking at the level of infrastructure that has improved, we have done reasonably well over the last two decades. There are many areas that we do need to invest in. However, there is one piece of infrastructure that we should not forget, which is the legal infrastructure. The enforcement of contracts is now possibly the single biggest constraint to long-term economic development. This shows in other areas as well. The sanctity of those contracts and their enforceability has tremendous impact on other infrastructure projects. The future government has to begin work on smoothening this process in partnership with the judiciary. So, if you gave me Rs 100 billion and allowed me to spend it on anything that I desired for, I would spend it on upgrading our legal system!
- MANISH PANT