The Indian government is emphasizing infrastructure-led growth. But how long will this crowd into private investment?

In 2022-23, GoI’s capital expenditure will increase to Rs 7.5 lakh crore, a staggering increase of 82% in two years. For India’s pandemic-hit economy, this is no small sum. But more than a number, it’s a marker of what Modi 2.0 plans to bring India’s struggling economy under control.

It came as a bit of a surprise when Finance Minister Nirmala Sitharaman’s 2022 budget didn’t go the usual route of handouts and sops as assembly elections in five states approach. Instead, it opted for growth fueled by infrastructure, loosening the purse strings for what it called the seven engines – roads, railways, airports, ports, public transport, waterways and logistics. In its speech, the FM said the budget gave impetus to growth, setting a parallel track, on the one hand, a plan for Amrit Kaal (25 years leading up to the centenary of Indian independence) and, on the other hand, large public investments for modern infrastructure that will prepare India for its 100th year.

FM’s strategy is simple: spend more in the core business and grow. His calculation is that a massive release of funds for infrastructure projects will be a boost for a large number of suppliers in the basic sector such as steel and cement, which will create more jobs and increase the economic demand – the two booster shots the economy needs. In the 2021 budget, FM had increased the capex (capital expenditure) by 34.5% to Rs 5.54 lakh crore, and in the recent budget, it increased it by 35.4% to Rs 7.5 lakh. crore.

Such a robust expansion of capital spending in two successive budgets means that the GoI is focusing on infrastructure. The focus is on growth, not subsidies. The big question is how soon will this increase in public spending lead to an increase in private sector investment? Moreover, does India have enough ready-to-start projects if the government also pursues this policy in the coming years? Even today, a question arises whether Indian Railways, for example, has enough projects to absorb the Rs 1.37 lakh crore budgeted from Rs 30,000 crore in 2020-21?

Trade and Industry Minister Piyush Goyal told ET that massive government spending on infrastructure will also boost the private sector. “Infrastructure investments have a multiplier effect of four times the money spent. More money in infrastructure also means more jobs. Young people, in particular, will benefit a lot in terms of jobs and new businesses,” he adds.

Amitabh Kant, CEO of government think tank NITI Aayog, says an expansion in capital spending is what the nation needs today, and two successive budgets have provided it. “With far-reaching economic reforms already introduced, complementing these reforms with infrastructure investments will put the country on a path of sustained growth,” he said. “Improving economic opportunities and lowering the cost of logistics will increase demand in the economy, both domestic and external. With increased demand, we will see private investment increase,” he adds.

The government’s strategy is therefore based on the premise that a strong increase in infrastructure spending will serve two purposes. First, it will create demand for several industries related to steel, cement, pipelines, construction equipment, etc., also increasing the capacity utilization of these factories. Secondly, it will boost employment across India which in turn will increase demand and hence private consumption. The advance estimate of private consumption for the current fiscal year shows that the country has not yet reached the pre-pandemic level. It is still 97.1% compared to 2019-20, according to the latest economic study. Vinayak Chatterjee, an infrastructure expert and chairman of CII’s national infrastructure council, believes increased capital spending will lift capacity utilization in sectors such as steel, cement, water pumps, construction, etc., at 80-85%. “Once these industries have reached this level of capacity utilization, they will necessarily have to invest in new factories. I expect the government’s decision to attract private investment in the second half of the financial year,” Chatterjee says, adding that several EPC (Engineering, Procurement, Construction) contractors will now be forced to scale up. of their balance sheet once they have a larger order book, mainly to maintain a good debt ratio. These companies will then raise funds on the stock market or private equity market, fueling private investment.

Meanwhile, infrastructure ministries and their allied agencies in roads, railways, shipping, etc., have already prepared lists of projects that will absorb the increased capital expenditure. A senior officer of the National Highways Authority of India (NHAI) has said that a plan for the deployment of Rs 1.25 lakh crore capex for civil construction works of road assets is ready. In total, the NHAI has been granted a down payment of Rs 1.34 lakh crore for 2022-2023, or about 70% from the Ministry of Road Transport and Highways. In addition, NHAI aims to raise Rs 20,000-30,000 crore through innovative financing mechanisms such as securing toll through special purpose vehicles for some flagship corridors like Delhi-Mumbai Expressway and Delhi Amritsar-Katra highway.

For the Ministry of Ports, Shipping and Waterways, the budget provided an outlay of Rs 574 crore, a relatively lower amount than for railways or roads. Minister Sarbananda Sonowal, however, says his ministry has a key role to play in the government’s new agenda. “Out of seven drivers of the PM GatiShakti National Master Plan, two – ports and waterways – belong to our ministry. We have a major role to play. Thanks to this integrated approach under GatiShakti, a port, its connecting road and a rail hub are often planned simultaneously,” says Sonowal. As FM points out in its budget, the seven engines will drive the economy forward in unison.

Larsen & Toubro (L&T) CFO R Shankar Raman says the massive increase in capital spending will lead to credit growth, which in turn will create more opportunities for the financial services industry. Known for engineering and construction, L&T also has a financial services branch. Raman has a suggestion for the government. “Since timely implementation is key to a strong outcome of the enhanced investment program, the government should quickly establish a high-level task force and give it responsibility for detailing implementation strategies. work,” he said.

A rise in capital spending was in line with the recommendations of most economists. But a whopping 35% hike was not expected, says former chief economic adviser Arvind Virmani. He says: “Given the slow recovery of private investment due to Covid uncertainties, it is clear that greater government investment is needed to increase overall investment, attract private investment, increase aggregate demand, create jobs and increase the incomes of the unskilled. He expects the Omicron wave to be over by March and a strong recovery in contact services, and associated jobs and wages, in April.

There are, however, two unanswered questions. First, will budgeted capital expenditure be fully utilized in 2022-23? We do not know yet, but taking into account the experiences of the current fiscal year, a full utilization of the expenses is possible. For 2021-2022, Rs 5.54 lakh crore has been earmarked for capital expenditure; the revised estimate is Rs 6.03 lakh crore. Even though we discount Rs 51,971 crore, which was spent on settling Air India’s unpaid debts and other miscellaneous liabilities, the overall target has been met.

The second question is whether India has enough ready-to-go projects? Based on a bottom-of-the-envelope calculation, Chatterjee says India has ready projects worth more than Rs 30 lakh crore, enough for the next few years. “But we have to develop a new generation of medium and long-term projects. Otherwise, India will face a paradoxical situation where it has more financing capacity than shovel-ready projects,” he says.

For now, the money and the machines are ready.


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