Private participation, efficient spending and curbing subsidies will help maintain growth momentum

India’s long-term growth prospects hinge on how we invest in the nation’s future. The key engines for India’s growth are our social and physical infrastructure, which require continued investments to accelerate growth prospects. CRISIL Research analysis reveals that between 2003-04 and 2010-11, budgetary spending on social infrastructure heads ( such as health and education) grew at a compounded annual growth rate (CAGR) of 18.7 per cent, ahead of CAGR of nominal GDP at 15.3 per cent. Spending on physical infrastructure (15.7 per cent) was nearly on par with nominal GDP during the same period. The challenge before the government right now is to sustain the present momentum in social infrastructure spends, while pumping financial resources into physical infrastructure. This requires a three-pronged approach: more private participation, especially in physical infrastructure such as power projects and ports, effective deployment of government funds and rationalising of subsidies and social welfare expenditure. This will result in inflow of private funds on one hand and savings on government spending on the other, which can be allocated towards areas that will help reap long-term benefits.

Let’s consider social infrastructure spends, which have been doing reasonably well but need to be sustained. In the period under analysis, spends in all four sub-sectors within social infrastructure— health, education, family welfare and scientific services — have grown faster than nominal GDP. The share of budgetary spending on social infrastructure in GDP increased from 4.1 per cent to 5.0 per cent over this period. Expenditure on social infrastructure picked up sharply after 2008-09 and overall spending in this segment grew at 24.5 per cent per year for the next three years. This positive momentum needs to be maintained. The development of these sectors critically relies on the government.

Within physical infrastructure, there is a dichotomy. Spends have grown particularly fast in urban development (CAGR of 28.9%), roads and bridges (22.1%) and rural development (19.4%). However, budgetary allocation towards crucial sectors like power projects (3.2 per cent), ports (12.0 per cent), irrigation (13.7 per cent) and railways (14.8 per cent) is lagging GDP. Overall, the share of physical infrastructure spending in GDP rose only marginally from 4.5 per cent to 4.6 per cent between 2003-04 and 2010-11.

Within physical infrastructure, one obvious solution is increased public sector thrust in areas such as irrigation and railways, and greater private sector participation in others, such as ports and power. For example, under the 11th Five Year Plan, private sector investments in power stood at only 37 per cent of the total investment in the power sector. To attract greater private participation in these sectors, the government first needs to remove policy bottlenecks related to fuel linkage, land acquisitions and other such contentious issues.

On the social infrastructure side too, return on government spending must be carefully monitored so that measurable results can be derived from every rupee spent. For example, according to the Planning Commission’s mid-term review of the 11th Five Year Plan (2007-12), school dropout rates in the country at the primary and elementary levels stood at 25.6 per cent and 43.0 per cent respectively. In other words, the issue here is whether classrooms are running full or empty. Reaping tangible dividends over the long term requires targeted, accountable and effective investments that get to the root of the problem.

Finally, there is also a pressing need to optimise subsidy and social welfare spends in a balanced and rational way. The considerable savings that will accrue from curtailing subsidies in fuel, fertilisers and food can be re-allocated to building much-needed infrastructure. The Kelkar panel recently called upon the government to prioritise and efficiently use available financial resources, which would potentially save up to $3.8 billion in planned expenditure, equivalent to about 0.2 percent of GDP. The panel’s recommendations, along with the proposed direct cash transfer of subsidies to its beneficiaries, will spur the move towards reducing subsidy expenditure significantly over the next few years and concurrently, making more funds available for much-needed expansion of infrastructure.

(The author is MD & CEO, Crisil)

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