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Reforming Infrastructure

Ushering in improved infrastructure across several sectors could become the much needed push to trigger an economic revival

Infrastructure is a big umbrella term that captures a wide range of areas, from institutes for vocational studies and sponsoring apprentice-ship programmes, to bridges, roads and highways, from software and skill development to physical hardware for tertiary economic activity.

Cold chains for food storage: With falling energy costs, there is a big trade-off between the (falling) cost of storing food vs the rising cost of producing it, (thanks to climate change). The components of these costs will change over time (but energy and transport logistics are the big items in food storage just now) and the various costs attached to climate change are not even fully known just now. But food is precious, and is going to get even more so, that is for sure.

Transport and logistics: This is a big area, and when we think of this, we tend to think road transport, but rail and shipping are very big game changers. The new thought process of inland water transport could be quite a dramatic new low-cost option. This is where the river-linking project, which otherwise sounds quite grandiose, could recoup much of its cost from the sharp reduction in transport costs that would accrue over the long-term.

Shipping and ports: Not enough has been done in this area, and we must note that world shipping costs are going to drop by half in the next 10 years, as almost all the ships in the world have to be renewed with fuel-efficient ships. This process has already set in, with massive losses being put into European bank portfolios because they are stuck with ships financed during the 2006-07 boom. That financing has not recovered the monies lent, because freight rates dropped in 2008 and are still 40-60 per cent below their all-time highs. Indian shipping, being relatively unlevered, will see big growth in demand and capacity, to take a bigger share of world shipping.

Urban renewal schemes: These would cover drainage and sewerage systems, which all need to be renewed with better piping. CI pipes need to be replaced with more corrosion-resistant hard plastics. Under-served towns need to see new installations. The 100-city programme is a step in the right direction. This is mostly an implementation issue for the new Government, rather than a creative new design. Most of these projects would be in the public sector; radical new ways of financing it with the public paying for such services, will not work well, because people are not amenable to paying for such municipal services.

Healthcare infrastructure: Rural healthcare is the creative challenge. The country has a robust private healthcare industry, which can find the money to grow, if there is a market in any particular location. But that is only in urban areas; rural and primary healthcare, especially healthcare insurance needs a huge fillip. Some kind of part-subsidy, or low-priced rural healthcare insurance that gives people access to superior facilities from the private sector, would be the right way. A fully public sector approach that tries to actually run hospitals for the poor will only make the problem worse. If malpractices in healthcare reimbursements (which are seen worldwide) can be controlled, it makes sense to subsidise healthcare insurance and let the market take care of the actual provision of services. This would require quite some courage, that needs to survive the periodic outbreak of small scams and frauds that will inevitably follow, but it is far better to avoid taking it all into the public sector, a vastly inferior option.

Education infrastructure: We have already seen the first wave of growth in this, with a burst of poor quality private schools that churn out unemployable graduates in a degree-selling explosion. Now we need to see the second wave of growth, where this infrastructure is used to build a higher level of quality in skills. This will need regulatory intervention, with the focus on vocational programmes, apprentice-ship schemes and on-the-job training. A pay-as-you-earn that incentivises institutes to create employability, with them being paid a part of the graduates' earnings, even as they teach modules based on actual requirements of industry, could be modelled on the German method of 'leasing' graduates to SMEs that provide skill-hubs.

Financial infrastructure: So much has been written about this, that I can only mention the major topics. It would take a book to deal with the opportunities here. But a good example is the case of health insurance mentioned above. The creation of a market, where, there is none, like in case of rural healthcare, is a good example. A system that cares for the risk embedded in healthcare for an individual, would ensure that he is able to afford the spikes in expenditure; this would create a market for rural healthcare, and the rest would be taken care of by the market.

There are many areas of financial risk, of volatility in earnings and expenditure streams, that need a financial intermediary to iron these flows for an individual: pensions, educational and child-rearing expenses, housing, unemployment (whether temporary or permanent), etc. Instead of handling this through 'hole-filled doles', it would make a lot of sense to create a (financial) industry that under-writes this risk for the populace. India could leapfrog the developed world in going straight to a market-based mechanism for the provision of 'social schemes' through subsidised payment schemes that leave the actual provision of services to the private sector.

All in all, an increase in economic productivity that does not use capital (or doles) and converts revenue deficits into capital subsidies (or direct equity investments) would be the 'Modi-factor'. It would need a better environment, and a culture of efficiency, which comes at no incremental cost. This is what the 'Gujarat Model' really is, it harnesses the spirit of the people without throwing public money down the drain. That is what would achieve incremental growth without much capital, especially Government capital. It would simultaneously improve Government finances, even as it increases growth.

The author teaches, trades and writes at [email protected]