Monday, March 14, 2016

Growth on steroids - the case of infrastructure sector

This blog has long questioned the fetish with emulating China and growing at 8-10% rates. Such growth is possible only through excesses, as was the hallmark of the 2003-08 growth episode - aggressive bidding by infrastructure contractors, reckless lending by banks, and lax contracting standards by the government. We are now picking up the pieces.

Livemint has this graphic which shows that bank loans outstanding to infrastructure and metals rocketed from 29.8% to about 47% in six years from 2005. 
And bank loans outstanding to infrastructure sector as a share of total non-food credit nearly doubled from 7.9% to about 14.5% in the same period.   
Such spectacular growth is akin to a sprinter on steroids, bad for health and simply unsustainable. It becomes all the more so when the economy does not have a broad enough base, in terms of various kinds of inputs, to support such growth spurts. And cleaning up takes years of slow growth and bitter suffering.

Unfortunately, neither businesses nor banks nor policy makers appear to learn from such experiences. The latest example of such excessive optimism may be in the solar power sector, where promoters have been bidding down tariffs hyper-aggressively. The steep fall in solar tariffs looks most likely another bout of irrational exuberance. This time too may be no different! 

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