Infrastructure Needs A Fillip

In the aftermath of the crisis of 2008-09 the government of India boosted fiscal spending in order to counteract the sharp slowdown in demand. To a large extent its measures succeeded in preventing a steep decline in GDP growth. But there were two flaws in the government’s policies. One, it continued with its expansionary fiscal policy for far too long. And two, its spending was aimed at boosting household expenditure rather than at augmenting the economy’s productive capacity. The consequences of these policies are before us now. Global growth is slowing once again. But with fiscal deficit already high the government cannot repeat its expansionary fiscal spending of the last crisis. Having boosted consumption in rural areas through employment guarantee programmes such as MNREGA without enhancing agricultural productivity, we now face high food inflation. And owing to persistently high WPI inflation (owing to, among other factors, the lack of capacity augmentation in manufacturing), the central bank can’t begin to cut policy rates until inflation moderates decisively, despite widespread signs of slowing global and domestic demand. At this juncture, the only option left before the government is to try and boost private investment in infrastructure. This will not be easy. Corporate confidence is at a low in an environment where demand is declining while high input costs and high interest rates are squeezing their profitability. Another obstacle arises from the nation’s state of politics. Since November 2010 (when the 2G scam broke), the government has been so engrossed in fighting corruption-related charges that policymaking and imple

This article was originally published on December 29, 2011.