From UPSC perspective, the following things are important :
Prelims level : NA
Mains level : National Champions Model for Infrastructure Development, Advantages and disadvantages
- Emerging economies struggle to provide functional and efficient infrastructure. Infrastructure has become a national aspiration good, a mechanism for job creation, and a necessity. The two biggest constraints on infrastructure provision are cost and public good component. This national champion’s model aims to incentivize private sector participation in infrastructure investments, but it also has its own set of challenges and limitations.
Traditional Financing Approaches and their Limitations
- The traditional approach to financing infrastructure has relied on tax revenues or government borrowing.
- However, this creates a vicious trap as poorer economies generate less tax revenue, which limits infrastructure investment, leading to a further spinoff that affects the growth of the economy and keeps the country poor.
- Increasing public borrowing domestically tends to crowd out private investment, exacerbating the problem.
The Public-Private Partnership Model and its Problems
- The Indian government tried to incentivize private sector participation in infrastructure investment by introducing the Public-Private-Partnership (PPP) model in the early 2000s.
- While the PPP model led to the construction of a lot of infrastructure, it 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.
The National Champions Model and its Innovations
- The present government has modified the PPP approach by assigning the bulk of infrastructure provisioning for roads, ports, airports, energy, and communications to a few chosen industrial houses.
- This is the national champions model where the government picks a few large conglomerates to implement its development priorities.
- This model incentivizes national champions to build projects by providing subsidies to cover the costs.
- New aspects of the National Champions Model:
- National champions need control over existing projects with strong cash flows to incentivize investment in projects with low returns and negative cash flows.
- Public association of champions with the government’s national development policy generates a competitive advantage for the champions in getting domestic and foreign contracts.
- Access to some cash-rich projects allows national champions to borrow from external credit markets by using these entities as collateral, which lowers the cost of finance of other.
Benefits of National Champions Model
- Economic growth: National champions can contribute to economic growth by generating revenue, creating jobs, and investing in research and development.
- Strategic importance: The model can help ensure that the country has a strong presence in strategically important industries, such as defense or energy, which can be critical to national security.
- Export competitiveness: National champions can become leaders in their respective markets and compete effectively in global markets, which can increase exports and improve the country’s trade balance.
- Innovation: National champions can invest heavily in research and development, leading to technological advancements that can benefit the broader economy.
- Access to capital: National champions may be able to access capital more easily than smaller companies, allowing them to make larger investments and pursue growth opportunities.
The Problems with the National Champions Model
- Too big to fail: Market and regulatory treatment of conglomerates as too big to fail. This means that these companies are so large and important to the economy that their failure could cause widespread harm to the financial system and the economy as a whole. This opens the door to market hysteria, delayed discovery of problems, and spillovers of sectoral problems into systemic shocks. The recent troubles of the Adani companies in India highlight the potential risks associated with this approach.
- Encouraging market concentration that can be bad for efficiency and productivity: Concentrated markets reduce competition and can lead to higher prices, lower quality, and reduced innovation. When firms have market power, they have less incentive to improve their products or services, reduce costs, or innovate. This can result in lower overall productivity in the economy.
- The risk of turning the country into an industrial oligarchy: An industrial oligarchy is where a small group of powerful and influential conglomerates control a large portion of the economy. This can have negative consequences for economic growth, social mobility, and political stability. An oligarchy may be resistant to change and less responsive to the needs and aspirations of the broader population.
- Uneven playing field: The optics of an uneven playing field in terms of market access and selective regulatory forbearance that can become a significant deterrent for foreign investors.
- While infrastructure is a necessary condition for growth, it is not a sufficient one. Effective demand is the problem, as seen in the power sector, where the inability of the power distribution companies to recover payments was the issue. India is at an inflection point in its development path, and the national champions model has its pros and cons that needs to be analyzed before its consideration.
Q. What is National Champions Model for Infrastructure development in India? Discuss its advantages and disadvantages.
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