Opinion | Where the government’s policy package could be found lacking
4 min read . Updated: 05 Sep 2019, 11:41 PM ISTThe 32-point plan is a step in the right direction but the moves on infrastructure and clearances of dues require fine-tuning
The most significant economic policy event in the first 100 days of the current government’s swearing-in was the document released by the finance minister listing 32 growth-boosting measures at a press conference on a Friday evening two weeks ago. Its significance lay in the government taking cognisance of the growth slowdown, and the need for prompt action to combat it. It was a mixed bag of selective countercyclical demand boosts (lifting the government ban on purchase of new vehicles) and long-term structural reform (strengthening the market for corporate bonds). There were a few reversals (decriminalizing defaults in corporate social responsibility), and administrative measures to lessen tax harassment, which recognized the need to improve the mood in corporate India.
Altogether, the package was a move in the right direction at a difficult time, when a combination of sectoral downturns (automobiles, telecom, aviation) has coincided with a number of structural chickens coming home to roost. I will focus on just two worry points.
The first is number 26 on the list, which promises investment of ₹100 trillion over five years, to be monitored by an inter-ministerial task force. No one can quarrel with the intent or scale of this assault on the country’s infrastructure deficit. The question is how it will be financed and processed.
Clearly, so large an expenditure cannot be financed entirely through the public exchequer. If evenly spread, it calls for ₹20 trillion during each of the five years. If front-loaded to combat the present slump, the asking sum for the current year—FY20—will be even greater. In the budget provisions for FY20, capital expenditure is budgeted at ₹3.4 trillion. Internal and extra-budgetary resources of the railways and other public sector enterprises, are budgeted at ₹5.4 trillion. Adding the two, the combined capital expenditure at the Centre is broadly set at ₹8.8 trillion. This is less than half the ₹20 trillion envisioned.
The problem is not just a matter of financing this (wholly laudable) vision. There is a return to a pre-1991 mindset, in which an inter-ministerial group is entrusted with the task of overseeing this proposed infrastructure programme. Let us not forget that public sector banks were reduced to their present state by large infrastructure loans, endorsed by the government. This is a historical legacy from the pre-1991 days, when a licensed project was automatically funded with no further diligence by lending institutions. Government approval was equated to commercial viability. Because of this, the capacity for risk assessment was very weak in India when the 1991 reforms happened. Banks and rating agencies had to fall back upon very small numbers of skilled assessors, who were further shouted down by cosy connections in the system. We need look back no further than the September 2018 Infrastructure Leasing and Financial Services (IL&FS) fiasco to see rating failure.
To conclude, the pipeline of infrastructure projects needs to be finalized not by an inter-ministerial task force, but by finance professionals, skilled at assessing market, credit and operational risks, who can get back to the government after their deliberations lead them to determine the viability gap funding required.
The second point I want to focus on is the wholly commendable stress in the growth boosting document on curbing delayed payments by the government for goods or services received. The intent to correct this is mentioned in three places in the document. Item number 18 promises a decision within 30 days on the recommendations of the U.K. Sinha committee on delayed payments to medium, small and micro industries (MSMEs). The Union budget speech promised an online payments portal for MSMEs. Why limit the portal to MSMEs? If all dues could be set up on a public portal, with a guaranteed maximum time limit to payment, nothing more is needed. There is no need for payments to be monitored by an already severely overburdened Cabinet Secretariat (item number 24).
The third reference is item number 25, announcing a minimum of 75% payable on arbitration awards involving government or central public sector undertakings, again to be monitored by the Cabinet Secretariat. Referral to arbitration has been the favoured route of government departments overseeing infrastructure development to justify delayed payments. The IL&FS default was precipitated inter alia by the rejection of a highway they had built as substandard, and referral to arbitration. Why was it substandard, if the monitoring schedule had been adhered to?
After the goods and services tax (GST), delayed payments from the government for construction projects have had an even sharper bite. Prior to GST, no service tax was leviable on services like construction sold to the government. Now, GST is payable at the time of submission of the invoice, and the tax (still not received in cash) is due (in cash) to the government. Receipt in cash could take as long as a year, possibly much more if the case goes into arbitration. Construction companies have responded by delaying payments to suppliers of inputs, such as cement and steel, and in many cases, by suspending further work altogether. Thus, a disease originating in the government, got communicated through the system.
The government needs to set its payments house in order. If the transfer from the Reserve Bank of India, over and above the budgeted sum, of ₹58,000 crore, is used to make stalled payments flow again, that in itself could be a major solution to the current slowdown, without adverse deficit consequences.
Indira Rajaraman is an economist
