No money for infrastructure? Blame it on subsidies

The funny thing is that the government has the money - but it is going into subsidies that Mr Jaitley has chosen to leave untouched, says T N Ninan.

The new government is full of good intentions about getting investment going. It justifiably wants to increase investment in the railways because, as the railway minister more or less said, the system is in a shambles. 

It also wants more roads, ports, metro transport systems, airports, broadband lines to every village, industrial corridors, smart cities and more - all of which the finance minister mentioned in his Budget speech.

The problem is that it finds itself constrained by the lack of resources.

The railway minister held out the weak and unconvincing promise of foreign investment and public private partnerships (PPPs) making up for the government's lack of funds; the finance minister simply doled out small amounts of cash that were clearly inadequate.

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The funny thing is that the government has the money - but it is going into subsidies that Mr Jaitley has chosen to leave untouched.

Out of the vast sums that the government proposes to spend this year, barely one in 15 rupees will go towards capital expenditure, whereas more than twice as much will go into subsidies.

If the subsidies reached the poor, there would be some justification for this skew, but everyone knows that is not the case.

Whether it is diesel or cooking gas, the wastages in the food subsidy programme or even the fertiliser subsidy that mostly benefits the larger farmers, the poor (who, remember, are mostly landless) are not the primary beneficiaries even if everything is done in their name.

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Since this is not a secret, it should be obvious as to whether subsidies or investment in infrastructure should get a higher priority. And since the reality is the opposite of what it should be, one would have expected the new government to re-order spending priorities. Regrettably, it has failed to do so. 

It wasn't always like this. As recently as 2007-08, for instance, capital expenditure was 70 per cent bigger than the subsidy bill, whereas now it is 53 per cent smaller.

Put another way, subsidies are up from 1.5 per cent of gross domestic product (GDP) seven years ago to two per cent, whereas capital investment financed by the budget has shrunk from 2.5 per cent of GDP to less than one per cent.

You can blame the last government for having engineered this massive shift in spending priorities, in the name of inclusiveness - except that it is more inclusive to create jobs than to give handouts.

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Investment in large rail and road projects involving construction work creates real work at better wages; it also creates real assets while generating demand for intermediate goods like steel and cement - and that generates its own employment, plus tax revenues.

The new government implicitly understands all this, but has not acted on its understanding. 

It is not enough to say that private and foreign investment will step in to fill the gap in government resources; the bulk of the investment in core infrastructure areas is almost always done with public money, in almost all countries.

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Devices like public private partnerships serve up to a point but, as was noted in the Budget speech, India already has the largest number of such PPP projects in the world (900 of them), and they have been bedevilled by disputes, as well as allegations of corruption.

If you can fix the problems with the PPP model, by all means do so because private investment is necessary and indeed should be welcomed for a variety of reasons. But that is not a substitute for putting the government's money where it should be put.

Announcing a new body that will look at government expenditure is simply kicking the ball down the road; the goals have to be scored now - or another year will be lost.

Please click here for the Complete Coverage of Budget 2014 -15