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Industrial output, once again, shows a dismal trend. Industrial growth for April-June 2013 over the corresponding period the previous year is negative at 1.1 per cent. Of 22 industries, 13 have recorded negative growth.
Therefore, to revive the economy, policymakers need to tap wealth through out-of-the-box measures, especially with respect to creating infrastructure.
How to attract investors
No doubt, in a depressed economy, attracting investors for infrastructure is a challenge.
But there are financial resources available in the country waiting to be tapped — reflected in high air traffic, demand for gold, and crowded shopping malls.
Therefore, projects chosen for development have to be such that they appeal to local sensibilities. The opportunity lies in developing the lower tiers of rural and urban India – going municipal in our infrastructure effort. The 73rd and 74th Constitution Amendment Act, 1992, aimed to strengthen municipal bodies and Panchayati Raj institutions (PRI), is recognised as a key step in providing essential services to citizens.
The amendments attempted to improve performance, answerability, and credibility of local bodies have not yielded much result.
Since 1992, central finance commissions have taken cognizance of local bodies. A number of State finance commissions have also been set up over the years which have made some recommendations, mostly routine and inconsequential.
In a nutshell, the third tier of governance which involves 3,842 highly diversified urban and 2,46,076 rural local bodies has not been strengthened.
Current levels of infrastructure, both urban and rural, are grossly insufficient to meet the demands of the population that is far more aware, thanks to the electronic media. An important focus area for such infrastructure expansion is finance. Most of the local bodies significantly depend upon the devolution of resources from State governments.
A modern source of financing infrastructure is the capital market. In the US, as of December 31, 2011, there were over one million different municipal bonds, with a total outstanding amount of nearly $3.7 trillion.
In sharp contrast, in India, 28 municipal bond issues have been made since 1997, amounting to just about Rs 3,000 crore.
For the existence of an effective and vibrant local body bond market, important considerations are transparency in the finances of local bodies, the volume of instruments offered, the number of investors, the role of rating agencies and a dispute resolution mechanism.
Injecting vibrancy
For the local body bond market to pick up pace in India, improvements need to be made — such as adopting modern practices and systems for recording transactions, maintaining accounts and proper budget-making. A formal system of data maintenance and dissemination of information could be explored.
Further, a regular system of monitoring, auditing and evaluation may also be required. To inspire confidence in local bodies, increase the volume of bonds, and lend credibility to attract investors, India needs a national local body financing authority (NLBFA) and a State local body financing authority (SLBFA) to meet the requirements of urban and rural areas.
They could focus on the standardisation of budget-making processes by the urban and rural bodies, assess the financial requirements of viable projects, train personnel in budget accounting and policy preparation, and tap the capital markets on behalf of local bodies, similar to the approach followed by the RBI for State government borrowings.
This will raise the confidence of investors and ensure consistency and volumes in supply of local body bonds in the market.
Investors, due to local affiliation and commitment, would be tempted to subscribe to the local bonds, especially if these bonds are project-specific and benefit the local population. The local authorities who sponsor the project would be accountable and responsible for delivery of projects.
On the 67th birthday of the nation, strengthening the bottom-up approach to building infrastructure may help tide over the gloomy phase.
(The author is RBI Chair Professor of Economics, IIM Bangalore.)
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