Welcome to a new video series on India’s economic reforms with Dr. Rakesh Mohan as part of The 1991 Project. Dr. Mohan is President Emeritus at the Center for Social and Economic Progress and part-time member of the Indian Prime Minister’s Economic Advisory Council. He is one of the architects of India’s economic reforms, having served in the Ministry of Industry, Ministry of Finance, and later as deputy governor of the Reserve Bank of India. This year marks 30 years of the India Infrastructure Report, which he chaired. During his time as a visiting scholar at the Mercatus Center, we spoke with him about the report’s legacy, how India has financed its infrastructure since, and the challenges ahead.

2026 marks the 30th anniversary of the India Infrastructure Report. Among its many prescriptions, you made the case for financing infrastructure through private capital. What was the thinking behind that shift at that time?

DR. RAKESH MOHAN: If you hadn’t told me, I would not have realized that this is indeed the 30th anniversary of that report. I can’t believe that it has been 30 years. The immediate trigger for doing that report was that the World Bank, in 1994, came out with the World Development Report on infrastructure financing. I would say that it was one of the finest World Development Reports that the bank has done. I had been abroad for about a year and came back in mid-1994 and suggested to the then finance minister, Dr. Manmohan Singh, who became the prime minister later, that we should do something like that. He said, “You do it.” 

Now, coming to the substance of your question: What had happened was that a lot of things had changed in the world, both in terms of overall thinking on development. Also, the breakdown of the Soviet Union in early ‘90s, and technology to do with a lot of infrastructure.

Prior to the 1990s, in the whole world, really, most infrastructure was done by the public sector, by governments in different ways, through public authorities, and so on. That started changing. The technology change was that, say, for example, in the electricity sector, you could do many more different kinds of tariffs and collection of tariffs because information technology, IT, et cetera, had started to become important.

Similarly, in telecom, with the onset of the mobile or cell phone revolution, it started to become feasible to have competition because, otherwise, telephony was a natural monopoly, and it was run by governments everywhere except the United States, which, originally had the AT&T monopoly. These are the kind of changes that took place, which meant that you could get the private sector into financing infrastructure in sectors such as power—where you have tariffs, and you can easily collect revenues, so private sector can collect the revenues—to telecom, where you can collect revenues from people’s phone usage. The natural monopolies started breaking up. 

Also, in the power sector, because the technology changed, in principle, a large consumer could actually choose the supplier. You could have competition. Therefore, you could have different power suppliers. Similarly, in the case of ports and airports, again, it’s very easy to levy user charges for ports and airports. Once again, they could also be charged, and there could be competition.

For all these reasons, for many of these sectors, it was becoming easier, A, to have competition between different private sector players, and B, to have actual revenues. In principle, the reason why infrastructure had always been in the public sector by the government almost everywhere was because they were monopolies, natural monopolies. Also, in some cases, you can’t capture the benefits of investment.

For example, roads—not easy. Similarly, a lot of municipal urban infrastructure, it’s not easy. Similarly, railways, although there, the issue is more complicated. I think those were the basic reasons why in the late ‘80s, early 1990s, in the world as a whole, there was more and more private sector infrastructure financing. Finally, given the needs for investment in infrastructure, it was felt that there would not be enough fiscal space to do the kind of infrastructure investment needed.

In the following [00:05:00] decades, India launched one of the world’s largest public-private partnership programmes in infrastructure and later faced a severe banking crisis. Your work traces how one led to the other. What went wrong?

MOHAN: I think what happened was that in sectors such as ports, airports, telecom, power, it’s relatively easy to separate out the consumers of the particular infrastructure service so you can charge them. They can be exclusive users. In the case of roads, it’s not so easy because anyone can enter a road, and therefore, it’s very difficult to charge people.

The only way you can charge people is through tolls, and particularly from highways that are separated from the other highways, and you can isolate the users going in and out. Even there, there’s an issue that people pay taxes, overall taxes, which are supposed to also help finance roads. In theory or in principle, the only charge that you should make from a toll road is the extra service that you are providing for the exclusive use of that entry-controlled highway.

In theory also, you should not be charging people for the full infrastructure investment in those highways, only the marginal extra that they’re getting beyond what they have paid for already. That is always difficult to accomplish. What is interesting here is—and this is where the India issue comes in—that even if you look around the world—you take the United States itself, the most capitalist country in the world—basically all highways have been financed and run by the public sector. They’ve been financed through the Highway Trust Fund, and the Highway Trust Fund gets its revenues from the taxes, the cesses on petrol and diesel.

Similarly, all of Europe, it’s all public sector. What is interesting is that international institutions like the World Bank and others really went gung-ho on making roads also with private sector investment. In India, I think we probably went the furthest in so-called public-private partnerships. In some sense, it was somewhat rational. Why public-private partnership? Because in effect, what you’re saying is that the public investment is really the public part. That is to say, what you’re getting is from taxes, and the private investment is for the marginal extra service that you get in principle, although I’m not sure anyone thought about it that way. In any case, we went perhaps overboard on that, certainly compared to the rest of the world, and particularly compared to the developed world. 

Similarly, we got into trouble in the power sector, which in principle we shouldn’t have because of some regulatory issues, inadequate tariff collection, and inadequate and wrong tariff policies. A lot of investment went into the roads and power sectors, which then turned bad, which is what led to the NPAs in the infrastructure sector.

You talked about the non-performing asset problem in Indian banks in the 2010s. From the detailed work that I’ve done with Divya Srinivasan and another colleague, Abhishek Kumar, what we found is that we can explain the large non-performing assets that appeared in 2010s about a third because of the huge fall in commodity prices after the North Atlantic financial crisis in 2008/9, and that many of the projects that were ex ante good projects, which the banks were then financing, went bad, no fault of their own, because those firms had good financials before the decisions took place.

Second, because of public policy of pushing public-private partnerships. What we therefore feel is that some of the arguments that we made, the infrastructure report and otherwise, need to be relooked at. We need to be much clearer on which sectors are appropriate for private sector investment, which sectors are appropriate for public-private partnerships, and which should be public and which should be private. I think if we do that, this will become much easier, and the banks won’t have as difficult a time.

To some extent, this has been recognized in public policy, which is why in many countries we had development finance institutions. We ourselves had the Industrial Development Bank of India, the ICICI, the IFCI. We also have some specialized public sector finance institutions like the Power Finance Corporation, the Indian Railways Finance Corporation, and so on.

What did happen is that, again, these development institutions were promoted by the international finance institutions right through the ‘60s, ‘70s, ‘80s. Then, because many of them got into trouble, and the financing was mostly from the government or from government-backed bonds and so on, it became, I should say, fashionable, to say, “Look, this is a bad idea.” All over the world, and certainly in India, they were shut down in the 1990s. 

Infrastructure needs long-term financing, so a burden of public-private partnerships financing then fell on the commercial banks, and particularly public sector commercial banks. Clearly, commercial banks have two problems. One, that their liabilities are shorter-term, that is, the deposits are shorter-term. Banks have difficulty raising more than 10-year money, even more than 7-year money, whereas a lot of infrastructure financing should be longer-term. That’s also why they got in trouble. Second, because they did not have a history of infrastructure financing, they perhaps had some difficulties in appraisal.

Looking ahead, what will it take to finance India’s infrastructure soundly?

Rakesh: Just going on the basic principles, that we should be clear on what ought to be public sector investment, and certainly a lot of municipal infrastructure. There is, as I said, an issue in the railways. The US is an outlier in that, as it was in the energy sector also, in the telecom sector also, almost all in the private sector. Otherwise, almost the rest of the world, and certainly all in Europe, railways have been in the public sector.

The UK had the most daring and most bold experiment in privatization in the late 1990s, but that has gone bad. It has taken 20 years for that to be figured out, that this was not such a good idea. I would say that the government has to finance some of these public infrastructure projects, like municipal infrastructure. 

In the US, of course, municipal or urban infrastructure is financed through municipal bonds. Similarly, in Germany, a lot of the municipal infrastructure is financed by what they call Pfandbriefe. These have been there for now about 120 years, actually, from before the Second World War. I think that the government has to think much more clearly on what it should finance, but it also needs to think of how to raise the finance. As the examples that I gave, in the US, you have municipal bonds. There’s a huge municipal bond market. The way it is done is that you have very transparent accounts of municipal governments, local governments, urban local bodies, which then can be rated by the credit rating agencies in a very transparent fashion.

You have a pretty large variation, actually, in the rating of these municipal bonds in the United States. I should also mention that, in some sense, the public character in the US of this is recognized by making the interest on municipal bonds tax-free. That’s effectively a federal government subsidy to local governments and the people, recognizing, in my view, that is, in some sense, the public aspect of those projects, therefore, is being subsidized.

I think that is one way forward, that you have to work much harder in making municipal governments, subnational governments, state governments, for that matter, municipal governments, et cetera, more creditworthy, so they can raise these long-term bonds. 

Second, of course, is to also have longer-term infrastructure financing institutions. Now, in India, the Infrastructure Development Finance Company was founded as a consequence of that infrastructure report. Unfortunately, I have to say that has been turned into a standard commercial bank. It completely overturned the objective for which it had been founded. In replacement, the government has founded two other institutions: IIFCL, it’s 100% government-owned. Now, even more recently, NaBFID, National Bank for Financing Infrastructure and Development. I’m not that familiar with the operation, but I think those are actions and policy actions in the correct direction. 

Finally, I think that the privatization of airports has proven itself, so that we have now very good airports, not just the top four, but a lot of them. Similarly, the privatization of ports or private investment in ports has gone very well. I think we still need some port sector reforms. Railways is a real problem. I think that public financing can move somewhat from the roads to the railways now. 

Telecom is on its own. So is civil aviation. The only two points I would make on both telecom and civil aviation is because of nature of the two industries, and this again has been happening everywhere, you’re moving towards a duopoly in both cases. Some thought needs to be given on how much competition you need to have. It’s very clear that in both civil aviation and in telecom, there are a lot of network effects, which leads to a monopoly or duopoly situation. Therefore, I think public policy has to figure out what needs to be done here.