Mixed view on infrastructure

Data indicate the number of stalled projects has climbed in the recent past but there has been some progress in road building

Growth is generally driven by a combination of skilled workforces, better infrastructure and good policy. A good policy environment and decent infrastructure can be created relatively more quickly, and together these two bring faster gains as well.

It is an article of faith that a better educated population can generate more gross domestic product (GDP). However, it cannot happen without the other two factors being in place. Given poor infrastructure and stifling policy, a well-educated workforce might not be able to deploy its skills to optimal effect. Ruchir Sharma of Morgan Stanley points out that Russia has the world's best educated population, with the most per capita years of schooling. But, Russia doesn't have high productivity, or GDP growth.

At its best, education might still take decades to make a positive difference to growth. It takes 12 years to impart high-school education. So that is the minimum time period before payoffs from investments in primary education. Skilling up middle school and high-school students for using high-end construction equipment, or doing medical lab tests, could give quicker payoffs. Even that takes years.

The Asian tigers like China, Taiwan and South Korea all achieved explosive growth while still coping with widespread illiteracy. In China, a combination of reforms and building up physical infrastructure set up the preconditions for growth. Taiwan and Korea had additional inputs such as the government giving cheap loans to private enterprise.

Unfortunately, India has a poor record in all three areas. Primary education is poor in quantity and quality. Many leave in middle-school. The workforce lacks the requisite skills to work as paramedics, lab-assistants, high-end construction workers, etc.

On the reform front, every government since the desperate days of 1991-94 has been reluctant to undertake policy reforms. Red tape and parliamentary logjams slow down legislation processes. The justice or arbitration system is also badly clogged.

This government has so far delivered little in the way of concrete reform, though it has said some of the right things. The passage of the goods and services tax (GST) Constitutional Amendment Bill is merely an early step. There's a long way to go for actual implementation. It will take 12-18 months before the new tax system works smoothly. This Lok Sabha term could well be finished before the benefits from GST accrue.

The rest of the current government's policy record is ho-hum. The National Democratic Alliance (NDA) wasted much equity on a land reform ordinance, which did not fly. It took two years to re-formulate civil aviation policy and an oil & gas exploration policy. It has refused to remove investment barriers in retailing. It has avoided enacting a privacy law that would offer clarity on deploying Aadhaar and other biometric systems, and on the use of location data and metadata. The coal auction process has run into controversy and it has set very high base prices for telecom spectrum.

Physical infrastructure is creaking. Many projects remain stalled. The available data indicates stalled projects have climbed in the recent past. Regulatory clearances and land acquisition remain persistent problems. The banking system is nearly broken and massive recapitalisation is needed.

In telecom, all the operators are trying to cope with large debts and high spectrum prices, and the auctions have been postponed again. The port and shipping sector will only recover when there's an uptick in global trade. The railways are also struggling to manage a difficult financial situation.

It's not all doom and gloom, of course. There has been some progress in road building. The power sector has seen another bailout scheme, UDAY. Which, combined with better coal production, has helped improve the power situation, at least temporarily. In oil and gas, low prices have meant a revival in city gas distribution, liquefied natural gas imports, pipeline building, refining, etc.

So, infrastructure is a mixed picture, with some bright spots. If GST comes in on top of a rising tide, there will be less pain in the initial period. Some more delivery on the infrastructure front could create preconditions for better tax collections.

The monsoon has, so far, been good. It's hard to say this with much confidence yet, but a cyclical uptrend could, with luck, be on the cards. If the pace of activity does accelerate in some infrastructure segments, construction will pick up, and so will commodity sectors like cement and steel. Those areas are now worth keeping under observation.