If the minister had stuck to his old fiscal deficit target of 3.6 per cent of Gross Domestic Product, he would have had to Budget for a fiscal deficit about Rs 4,500 crore (Rs 45 billion) less than the revised estimate, notes Ashok Lahiri
In Budget 2015-16, Finance Minister Arun Jaitley mentions increasing investment in infrastructure to match the country's growth ambitions as one of his four main challenges.
Private investment in infrastructure, including through public-private partnerships, is weak.
Thus, he sees an urgent need for stepping up public investment. But there is also the need for fiscal consolidation, another of his four challenges.
As a compromise, given the improvements in the economy, he has attempted to open up fiscal space by postponing the target date for reducing the fiscal deficit to three per cent of gross domestic product from 2016-17 to 2017-18.
He proposes to use the additional fiscal space for infrastructure investment.
With growth projected at 11.5 per cent, nominal gross domestic product is Rs 141 lakh crore (Rs 141 trillion) in 2015-16.
If the minister had stuck to his old fiscal deficit target of 3.6 per cent of Gross Domestic Product, he would have had to Budget for a fiscal deficit about Rs 4,500 crore (rs 45 billion) less than the revised estimate for 2014-15.
Instead, by settling for a fiscal deficit target of 3.9 per cent of gross domestic prooduct for 2015-16, he has bought elbow room of Rs 42,327 crore (Rs 423.27 billion) in the fiscal space.
The pressure on revenue expenditure appears to be immense.
With his budgeted revenue and disinvestment receipts for 2015-16 Rs 53,431 crore (Rs 534.31 billion) higher than 2014-15 RE and his revised road map for fiscal consolidation, the minister got an additional Rs 95,758 crore (Rs 957.58 billion), or $15.5 billion, to spend in 2015-16 compared with 2014-15 RE.
The pressure of revenue expenditure did not allow him to allocate anything more than about a half of this extra to capital expenditure.
Going forward, as he mobilises more revenues, Mr Jaitley will continue to face the challenge of rationalising revenue expenditure to open up fiscal space for added infrastructure investments.
But infrastructure investment needs to be stepped up to as much as $200 billion a year or more.
The pace of fiscal restructuring is unlikely to meet this requirement. Thus, India will have to rely heavily on private investment and PPPs in infrastructure. Three statements in the Budget and the Economic Survey are notable in this context.
First, in his Budget speech, the finance minister has mentioned that capital expenditure of the public sector units is expected to increase by Rs 80,844 crore (Rs 808.44 billion) to Rs 3.17 lakh crore (Rs 3.17 trillion) in 2015-16.
Is he hinting at emulating the Chinese model of using funds from state-owned enterprises for promoting infrastructure?
A welcome move, as long as such funds are utilised without political interference in project choice and design, and determination of financial viability.
Second, the minister has announced the setting up of a National Investment and Infrastructure Fund .
It will have an annual inflow of Rs 20,000 crore (Rs 200 billion).
The model will work through leveraging -- the NIIF will raise debt and invest it as equity in infrastructure finance companies such as the Indian Railway Finance Corporation and National Housing Bank, who, with a stronger equity base, in turn, will raise more debt to invest in infrastructure.
The differentiated roles of the India Infrastructure Finance Company Ltd set up in 2006 and the proposed NIIF hopefully will be clarified soon.
Third, the minister has announced that the PPP mode of infrastructure development will be revisited and revitalised to rebalance risks away from the private party and towards the sovereign.
The Economic Survey expands on the idea. It points out that given weak institutions, the private sector taking on project implementation risks involves costs (delays in land acquisition, environmental clearances and variability of input supplies, etc), and suggests a bigger devolution of risks to the public sector.
Indeed stalled infrastructure projects, and stressed assets on banks' balance sheets as a result thereof, are worrisome factors.
The survey points out that there were 80 stalled projects in the electricity sector alone -- 75 in generation and five in distribution.
And all were actually PPP projects! Air transport, roads and shipping were the other big contributors to the stressed assets on banks' balance sheets.
The survey goes on to emphasise a big public sector-led push in railways, indicate some modifications in existing design of PPP contracts, suggest a high-powered Independent Renegotiation Committee for deals gone sour, and a better clean-up policy in the form of bankruptcy laws and guidelines for asset restructuring.
It endorses combining construction and maintenance responsibilities to incentivise building quality, and recommends that states be allowed to experiment with concession agreements. Indeed many of these suggestions when implemented are likely to yield tangible benefits.
But there may be merit in being cautious in our approach to transfer more risks to the public sector.
This is particularly so because of the vulnerable fiscal condition and the relatively short period that PPP, as a model for infrastructure development, has been in vogue in this country.
In India, a late-starter, the historic shift to PPP took place only in January 1997, when the Infrastructure Development Finance Company was set up. Enabling legislations such as the Electricity Act, 2003, also came only about a decade ago.
Prior to the mid-1990s, barring for some historic exceptions, such as the Calcutta Electric Supply Company or the Brihanmumbai Electric Supply and Transport Undertaking in Mumbai, the public sector fully financed, owned and managed infrastructure projects and took all the associated risks.
The role of the private sector was restricted to the traditional procurement model.
The state engaged the private sector only to build (and often design) the asset. The asset was ultimately owned and operated by the state.
Experience with the state taking all the risks was not particularly happy.
With the state taking all the traffic risks in railways, money went for connecting VIP constituencies by rail rather than expanding congested rail corridors with maximum freight and passenger needs.
Inefficiencies, delays and failures took years to come to public notice. Recently, regulatory reasons accounting for the bulk of stalled infrastructure projects in the public sector came to the public notice expeditiously.
Perhaps without similar private sector projects stalled by regulations, the problems would have surfaced only after a number of years.
Implementing an efficient PPP model requires building up capacity to accurately specify service quality in the contract, to distinguish between viable and unviable bids, and to respond to economic shocks or unanticipated demand shortfall.
Such capacity can be built only through learning by doing.
Let a thousand flowers bloom and let the states experiment with different models of PPP.
Let us hasten slowly in a premature return to the old era of the state taking too much risk.
In any case, the state hardly has the financial capacity to do so.
Ashok Lahiri is an economist