Mid-Year Economic Review: PPP is not the answer to India's development problems

Just four days ago, Nitin Gadkari, Union Minister of Road Transport, Highways and Shipping, made a strong case for public private partnership for infrastructure development. "Water, power, transport and communication are the four pillars of infrastructure development and public-private partnership (PPP) is the only viable alternative to complete and operationalize projects in these areas," he said while addressing an international relations conference on India's 'Look East, Act East' policy at Symbiosis International University.

PPP has become synonymous with deliverable development, especially in the last two decades when the so-called PPP movement began in India. Vinayak Chatterjee of consultancy Feedback Infra writes that it began probably when electricity generation was opened to private participation by the government in 1991 and when the National Highways Act, 1956, was amended in 1995 to encourage private participation.

India has continued with its unwavering faith in the PPP model of development where the project is funded and operated through a partnership between the government and private sector. Delhi and Mumbai airports are successful examples when PPP has worked out beautifully. But, as the Mid-Year Economic Review points out, the PPP model has been less than successful.

Amidst the publicity blitz of 'Make in India', the numbers present a sobering picture. The investment rate, which touched nearly 15 per cent of GDP in 2009, has not picked up. Investments inched back up to about two per cent of GDP in the third quarter of 2014 from near-zero in the second quarter.

The review points out domestic factors that have kept investments tepid. The "most important", states the review, is the "over-exuberant investment especially in infrastructure and in the form of PPPs."

Projects worth Rs 18 lakh crore, about 13 per cent of GDP, are stalled. Of these, nearly 60 per cent are in infrastructure. Corporate profitability, as a result, has declined. More than one-third firms have an interest coverage ratio of less than one, indicating that companies are borrowing to cover their interest costs. "Over-indebtedness in the corporate sector with median debt-equity ratios at 70 per cent is among the highest in the world," the review says.

Gross capital formation surged from 6.5 per cent in 2003/04 to 17.3 per cent in 2007/08 - investment was based on the perception that the economy would continue to grow at 8.5 per cent annually indefinitely and banks, especially public-sector banks, would lend to private sector investors in infrastructure. As the boom years ended and projects went awry, banks have been left saddled with distressed assets and are now wary of lending.

The review recommends that, for investment to pick up, the project backlog needs to be cleared and more than that the balance sheet problem of companies needs to be resolved. "But even if the backlog is cleared, there is going to be a flow challenge: attracting new private investment especially in infrastructure. The PPP model has been less than successful. The key underlying problem is allocating the burden from the past-the-stock problem that afflicts corporate and bank's balance sheets needs to be resolved sooner rather than later. The uncertainty and appetite for repeating this experience is open to question," the review says.

"It seems imperative to consider the case for reviving public investment as one of the key engines of growth going forward," the review says. But fiscal room for public spending is somewhat constricted, considering the budget was over-optimistic in its revenue projections - the review pegs revenue optimism at Rs78,000 crore - and expenditure will have to factor in the carry-over subsidies from the past which could range from 0.3 to as much as one per cent of GDP.

The forthcoming budget will be a tougher one, not only fiscally, but also in terms of vision and its deliverability-expectation is of innovative thinking in translating much of the Modinama into reality.