Key Details
Reassessment of National Parameters for Appraisal of Public Investment Programmes/Projects in India, prepared by researchers at the Indian Statistical Institute, Delhi Centre, proposes updates to the estimates used to compare a public project’s economic benefits and costs, rather than its financial returns alone.
Parameter | Study’s Estimate or Recommendation |
|---|---|
Social discount rate | 9.23% in real terms for benefits within the first 30 years, compared with 8% in the 2018 assessment |
Later benefits | 6.2% for years 30–50, 4.8% for years 50–75 and 3.4% for years 75–100, where a declining-rate approach is used |
Traded goods and foreign exchange | Standard conversion factor of 0.92 and a corresponding shadow exchange-rate factor of 1.09, up from 1.08 in 2018 |
Unskilled labour | National shadow wage-rate factor of 0.86, with state-specific estimates available |
Carbon emissions | At least US$10 per tonne of CO₂ as a proposed value for climate damage occurring within India |
A practice note preceding the study rounds the proposed discount rates to 9.5%, 6.5%, 5% and 3.5% for use in appraisal.
Public projects are often judged by whether their expected benefits exceed their costs. But that comparison is not straightforward: benefits may arrive decades after construction, and wages or prices paid by a project may not reflect the true cost of resources to society. In an independent study published by NITI Aayog, researchers at the Indian Statistical Institute reassess the national parameters used to make these economic appraisals. Their proposals update a 2018 assessment; they are not adopted government rules.
The Proposed Rates Change How Future Benefits Are Valued
The study’s most consequential proposal concerns the social discount rate—the rate used to express future costs and benefits in today’s terms. For benefits arising within the first 30 years, the researchers recommend 9.23% in real terms, up from 8% in the 2018 assessment. They base this estimate on the economic cost of funds committed to public investment.
For benefits arising further into the future, they propose progressively lower rates: 6.2% for years 30–50, 4.8% for years 50–75 and 3.4% for years 75–100. This would give greater present value to distant benefits from projects such as climate protection, healthcare and education. Crucially, a long-lived project would not receive a lower rate for its entire lifetime: each year’s benefits would be valued at the rate applicable to that period. The study’s practice note also allows sensitivity analysis as an alternative for longer projects.
Prices Paid by a Project May Not Reflect Its Economic Cost
The researchers also examine what a project’s inputs cost society, which can differ from what the project pays. Import duties, subsidies and other distortions can affect the prices of materials, while the wage paid for unskilled labour may differ from the value of the work that labour would otherwise have done.
To support these adjustments, the study estimates a standard conversion factor of 0.92 for traded goods and a corresponding shadow exchange-rate factor of 1.09. These are related methods of valuation, not two adjustments to apply to the same cost. For unskilled labour, it estimates a national shadow wage-rate factor of 0.86. Where labour accounts for a substantial share of a project’s costs, the practice note favours state-specific or project-specific evidence over that national average.
Carbon Emissions Enter the Cost-Benefit Calculation
A project can impose climate costs that do not appear in its budget. The study proposes valuing these at at least US$10 per tonne of CO₂ emitted, based on damage occurring within India rather than worldwide. Including such a value would allow appraisals to compare projects with different emissions on a more consistent economic basis.
The researchers do not treat US$10 as a definitive measure of India’s climate damage. They draw on international studies, find a wide range of possible values and call for further India-specific research. Together, the proposed discount rates, price adjustments and carbon value aim to make comparisons across public projects more consistent—while leaving the decision on whether to adopt them to the government.
Policy Relevance
Project selection: Common parameters would make appraisals across ministries more comparable. A project passing an economic viability test would still need to be weighed against other uses of a limited public budget.
Long-lived investments: The proposed declining schedule could materially affect the assessed value of distant benefits. Appraisals would need to show which rate was applied to which years, rather than choosing one low rate for a project’s entire lifetime.
Local evidence: National conversion factors simplify appraisal, but substantial labour costs and significant carbon effects call for more specific evidence. The study’s figures provide a basis for review, not a substitute for a decision to adopt appraisal guidance.
Follow the Full Study Here: Reassessment of National Parameters for Appraisal of Public Investment Programmes/Projects in India