Will the national champions model of infrastructure development work?

General Studies Paper 3

Context: Infrastructure in emerging economies like India has seemingly become both a demonstration of good and a necessity.

Importance of Infrastructure in emerging economies:

• Simultaneously works as a national aspiration good,
• A barometer of national progress,
• A mechanism for job creation,
• A vehicle for crowding in private investment, etc.

Constraints on infrastructure provision are:

• Expensive, because it needs to be built to a minimum scale.
• Often has a public good component,which makes the social value of infrastructure higher than its private value to individual users → making it relatively unprofitable for private investors.
• The traditional approach to financing infrastructure→ tax revenues or government borrowing.
• Vicious trap→ poorer economies generate less tax revenue → increasing public borrowing domestically → crowd out private investment → limits infrastructure investment, growth of the economy → keep the country poor.

Indian government’s efforts to come out of this vicious trap?

• Incentivise private sector participation by providing targeted subsidies for infrastructure investments.
  • In the early 2000s, thePublic-Private-Partnership (PPP) model was introduced.
  • While the program did result in the construction of a lot of infrastructure, it ended in an avalanche of non-performing assets with public sector banks → widespread corruption → change in government in 2014.
• The “national champions” model:It modified the  PPP approach by assigning the bulk of the infrastructure provisioning for roads, ports, airports, energy, and communications to a few chosen industrial houses.

How does this model overcome the difficulty of financing infrastructure?

• Incentivising national champions to build the projects identified by the government.
• New aspects of the national champions model:
  • Champions given control over existing projects with strong cash flows → helps them to achieve targeted returns and borrow from external credit markets → lowers the cost of finance, freeing up domestic savings for private investment
  • The public association of the champions with the government’s national development policy → generates a competitive advantage in getting domestic and foreign contracts.

Issues with the national champions model:

• The direct association of conglomerates with government policies→ markets, regulators treat them as too big to fail → delayed discovery of problems, spillovers.
• The longer it takes for projects to generate large cash flows, the greater will be the need for the state to provide access to additional cash flows.
• This risks turning the country into an industrial oligarchy.
• An uneven playing field in terms of market access, regulatory relaxations → a significant deterrent for foreign investors → bad for efficiency and productivity at the economy-wide level

Dilemma India is facing:

• Can infrastructure provision be the solution to India’s growth aspirations?
• India is at an inflection point in its development path.
• Way ahead: A development model based on a domestic demand-driven production structure, powered by soft and hard infrastructure.