The last-mile challenges

A New Deal is required to tackle the ground-level problems posed by reforms

By Mohan Sule

The global economic gloom has not clouded the silver lining: the fastest-growing economy in the world. Fiscal and current account deficits are deflating largely on lower commodity prices and declining subsidies. Government investment in infrastructure is gathering pace. Interest rates are moving south. FDI is coming in fast and furious as the world is looking at India anew. Natural resources are getting auctioned. Many government departments and outfits are undertaking open bidding. PSU divestments started with a bang. The IPO market is reviving. Make in India to export to the world appears an attractive proposition with a weak rupee. Digital India is an ideal alternative to pass around infrastructure bumps. Smart Cities and Housing for All will be powerful boosters for job creation. The Jan Dhan Yojna is a smashing success in enlisting the unbanked. Mudra Bank and small finance banks are expected to fill the gap left by big banks in catering to the small borrowers. The social security schemes including pension and insurance are steps towards financial inclusion. Foreign portfolio investment outflow has slowed down as the US Federal Reserve is unlikely to increase interest rates this calendar and on second look at domestic valuations. In short, all the ingredients are in place for India to take off. Yet there is concern that despite the good intentions, the country could trip. Last-mile connectivity might pose a problem. Some of the legacy issues look insurmountable, frustrating policy makers in finding a solution. The choice is between tough decisions and letting the problem fester at the cost of the health of the economy.

Supply of coal and gas to power plants has improved and so also power generation capacity. Private sector is participating in the transmission and distribution sector. The hitch is the state electricity boards. They are unable to sell power to residential users at a cost plus basis. Cheap power is the poll plank of most political parties to win elections. Resultantly, SEBs cannot pay in full to generators and T&D companies. The situation has deteriorated to an extent that, despite adequate power, users are not getting uninterrupted supply. SEBs have turned to public sector banks to tide over the cash crunch. Their exposure comprises two-thirds of the Rs 450000-crore power sector loan portfolio of PSBs. Interest payment constitutes nearly 25% of the power cost. In 2002, a Rs 40000-crore package by the Central government mandated a deficit reduction timeframe. More than a decade later, Rs 200000 crore more were sanctioned for their restructuring, with the Central government taking on 50% of the liabilities. The remaining debt was to be converted into bonds to PSBs at less than 9% interest rate. In return, SEBs had to increase tariff. The average hike was a measly 14%. As the new Reserve Bank of India norms stipulate banks to make 15% provision for even restructured loans, any more credit from the PSBs in unlikely. Also, there is rampant corruption in SEBs. Inflating of cost is common.

The second tripping point is the telecom sector, with call drops becoming a recurring nuisance. The industry, the second largest after China by subscribers, is becoming a victim of its own success, with demand outstripping the spectrum available. There are more than five lakh towers in India, half of what are required. Services such as 3G or 4G require higher frequencies (above 2,100 MHz), which means more numbers. Metros and tier 1 cities do not have them in sufficient quantity. There is reluctance to share the infrastructure. Civic bodies do not have uniform standards for granting permission. The government has allowed trading of spectrum at a price pegged at the latest auction to tide over the shortage. Unless telecom connectivity is put on par with water and power supply, things are unlikely to improve and Digital India and Smart Cities might remain wishful thinking. The third obstacle is the health of banks. Non-performing assets do not allow them to focus on the future. Most of the bad loans are beyond repair. Unfortunately, these are to industries such as infrastructure that have to start spending to boost the economy. Capital infusion by government is a short-term solution. The Indradhanush reforms giving operational freedom will take a few years to show results. The fourth speed breaker is the conflict between MNCs and domestic players. In the power sector, most of the capital goods orders issued by PSUs have been snapped by MNCs and Chinese firms at rock-bottom prices. This plays to the advantage of the buyer but sounds the death knell for listed local players. Tackling these tough challenges means demolishing the status quo and giving India a New Deal.