A Niti Aayog-commissioned study has recommended revising the social discount rate to 9.23% for infrastructure projects with horizons of up to 30 years, while suggesting a lower 6.2% rate for projects lasting between 30 and 50 years.
New Delhi, October 14 — A new study commissioned by Niti Aayog has proposed changes to the social discount rate used to evaluate public infrastructure and investment projects in India.
For projects with a time horizon of up to 30 years, the study has suggested raising the social discount rate to 9.23% from the existing 8%. For projects with horizons of 30 to 50 years, it has recommended reducing the rate to 6.2% from 8%.
The social discount rate, or SDR, is used in economic cost-benefit analysis to convert future economic benefits and costs into their present value. It reflects the trade-off between present and future consumption and plays an important role in determining whether a public investment project is economically viable.
Projects with longer time horizons can be especially sensitive to changes in the discount rate because expected future economic growth and benefits are spread over several decades.
An earlier study commissioned by Niti Aayog in 2018 had recommended an SDR of 8% for projects with horizons of up to 50 years, with a lower rate of 6% for long-gestation infrastructure and environmental projects.
The latest study, titled “Reassessment of National Parameters for Appraisal of Public Investment Programmes/Projects in India”, was prepared by E Somanathan, Monisankar Bishnu and Raavi Aggarwal with support from Niti Aayog for independent academic and policy-oriented research.
Public investment decisions across infrastructure, energy, transport, urban services and social-sector programmes are generally assessed using economic cost-benefit analysis.
Under this approach, a project is considered acceptable only when the present value of expected benefits is higher than the present value of expected costs. The discount rate therefore has a direct impact on how projects with long-term economic returns are evaluated.
The proposed revisions could have implications for the appraisal of future infrastructure projects, particularly those with long implementation periods and benefits that extend over several decades.
