Cut subsidies to increase investment in infrastructure: RBI

KOLKATA: RBI Deputy Governor Rakesh Mohan on Friday said drastic reduction in subsidies on power, railways and water supply in urban areas was required to increase government investment in infrastructure and maintain a steady 8 to 8.50 per cent growth over the next 10 to 20 years to be at par with South-East Asian countries.
The subsidies offered on power and railways, meant to help the underprivileged was hardly reaching them as almost 40 per cent of such people neither had a power connection nor travelled by rail, Mohan told the members of the Indian Chamber of Commerce.
He said 90 per cent of water in urban areas were being used by people who could afford it, and therefore there was no justification in continuing with subsidising it.
"Because of huge revenue expenditure, government and government utilities are unable to spend on infrastructure and as such growth prospect is getting hampered," Mohan said.
The deputy governor also said the country needed to focus on four to five issues, including rationalisation of user charges (in railways, power, water), focus on public sector management, instilling excellence and commercialisation of management, to become competitive and maintain steady growth in GDP.
"Tax to GDP ratio also needed to be increased as it was found that in the past ten years, despite a 65 per cent jump in income level, compliance of tax has not increased accordingly," Mohan said.
Explaining why government investment was not coming for infrastructure development, Mohan said during the past few years there had been little or no increase in service charges of railways and power because of political considerations.
He said due to this government utilities could not spend on developing infrastructure.
"Willingness of the public to pay user charges is a must to enable government utilities or the government to spend more on infrastructure development," he said.
Mohan said though infrastructure development was primarily the responsibility of the government, the private sector could be leveraged into developing some like roads and telecommunication.
Coming back to the power sector, he said the gap between average cost of production and average tariff collection per unit has widened over the years due to continued subsidy. The situation was such that for every unit of power produced, there was a loss of Rs 1.10 to the SEB''s.
He said unless there was a drastic reform to improve efficiency in the railways, freight would go to road.
"Unless Railways improve efficiency, which can be done through fresh investment, the situation is unlikely to improve. But there does not seem to be willingness to go for drastic reforms to improve efficiency."