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Infrastructure Development in India's Reforms
Montek S. Ahluwalia
It is a privilege to contribute to this volume honouring Dr
Manmohan Singh. I first met Dr Singh in 1970, when I was a
very young staff member of the World Bank and it was at his
encouragement that I later left the World Bank to join the Ministry
of Finance as Economic Advisor. Many years and two other
assignments later I returned to the Finance Ministry in 1991, a
few months after Dr Manmohan Singh became Finance Minister
and thus had an inside view of economic reforms which were to
become inseparably linked with his name. It is a manifestation of
this linkage that when my good friend Swaminathan Anklesaria
Aiyyar, then Editor of the Economic Times, coined the term
'Manmohanomics' to describe the economic rationale of the new
policies, it quickly gained currency, as if plain vanilla 'economics'
had been irretrievably appropriated by the other side!
The five years during Dr Manmohan Singh's stewardship of the
Finance Ministry saw a remarkable change in the mind-set of
those interested in economic policy. The reforms which were
initially seen as an unpleasant though necessary package to
stabilize the economy, began to be perceived as the only way of
raising India's hitherto modest growth performance to the 'high
growth — poverty reducing' combination enjoyed by many East
Asian countries. It is of course too early to pronounce whether
they will succeed in this objective, but the early results are
certainly promising. After a swift recovery from the 1991 crisis,
economic growth accelerated to an average of 7 per cent per
year in the three years ending in 1996-7, taking the average for
the Eighth Plan period, 1992-3 to 1996-7, to 6.5 per cent which
is significantly better than 5.6 per cent in the 1980s. India's
relatively closed economy has been made much more open to
trade and foreign investment, with none of the negative effects
feared by critics, and with every expectation of reaping efficiency
gains in future.
These successes notwithstanding, there are also some deficiencies which could limit the effectiveness of the reform
package. One such deficiency relates to infrastructure
development. Acceleration of growth from 5.6 per cent per year
achieved in the 1980s to East Asian levels of 8 per cent will
generate a massive demand for infrastructure services, such as
electric power, roads, ports, railways and telecommunications.
Since these services are all non-tradable, the additional demand
arising from faster economic growth has to be met by expanding
domestic supply in each of these sectors. 1 Furthermore, since
growth will in future occur in a more open trading environment,
with strong pressures to improve competitiveness, the quality of
infrastructure services will also have to improve significantly.
Indian industry will not only need adequate power supply, but
1
The term infrastructure is used more loosely in Indian official
literature and often includes tradable items such as steel, cement,
fertilizers and petroleum products. However 'important' they m a y
be, they are all importable and therefore cannot be a physical
constraint on the expansion of the economy hi die same sense as
non-tradables. Of course, the dependence on imports may pose
foreign exchange problems and this has to be viewed as part of the
strategy for managing the balance of payments. The expansion of
domestic supply of these items in that context has to be justified as
part of an optimal production response to balance of payments
problems, taking account of other possibilities of expanding
production of exports and other import substitutes.
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also high quality power, free of interruptions and voltage
fluctuations. Similar upgradation of quality is relevant for other
infrastructure services also. The economic reforms must
therefore be accompanied by a strategy for infrastructure
development which can meet the increased demand for
infrastructure services both in terms of quantity and quality.
Does India's reform programme have such a strategy for infrastructure development? This paper analyses the approach to
infrastructure development adopted in the reform programme
and evaluates performance in individual sectors. Some lessons
are drawn for the future from the experience thus far.
I.
STRATEGY FOR INFRASTRUCTURE DEVELOPMENT
public sector dominance, with the private sector playing only a
supplemental role.
Since the scale of construction in these areas is very large and
these are of direct and immediate benefit to large sections of the
society, the public sector will continue to play a dominant role in
the area and will have the ultimate responsibility of meeting the
demands. However if private initiative comes forward to
participate in creating such infrastructure like power plants,
roads, bridges, social housing, and industrial estates on
reasonable terms and with full protection of peoples interest
such initiatives must be positively encouraged.
Eighth Five Year Plan Vol. I, para 1.4.26.
Infrastructure problems were not the central focus of policy when
the reforms began in mid-1991. The agenda for reforms in the
early years was understandably dominated by crisis
management and the need for domestic and external
stabilization. The primary focus therefore was on reducing the
fiscal deficit to restore macro-economic stability and introducing
a package of efficiency-oriented reforms aimed at deregulating
the domestic economy, reforming trade and exchange rate
policies and liberalizing foreign investment policy. Besides,
infrastructure was not a significant constraint on short-term
economic performance at die start of the reform programme
because there was slack in the system with considerable scope
for expanding supplies of infrastructure services in the short run
through better utilization of existing capacity.
The Plan did break from past tradition by recognizing a possible
role for tire private sector in building infrastructure — the
Seventh Plan for example had made no mention at all of private
investment in infrastructure — but the scale envisaged for
private-sector activity was limited. This conventional approach
reflects the institutional arrangements then prevailing, with
infrastructure services being supplied almost exclusively by tire
public sector.
The first articulation of a strategy for infrastructure development
as part of the reform programme is to be found in the Eighth Five
Year Plan which was published at the end of 1992. Contrary to
the impression conveyed by many critics that tire reforms relied
excessively and unrealistically upon private investment for development of infrastructure, the strategy outlined in the Plan, as
the quotation below makes clear, envisaged a continuance of
The cautious approach of the Eighth Plan contrasts with the
rethinking taking place elsewhere in the world questioning the
traditional acceptance of the public sector as the natural supplier
of infrastructure services and shifting towards a positive
preference for private sector suppliers wherever possible. This
shift has been triggered by several factors. One is the general
disillusionment with public sector performance, which has
Electric power generation included some independent private
utilities supplying power to Ahmedabad, Mumbai and Calcutta,
but over 95 per cent of generation and distribution of electricity
for sale (i.e. excluding captive power generation by some large
industrial units) was in the Central or State public sector. Roads,
ports, railways and telecommunications were exclusive public
sector areas.
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created a perception that public sector operations are inherently
inefficient and comparatively insensitive to consumer concerns.
On this view, the public sector is a natural supplier of
infrastructure services only where the service involved is of a
basic nature, with relatively Sow expectations of quality and a
low ability to pay. As expectations of quality increase, with
corresponding willingness to pay for better services, it is
appropriate to shift to private sector suppliers. Privatization has
also been driven by technological developments in some sectors
which make it possible to introduce private sector suppliers
where it was infeasible earlier. The development of cellular and
wireless telephone, for example, makes it possible to have more
than one competing supplier for local telephone services
whereas earlier, economies of scale prevented introduction of a
competitor operating an overlapping wire-telephone network.
Even if full competition in all parts of the system is not feasible, it
is possible to 'unbundle' the system and introduce competition in
some segments. In the power, sector for example, electricity
distribution may have to be organized on the basis of a single
supplier for each area, because of the expense of creating an
overlapping distribution network, but there can be competition in
the generation of electricity with independent power producers
selling electricity to the distribution system on the basis of
suitable long-term contracts combined with spot sales. 2 Another
major factor triggering the shift to privatization is the tremendous
growth in capital markets and innovative means of finance which
makes it possible to finance large infrastructure projects despite
the long payback periods involved.
2
Advances in electronic metering in billing make it possible in the
U.K. for electricity distributing companies to optimize purchase of
electricity from competing suppliers quoting rates for electricity,
depending upon availability in different parts of the system, which
vary within the same day.
The economic rationale for private investment in infrastructure
has to be grounded in the expectation that private sector
suppliers, operating within a competitive framework, will reduce
costs to the economy and thus promote efficiency. It is important
to distinguish here between costs to the economy and costs to
the consumer. Public sector supply of infrastructure services
may appear cheaper for the consumer if the service is provided
at highly subsidized rates or, as in the case of roads, even free
of charge. However, low user charges in these cases are less a
reflection of economic efficiency than of hidden subsidies,
usually in the form of tolerance of large losses. Consumers pay
for these subsidies either directly in the form of higher taxes or
indirectly in the form of other government expenditure foregone,
but these costs are not always recognized. In any case
continuation of low-cost, public sector supplies is not an option
because our ability to bear the hidden subsidies involved is now
severely limited. Increasingly therefore infrastructure services,
especially of the higher quality variety, will have to be provided
on the basis of full cost coverage, whether through the public
sector or the private sector. Consumers consequently have a
direct interest in ensuring economic efficiency and if private
sector operations are more efficient, it is logical to devise
infrastructure strategies which encourage private investment in
infrastructure.
There was little discussion of these issues in the Eighth Plan
document, and certainly not enough recognition of the positive
need to introduce private-sector suppliers in order to achieve
greater efficiency or improve the quality of service. Telecommunications is perhaps the only sector where the Plan came
close to recognizing this aspect of privatization. Without a bold
initiative for allowing private enterprise in areas hitherto kept
as a preserve of the public sector it is apprehended that the
long term objective of improving telecom services in the country
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