Comment on “Infrastructure and Connectivity in India: Getting the Basics Right”

Abstract

Singh and Kathuria (2016) give a good overview of India's infrastructure challenges by describing how inefficient and costly its infrastructure services are in India. The authors also give clues for addressing those challenges and attempt to show ways to realize the potential of connectivity in facilitating economic integration within India as well as with other developing economies in Asia. While appreciating the paper's findings, I would like to contribute to the discussion by referring to some missing elements from a practitioner's perspective. My first point is related to the implications of connectivity. As is rightly recognized, poor and high cost infrastructure services remain one of the most serious impediments to India's participation in global supply chains and its attractiveness as a destination for foreign direct investment (FDI). Therefore, bridging connectivity gaps and reducing cross-border logistics costs could be a necessary condition. But it is not necessarily a sufficient condition for positive gains for Indian producers and exporters. The poor infrastructure adversely affects the competitiveness of domestic firms through high transport costs effectively imposed as “a tax on exports.” On the other hand, export-oriented sectors in major trading partners could gain from India's large domestic markets. In fact, according to the Ministry of Commerce and Industry India's imports from ASEAN were $45 billion, while its exports remained at $32 billion in 2014/15. The merchandise trade deficit has tended to widen in ASEAN's favor. I would like to know how to reduce India's high domestic logistics costs because of its highly fragmented governance structure. Another question is how the services sector's strength and potential could give India a chance to enhance its trading opportunities despite the emerging constraints on information and communications technology (ICT) connectivity. Better connectivity could expand India's trade gains only when India's competitive disadvantages are corrected and advantages are maximized. My second point is on the efficiency and effectiveness of infrastructure. Policy makers should focus more on the efficiency and effectiveness of network infrastructure. We should avoid just cheerleading the huge demand for infrastructure investment and financing. Instead, we should shed light on the ways to allocate limited resources among priority areas with maximum efficiency and effectiveness to address India's pressing needs. One of the striking facts is that the share of road transport in freight traffic in India is almost twice that of the United States, while only 2% of the total road length carries 40% of all road traffic (National Transport Development Policy Committee, NTDPC, February 2016). Inefficiency is caused by an overemphasis on road development with the resulting modal share increasingly skewed towards roads. The diversion of freight and passenger traffic to roads from railways gives rise to larger freight and environmental costs. My third point is on the financing options and limits to public–private partnerships (PPPs). Infrastructure financing poses a major risk to the soundness of commercial banks. The growing trend of stressed assets mainly from PPP infrastructure projects has reached a critical point with the non-performing asset ratio at over 20%. Takeout financing could be a remedy, but shifting from bank financing to bond financing should be a fundamental cure. In this context, bond market development and a mechanism to connect banking with bond markets are two of the priority policy challenges. Should project bond markets be in place, credit enhancement could temporarily help mobilize insurance and pension funds for infrastructure financing with a resulting risk transfer from such funds to guarantors. Municipal bond markets also have a potential. However, the cases such as revenue bonds issued by local governments in the United States relied heavily on the credit enhancement provided by monoline insurers which became marginalized after the Global Financial Crisis in the mid-2000s. The fundamental constraints are the limited supply of bankable infrastructure projects. Effective utilization of private sources of finance for infrastructure development depends on the commercial viability of projects. As Singh and Kathuria suggest, both “fair return to private investment” and “protection of consumer interest, including safety and affordability” are the key ingredients for successful PPPs. But balancing both is not an easy task, particularly given India's socio-economic environments. We should note that the inherent conflict between the public and private sector priorities as well as the inevitable contingencies could entail risks for the government to eventually assume an excessive fiscal burden through subsidies or in the form of contingent liabilities (Nishizawa, 2011). In essence, the cost of building, operating, and maintaining infrastructure facilities eventually has to be either paid for by the users or charged to taxpayers. Commercial banks are now paying the cost of excessive risk taking on less-bankable projects at best. I agree with Singh and Kathuria's emphasis on the importance of both hard and soft infrastructure for enhancing trade flows and growth.