The latest budget bets big on capital expenditure across the infrastructure sectors, which is consistent with the trend over the past few years. However, the Union Budget 2023-24 has considerably increased the outlays for infra-related sectors.
This is, in some senses, a courageous political gamble, because some of the capex allocation has come from cutting or flattening social-sector-related expenditure – that too, going into an election year. While the central fiscal deficit remains high at nearly 6 per cent, a commitment has been made to reduce this to 4.5 per cent by financial year 2025-26.
The budget is presumably hoping for a high multiplier effect, whereby capex-related spends result in large positive externalities. The minister estimated this multiplier as 2.95x – that is, every rupee spent on capex could generate returns of Rs 2.95 downstream.
Building infra capacity should lead to cost reductions, enhanced productivity and increased efficiency, apart from directly and indirectly generating employment and increasing aggregate demand across the economy. This is all dependent on projects being properly conceived and designed, quickly rolled out and completed in a timely fashion.
The year-on-year increase for infra-related allocations is around 33 per cent, with capex rising to around Rs 10 trillion, which is equivalent to around 3.3 per cent of GDP. As a share of the total budget expenditure, capex is around 22 per cent, which is the highest in at least 15 years. Some of this is, of course, “catch-up” expenditure deferred due to Covid-19. Another Rs 3.7 trillion has been allocated as Grant-in-Aid to states, pushing up what the budget calls “effective capex” to Rs 13.7 trillion, or 4.5 per cent of GDP.
There is a very strong transport focus, with high allocations for the ministries of railways, road transport and highways, civil aviation, etc. This includes about 100 transport-related projects which will be allocated Rs 750 billion, with Rs 150 billion of this to come in via private investments. Apart from expanding road and rail networks, four new multimodal logistic parks are to be launched, and 400 new express trains and 100 new cargo terminals are to be built over the next three years.
The National Infrastructure Pipeline (NIP) has identified close to 9,000 projects across 34 subsectors, which will entail a total project cost of about $1.8 trillion. These will be serviced. There’s also a focus on urban infrastructure and renewable energy, as well as a welcome focus on artificial intelligence (AI) and leveraging the roll-out of 5G to build more commercial use cases for faster networks.
Apart from budget support and state government funding, such projects will entail investments that are envisaged to appear via banks and financial institutions (whether domestic, multilateral, bilateral), capital markets (deploying instruments such as infrastructure investment trusts and infrastructure bonds), and public-private partnerships (PPPs) pulling in private investment in areas such as energy, logistics and data infrastructure. Quicker turnaround on investments will be facilitated through a process of asset monetisation, where foreign direct investment may be crucial, going by previous experiences of asset monetisation.
All this implies a big opportunity for private sector know-how and private capital to be deployed meaningfully. The concept of the Infrastructure Finance Secretariat is supposed to enable this flow of private resources. The secretariat will assist all stakeholders in driving more private investment in infrastructure. A harmonized Master List of Infrastructure will be created across 16 ministries and reviewed by an expert committee to recommend the classification and financing framework.
A budget outlay of Rs 31 billion will be allocated to build 50 additional airports, helipads, water aerodromes and advanced landing fields. The long-awaited divestment of Air India will lead to greatly reduced liabilities in civil aviation, and more funds can therefore be dedicated to regional connectivity projects, while cutting the overall allocations for the Ministry of Civil Aviation.
The finance minister spoke about “sustainable cities of tomorrow”, mentioning that Rs 160 billion has been allocated on this account to transform multiple cities. The budget has also allocated a dedicated amount of Rs 100 billion per annum through the Urban Infra Development Fund for Tier II and Tier III cities, as well as Rs 790 billion crore for the Pradhan Mantri Awas Yojana, giving a boost to the programme to provide affordable housing.
The Ministry of New and Renewable Energy saw an increase in allocation of 48 per cent from Rs 69 billion to Rs 102 billion. This enhanced allocation covers off-grid solar power projects, the Pradhan Mantri Kisan Urja Suraksha Evam Utthan Mahabhiyan, the National Green Hydrogen Mission, the Green Energy Corridor, the bioenergy programme, as well as grid-connected solar and wind power projects.
The shipping sector will see more in the way of PPP models and rely on viability gap funding for development, with an increase of about 30 per cent in the allocation to the Ministry of Ports, Shipping and Waterways. The Ministry of Power saw a similar increase of 29 per cent in outlay.
The Ministry of Railways had a big allocation increase of 72 per cent to Rs 2.4 trillion, and a strong focus on capital outlay. The capex is for projects such as the 500 planned Vande Bharat Express trains, achieving a target of 100 per cent electrification across the network, and the makeover of 1,275 stations under the Amrit Bharat scheme.
The Ministry of Road Transport and Highways received a hike of 36 per cent in allocation, bringing the total to Rs 2.7 trillion. The thrust here is on achieving the target of developing a 25,000 km road network every year, to add to the current network of 140,000 km. This target was announced in the 2022-23 budget, but only 10,000 km of the network will be developed in this current fiscal. The NHAI has received around Rs 1.6 trillion in this budget.
It is important to note that the 50-year interest-free loan scheme to state governments is being continued for one more year to spur state-driven investment in infrastructure and to incentivise states to undertake complementary policy actions. This has an outlay of Rs 1.3 trillion, enhanced from Rs 760 billion in the revised estimates of 2022-23 the budget. This increase might be considered election-related, given that nine important assembly elections are scheduled for fiscal year 2023-24, but it should have a positive economic impact.
The budget has also announced some policy support for start-ups, such as extension of the date of incorporation of income tax benefits for another year. Setting up 100 labs to develop applications using 5G services will lead to new opportunities. There are multiple incentives for battery production such as viability gap funding, and extension of customs duty exemptions on import of capital goods and machinery required to manufacture lithium-ion cells. These will help to drive the green economy by addressing storage issues in that value chain. Rs 350 billion has been allocated to the “net zero carbon” commitment and the process of energy transition.
The budget has also announced the addition of a Green Credit Programme in the Environment Protection Act to incentivise sustainable growth. Bureaucratic processes are to be further streamlined for faster clearances, making it easier to get projects off the ground. Combined with support for various PLI schemes across sectors, this should ensure that the manufacturing base expands to support the “Build India” programme conceptualised by this Budget. Apart from the direct benefits accruing for construction firms that figure in the building of the road, rail and airport networks, there should be strong demand created for cement, steel, pipes and other more innovative construction material. This, in turn, could drive an investment cycle for private industry as capacities in core areas will need to be ramped up quickly.
The use cases created by the 5G roll-out, and the labs researching these along with AI, should also improve efficiencies across the economy. Moreover, there should be significant employment generation across sectors as the projects get under way. This, in turn, should generate more consumption demand, helping to bootstrap growth. Since all this is largely going to be driven by domestic activity, it will help insulate the Indian economy from the ongoing global slowdown.
However, there are certain dangers in this approach. Infrastructure creation, by its very nature, is capital intensive, with long gestation periods. Projects take time getting off the ground and generating returns, and infra projects are also prone to delays and cost overruns. Given the current inflationary trends, financing infrastructure could be a tricky task. Bond market mechanisms will need to be reviewed to ensure that there’s enough cash in the pipeline to prevent spikes in interest costs.
If the demand created by these projects exceeds the current capacity to produce steel, cement, copper, etc., there will also be an inflationary impact until such time as supply-side capacity expands sufficiently to meet enhanced demand. Given the timeline, with a general election due in 2024, inflation is not just economically undesirable, it is also a political risk. Policymakers will have to ensure work on the ground proceeds at the fastest possible speed, and that any inflationary impacts are minimised.
Devangshu Datta
