Addressing long-pending bottlenecks in the infrastructure space will help realise the full benefits of increased capex spending.
Amidst persistent global economic shocks and uncertainty on account of the COVID-19 pandemic, the Union Government Budget 2022-23 continued to prioritise growth over fiscal consolidation for the second year straight, providing a fresh impetus and capital infusion for infrastructure spending in particular, in the Union Budget for the year starting 1 April. Last year’s Union Budget also announced the National Infrastructure Pipeline, which promised a total investment of INR 110 lakh crore with an investment ratio of 39:39:22 from the Centre, states, and the private sector.
This budget takes a deep dive into each sector of infrastructure, particularly transport, announcing the expansion and increased allocation to national highways, 500 new Vande Bharat trains,’ One Station-One Product’ for railway stations to endorse local businesses and the augmentation of 2,000 kilometres of rail under an indigenous safety technology ‘Kavach’. Provisions also include the re-orientation of civil structures for metro rails, additional allocation of INR 19,500 crore under the PLI scheme for domestic manufacturing of high-efficiency modules to achieve the committed target of 280 GW of installed solar capacity by 2030 and the development of eight ropeway projects in the coming year. Sovereign green bonds are also envisaged to mobilise resources for green infrastructure.
Despite the devastating impact of the pandemic on the economy, India’s fiscal stimulus has remained low for the second year in a row: 2.2 percent of India’s GDP as opposed to 4.7 percent for developing countries and 8.5 percent for developed countries, on average.
A closer look at the provisions reveal that effectively, the 35 percent increase in capex is misleading since bodies like NHAI and BSNL have been publicly funded in greater proportion in this budget, while previously they heavily borrowed from the market. While this improves the financial health of these bodies, it does not contribute much to growth prospects. Despite the devastating impact of the pandemic on the economy, India’s fiscal stimulus has remained low for the second year in a row: 2.2 percent of India’s GDP as opposed to 4.7 percent for developing countries and 8.5 percent for developed countries, on average. The lack of other major growth investments or policy reforms in the budget was disappointing and numerous deeply-affected sectors such as tourism, exports, MSMEs, are not adequately targeted through a capex-based stimulus.
The budget for 2021-22 was a much anticipated one, with expectations for increased direct benefit transfers topping the polls. However, in contrast to this, infrastructure was made the focus of growth revival in India. Yet, in the last one year, we see that not much has changed. This is actually not very surprising considering the nature and potential of infrastructure development. Infrastructure investment is complex, and getting from project conception to design, construction, and operations, is a long road fraught with numerous bottlenecks. The lack of planning and poor governance is a major reason why infrastructure projects often fail to meet their timeframe, budget, and service delivery objectives, and often get stalled resulting in massive cost overruns. It is also argued that the expected ‘multiplier effect’ of infrastructure spending can only be optimised if pre-existing institutional and procedural constraints are addressed allowing projects to be delivered in a timely manner with effective targeting. Public capital must be sufficiently productive to ensure that anticipated fiscal benefits are ultimately realised. This is a challenge considering the pandemic-induced slowdown that India finds itself in. Capital infusion in infrastructure is often a method used by governments to fuel growth, employment, and service delivery, whilst also providing an investment destination for foreign investors. So how does this strategy play out for India?
The expected ‘multiplier effect’ of infrastructure spending can only be optimised if pre-existing institutional and procedural constraints are addressed allowing projects to be delivered in a timely manner with effective targeting.
Infrastructure is well-recognised as an engine of growth, a tool to generate employment, and an attractive investment destination which in turn induces modernisation, improving the final service. As the above section demonstrates, this has not always been true for India. Infrastructure in India is prevented from reaching its full potential due to numerous factors, which can be summarised as follows:
The government’s budget seems to believe that supply creates its own demand. This is, however, not guaranteed—increased volatility in employment and livelihoods have induced the need to save more. The government can allocate more funds to infrastructure but that will not address deeply ingrained institutional and procedural bottlenecks. Announcements from the last budget, such as the constitution of the National bank for financing infrastructure (NaBFiD) are yet to take off.
Bodies like the NHAI have excessively borrowed in the last four years, resulting in accumulated debts of over INR 3 lakh crore, prompting the Finance Ministry to prevent it from borrowing for this fiscal year.
Infrastructure-driven growth has a longer gestation period that needs significant capital infusion, and keeping in mind budgetary constraints, it is imperative that reformative steps are taken to improve the success rate of projects and perceptions of the private sector towards public asset investment and creation. The positive impact that infrastructure can have on social indicators such as education and healthcare makes it a key pillar of progress for greater achievement of the Sustainable Development Goals 2030.
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Charmi Mehta is a Research Consultant with the Asian Development Bank and the Chennai Mathematical Institute. Her research interests lie at the intersection of public ...Read More +