There is much talk of government investment in infrastructure as a policy response to the current financial crisis. China announced a $586 billion stimulus package this week. Prime Minister Manmohan Singh too has been speaking of similar plans. And from the lack of alternative responses from anyone else, it appears that indeed the government will try to “pump-prime” the economy. This means that we should expect dramatic increases in government expenditures directed towards the infrastructure sector.

There are many good things that can come about from improved infrastructure, but the critical issue is not whether improved infrastructure would help, but whether government financed/built infrastructure will help us in getting out of the expected slowdown. The answer is an unambiguous no.

It is well known that the government has tried many ways to improve infrastructure but has not been as successful as it desired. The reasons have to do with difficulties in contracting and follow-up action between the various entities involved in the government and private sectors. Systems that enable smooth interaction between the two are still somewhat weak in India.

Consequently, the only way the government will be able to pump-prime the economy very rapidly would be through public sector leadership and action. This is the first danger. Post-Independence we assigned to the public sector a similar task, and it delivered for a while; but it took us many decades to emerge from the deep hole of inefficiency that we let the pubic sector dig for us.

The second danger is related to financing these expenses. Where will the government get the money from? It won’t tax much more, and will borrow either internationally or domestically. Domestic borrowings will lead to the same set of problems that contributed to this mess — increased interest rates, the crowding out of stable but low-return investments in the private sector, and greater probability of high-risk, high-return investments. Given recent experience, the government would like to avoid this.

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