Editorial 1: Betting on national champions model of infrastructure development work
Context:
- Providing functional and efficient infrastructure has been struggle for developing economies
- As Infrastructure in emerging economies represents as a national aspiration good, a barometer of national progress, a mechanism for job creation, a vehicle for crowding in private investment, and more
- Infrastructure has seemingly become both a demonstration good and a necessity.
Challenges related to infrastructure creation
- The two biggest constraints on infrastructure provision are
- One, it needs to be built to a minimum scale, which makes it expensive; and
- two, it often has a public good component which makes the social value of infrastructure higher than its private value to individual users.
- Hence, private investors tend to find such investments relatively unprofitable.
A Vicious cycle which constraints the investment in infrastructure:
- The traditional approach to financing infrastructure has relied on tax revenues or government borrowing.
- But this introduces elements of a vicious trap: Poorer economies generate less tax revenue which limits infrastructure investment.
- This reduces returns to private investment with further spinoffs that affect the growth of the economy and keep the country poor.
- Attempting to break the cycle by increasing public borrowing domestically tends to crowd out private investment.
How to come out from this vicious cycle?
- One possibility is to incentivise private sector participation by providing targeted subsidies for infrastructure investments. India tried this in the early 2000s by introducing the Public-Private-Partnership (PPP) model.
- The arrangement entailed the government facilitating acquisitions of land and primary commodities, as well as access to credit from public sector banks for infrastructure projects.
- With these implicit and explicit subsidies, the private sector got to construct and run the projects for a designated period of time.
- While a lot of infrastructure did get built under the programme, the PPP model ended in an avalanche of non-performing assets with public sector banks, private sector bankruptcies, accusations of widespread corruption, and a change in government in 2014.
- Therefore, government has 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 new model get around the infrastructure financing constraint?
- There are three new aspects to new infrastructure development model.
- First, infrastructure projects take a long time before they start generating returns which also tend to be low.
- To incentivise investment in such projects, there is need to give control over existing projects with strong cash flows. This helps the conglomerates to achieve their targeted aggregate returns while keeping negative cash flow projects on their books.
- Second, the public association with the government’s national development policy generates a competitive advantage for the infrastructure developer in getting domestic and foreign contracts. This too guarantees some stable cash flow.
- Third, access to some cash-rich projects allows these national champions to borrow from external credit markets by using these entities as collateral. This lowers the cost of finance of the other projects while also freeing up domestic savings for private investment. This is clever and innovative.
Issue with new infrastructure development: It has basically four concerns
- First, the direct association of these conglomerates with government policies creates the potential for markets and regulators to treat them as too big to fail.
- This opens the door to market hysteria, delayed discovery of problems, and spillovers of sectoral problems into systemic shocks. This has been brought into sharp relief by the recent troubles of the Adani companies.
- Second, the market concentration it encourages can often be bad for efficiency and productivity at the economy-wide level.
- Third, the longer it takes for projects to generate large cash flows, the greater will be the need for the state to provide the champions with access to additional cash flows. That risks turning the country into an industrial oligarchy.
- Fourth, the optics of an uneven playing field in terms of market access and selective regulatory forbearance can become a significant deterrent for foreign investors, an outcome that India can ill afford.
Developing the power sector infrastructure which is key for development of other sectors
- A deeper issue is with regard to the proposition that infrastructure provision is the solution to India’s growth aspirations.
- The prevailing thinking is that once the ports, roads, power, etc. are in place, private investment will follow. If the experience of the infrastructure investment boom of the early 2000s is any guide, this assumption is problematic.
- The problem in the power sector was not generation but rather the inability of the power distribution companies to recover payments. That is a problem of effective demand.
Conclusion:
- India is at an inflection point in its development path. It has bet on a development model based on a domestic demand-driven production structure, powered by soft and hard infrastructure that is heavily concentrated in a few hands.
- If it works it will be touted as the next-generation Asian model. Else, it will provide a salutary tale of caution for many generations.
- Therefore, there is need to increase the private players participation in developing the infrastructure through PPP model.
Editorial 2: Iran-Saudi deal: What the gambit can mean for China, West Asia, and India
Recent Context:
- Recently, The China-brokered Saudi-Iran deal which seeks to secure long-term economic interests as well as lay the foundations for political influence in the region, to rival the role that the United States has traditionally played.
How deal is expected to strengthen the China’s position
- The March 9 announcement of the deal came when the National People’s Congress session confirmed President Xi Jinping’s third term.
- The Iran-Saudi deal appeared to usher in with a bang Xi’s new 24-character slogan for China: Be calm, be determined; seek progress and stability; be proactive and go for achievements; united under the Communist Party; dare to fight.
- Earlier From 2014, the two countries had been at each other’s throats in a proxy war in Yemen, where Iran is backing the Houthi rebels, and the Saudis lead a coalition of Gulf states backed by the US. A UN-negotiated truce came into effect in April 2022, and the fighting has not resumed even after the six-month ceasefire lapsed last October.
- Under the deal, both parties are expecting that the deal sealed in Beijing may lead to a lasting peace in Yemen, and also end proxy Saudi-Iran hostilities in Lebanon, Syria and elsewhere in the region.
- It is significant that China is also a signatory to the deal, called “joint trilateral statement”, projecting itself almost as a guarantor of the terms: resumption of diplomatic relations and reopening embassies and missions within two months; respect for the sovereignty of states and the non-interference in internal affairs of states.
The deals aim to normalise relation between Saudi and Iran
- Both Saudi and Iran had compelling reasons to normalise relations.
- For Saudi, the frosty relations with the Biden Administration; the absence of American security guarantees against Iran as made clear by the Trump administration after the Houthis successfully targeted its oil facilities in 2019; and China’s rising profile in West Asia at a time of lowering American engagement in the region.
- For Iran, which signed a long-term strategic agreement with China in 2021, the isolation that came with the nuclear sanctions; more importantly, the coming together of archenemy Israel with the UAE and Bahrain in the Abrahamic accords with the apparent silent support of the Saudis; plus its own domestic difficulties with the uprising of women against hijab rules.
- Last August, Iran normalised relations with UAE and Kuwait. Saudi was the next step.
World’s response
- The US welcomed the agreement immediately despite its confrontational relations with China, saying if it brought lasting peace, it did not matter who brokered it.
- At the same time, it sought to play down the assessment of diminished US influence in the region. Sections of the US establishment are betting that this pact of “three autocracies” will fail.
- Minister Binyamin Netanyahu’s foreign policy. He claimed credit for the 2020 Abrahamic Accords, and projected himself as the only Israeli leader who could bring together an Arab-Israeli coalition against Iran.
- The new pact has heightened Netanyahu’s domestic political troubles, with opposition leaders blaming his ultra far-right government for alienating Arab friends.
India’s week-long silence
- India taken aback at China’s new avatar like the rest of the world, took a week to break its silence on the deal brokered by its principal adversary in a region where it has invested much diplomatic energy over the last decade.
- India has not clearly represented its stand on the deal. However MEA officer said that “We have seen the reports regarding this. India has good relations with various countries in West Asia and we have abiding interests in the region,”.. Along with “India has always advocated dialogue and diplomacy to resolve differences”.
Conclusion:
- China’s big-ticket diplomacy in the region is sure to impact the I2U2 (Israel-India-UAE-US) grouping
- It calls for India to work on its ties to the region independently of the US (for instance with Iran), and in ways that project its civilisational and cultural links and the positive contributions of the Indian diaspora.