Building on the Budget

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.

Are budgetary infrastructure boosts really the panacea to growth revival?

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.

• Economic growth provides both the need for and the resources to fund various types of infrastructure that in turn fuel further growth. However, this is a source of long-term returns, and a rather risky bet to peg growth revival targets on. For example: A road is constructed to link two growing economic clusters, residents of which will pay the tolls as well. This growth was affected due to external reasons or a mere over-anticipation of its potential. In such an event, the road concessionaire is unable to recover its investment, therefore, turning into a non-performing asset for the bank that lent to him.

• Infrastructure projects like highways, industrial corridors, etc. are caught up with numerous pre-construction clearances, land acquisition, project planning, and other such steps which push the construction date far out into the future, and construction is the phase that can employ a majority of the labourers. Often these steps face extreme delays resulting in stalled/heavily delayed projects. Employment generation through infrastructure can only work when institutional and procedural constraints are first resolved and optimised.

• The government is pegging its hopes on the asset monetisation scheme announced, which looks at attracting foreign institutional investors investing in brownfield assets across the country. Contrary to the expectation, this has not taken off well, as is evident from NHAI’s experience of the same with national highways.

• When there is significant lag in project execution and completion, the end users of the service (citizens) suffer. Lags in the process lead to cost overruns in projects which are also serviced using taxpayer money, which could have otherwise been invested elsewhere.

Making investments in infrastructure pay off

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:

• Government contracting is the predominant front of public-private interface, especially in infrastructure, where the government gets contracts in a big way (six of the top 10 procurers are in the infrastructure sector). Presently, private sector interest in public assets is low, on account of payment delays, bureaucratic processes, and major lags on project implementation. Of the 1,009 road projects surveyed by MoSPI, only 136 were found to be on track. Tangible reforms in government contracting are needed that will improve the state of working within infrastructure sectors.

• Public-private partnerships (PPP) were evolved to tangibly shift financial risks to the private sector who was expected to be a partner in nation-building. However, after a successful decade-long run, the faltering state of PPPs has made the private sector wary of engaging in such projects. PPP revival is crucial to addressing constraints across power, telecom, and transport sectors.

• The non-viability of PPPs has made them prone to going bust in the last seven-eight years. Banks that had a higher exposure to highway projects are now reluctant to lend. Further, 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. Innovative but realistically feasible financing mechanisms are needed. Smaller scale asset recycling is an option, which has had success in Australia’s roads and port sectors.

• At present, infrastructure-related litigation forms a majority component of all litigation involving the government. The NHAI’s outstanding claims are also contributing to the massive debt it is under. A higher likelihood of getting embroiled in litigation increases the overall costs of doing business with the government, whilst also leading to delays and cost overruns.

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.

• Indian Economy
• India
• Budget
• economic
• GDP
• infrastructure
• NaBFID
• national highways
• PLI

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