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Saturday, October 25, 2014

The logjam in infrastructure investment

Quarter-on-quarter growth
of the non-seasonally adjusted value of
infrastructure projects that are classified as being `Under Implementation'
in the CMIE Capex database.

In the standard narrative, the first wave of infrastructure investment in India (2003-2010) choked owing to the ground-level difficulties of investment, including land acquisition, corruption scandals, contract disputes, etc. By this logic, if we solve these problems, we will have set the stage for the second wave of infrastructure investment. This is the sort of idea that motivated the `Cabinet Committee on Investment' in the late days of the UPA.

There is, however, another logjam which needs to be solved, that of infrastructure financing. In today's Indian Express, I worry about the short-term measures which were taken during the first wave. Each of them felt expedient at the time, but with the benefit of hindsight, they were mistakes. Instead of looking for more short-term expedient solutions, we need to solve the deeper problems of the financial system in order to break this logjam.

The second wave of infrastructure financing, that we now require, needs work on both tracks: fixing the foundations of the financial system so that well-incentivised developers try to invest, and fixing the ground level difficulties so that this investment actually turns into smoothly working operating assets.

Acknowledgements : My thinking on these questions has been greatly aided by Josh Felman (IMF), Gopal Sarma (Bain Consulting) and Suyash Rai (NIPFP). The phrase `the long run has caught up with us' is by K. P. Krishnan.

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