Don't rejoice welfarists, Jaitley's policy doesn't mark failure of liberal economics

Does the advocacy, in the government’s Mid-Year Economic Analysis, of a public investment-led economic revival mean an acknowledgement that a private sector-led growth model is inherently flawed? And a return to the welfarist economics model that India had decisively moved away from in 1991 and which the previous government tried to bring back?

There is a barely-concealed we-told-you-so glee among the welfarists, who see this as a vindication of their stand that India’s rejection of the Keynesian model was wrong. They are even more delighted that a document authored by a believer in the market economy - chief economic adviser Arvind Subramaniam has made this point.

Unfortunately, it is this group that is wrong. The public investment-led revival that Subramaniam is advocating is not the dig-ditches-fill-them approach that came to mark the interpretation and execution on the ground of the Keynesian model. Nor does it involve reckless government spending to put more money in people’s hands. What the Mid-Year Economic Analysis talks about is a very specific, focussed intervention in the infrastructure sector. One that is much needed.

The document talks about the need to get stalled projects going and what needs to be done for this - clearing bottlenecks in coal and gas supplies for power projects, faster environmental clearances and reforming land and labour laws. It then goes on to point out that even if these projects get off the ground, the issue of attracting new investment, especially in the infrastructure sector, will still have to be dealt with. It is in this context that it makes out a case for reviving public investment as one of the key engines of growth, “not to replace private investment but to revive and complement it"(emphasis added).

The document makes out a three-pronged case for public investment. It actually makes the most important point at the end - that manufacturing today is constrained most of all by poor infrastructure and there is a dire need to address this deficit.

But who is to bridge this deficit?

The second point the Mid-Year Analysis makes is that the private sector may not be interested in certain projects like roads, public irrigation and basic connectivity. This will promptly attract the accusation, by the left of centre group, of cherry-picking on the part of the private sector, but that would not be a very fair charge. These are, after all, public goods and it is the primary duty of the state to provide these. The free market fundamentalists will counter that the private sector will come into these areas provided the regulatory environment is conducive. But examples of large private investments in these are not numerous enough to bear this out.

Three, the document says that India’s public-private-partnership (PPP) experience has not been a very happy one. There can be no argument with this. India’s PPP model has been more oriented towards maximising revenue for the government rather than bringing in the efficiencies of the private sector or improving services for the public. The private sector has been left to deal with clearances and other procedural issues that are best dealt with by the government. Unfortunately, they are not. The main cause of delays in PPP projects is that the private firms are left to deal with sovereign clearances as if they were its problem alone, when actually these clearances should have been secured before the projects were bid out. That is the reason why there is a growing clamour for a return to the EPC (engineering-procurement-construction) model, where the project is funded by the government and private firms come in as contractors.

PPPs were a response to a situation where a cash-strapped government did not have the resources to invest in infrastructure. Unfortunately, they were becoming a default option. While PPPs generally bring in efficiencies of the private sector, this was missing in India because they were not designed properly. The private sector was bearing risks that should have been borne by the government.

Accepting the fact that the provision of public goods - physical infrastructure certainly is one - does not amount to doing a U-turn or a sign of inconsistency. Yes, there is a resource problem but part of it can be mitigated by re-orienting expenditure from revenue to capital expenditure. This cannot be done overnight - 80 percent of revenue expenditure is committed. But the government should do whatever is possible to reduce the burden of these commitments and play around with the remaining 20 percent.

As the revival is happening, let the policy infirmities that hamper the private sector’s involvement in infrastructure be removed. There are many, but they mostly revolve around the issue of sovereign clearances and risks which the government must bear and not push on to the private sector.

Badgering the central bank to reduce interest rates without addressing the infrastructure deficit (along with other regulatory issues) is not going to help.