NITI Aayog proposes higher social discount rate for project appraisal

New Delhi: A NITI Aayog working paper has proposed raising the social discount rate (SDR) for the appraisal of projects with a time horizon of up to 30 years to 9.23%, compared to the 8% proposed in 2018, a move aimed at raising the bar for projects to qualify as economically viable.

The SDR is the rate used in cost-benefit analysis to calculate the present value of future costs and benefits for public or social projects.

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The working paper, developed by the NITI Aayog in collaboration with the Indian Statistical Institute, reassessed the national parameters for the appraisal of public investment programmes or projects in India, almost eight years after the last assessment was done in 2018.

The proposed revision in the SDR is expected to have implications for the finance ministry, NITI Aayog and sectoral ministries involved in long-duration projects, including infrastructure, energy, irrigation and environmental projects. For longer project horizons, the paper recommends the SDR of 6.2% (30-50 years), 4.8% (50-75 years) and 3.4% (75-100 years).

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The last assessment in 2018 pegged a social discount rate of 8% for projects with horizons up to 50 years, 6% for long-gestation infrastructure and environmental projects, and below 6% for projects extending beyond 100 years.

"Large-scale expenditures on infrastructure, energy systems, transport networks, urban services, and social programmes require a rigorous appraisal framework that can determine whether the present value of economic benefits from a project exceeds its economic cost," it said, suggesting the need for an economic as well as financial appraisal of such projects.

According to the paper, the revised estimates reinforce the credibility of appraisal exercises and support more efficient allocation of public resources.

"Their systematic use will help ensure that major public investments are evaluated on a consistent basis, strengthening the quality of India's development planning," it said.

The paper estimated the standard conversion factor to be 0.92, indicating that domestic prices for tradable goods exceed their economic values once duties and taxes are removed. Meanwhile, the corresponding shadow exchange rate factor is 1.09, implying a foreign-exchange premium of about 9%.

The shadow wage rate factor is estimated at 0.86 for unskilled labour-with average values of 0.88 for men and 0.82 for women-reflecting wage distributions observed in the Periodic Labour Force Survey data.

Further, it pegged the social cost of carbon for India at $10 per tonne of CO₂, with a broader evidence-based range of $9 to $87 per tonne. However, the working paper recommended further study to estimate the appropriate social cost of carbon for the country, helping incorporate economic damages into global damage functions and reconcile empirical estimates with those from modelling studies.