The Big Public Infra Bet

Almost an hour into her budget speech on February 1, when finance minister Nirmala Sitharaman announced a 35.4% hike in capital expenditure to ₹7.5 lakh crore for FY23, the treasury benches resonated with a loud thump granting its appreciation of the mega infrastructure plan to bring the economy back on high-growth path after the debilitating impact of the pandemic. Prime Minister Narendra Modi couldn't stop himself thumping the bench twice as the finance minister announced the capital expenditure target for the next financial year.

Ahead of the tightening of global as well as the domestic liquidity inflow in the current year, the government has taken upon itself yet again to stoke growth in the economy. An allocation of ₹7,50,256 crore has been made towards capital expenditure in Budget 2022-23, including ₹1 lakh crore in infra funding to states. Sectors, including highways and railways, have received the larger share of the capital expenditure pie, with an expectation that infra spending will create a multiplier effect on the economy. For the second year in a row, the Centre is betting on public infrastructure push for growth. But how good has implementation been in the last one year?

“The outlay for capital expenditure in the Union Budget is once again being stepped up sharply by 35.4% from ₹5.54 lakh crore in the current year to ₹7.50 lakh crore in 2022-23. This has increased to more than 2.2 times the expenditure of 2019-20. The outlay in 2022-23 will be 2.9% of the gross domestic product (GDP),” Sitharaman said in the budget speech. “With this investment taken together and the provision made for creation of capital assets through grants-in-aid to states, the effective capital expenditure of the Central government is estimated at ₹10.68 lakh crore in 2022-23, which will be about 4.1% of GDP,” she added.

However, going all out on capital expenditure was not an easy decision by the finance ministry, especially in the context of suggestions to opt for fiscal consolidation, and cut down on expenditure. But the ministry still went ahead, and as revenue secretary Tarun Bajaj puts it, the focus was on the “quality of expenditure”.

Addressing a post budget interaction with industry body Assocham on February 4, Bajaj said, “One of the suggestions that came from commentators was that curtailing our expenditure, fiscal deficit, and not raising the capital expenditure as much as we have, was one of the options to show a consolidation.”

“But in our deliberations inside, we realised that it was very important to give a push to the economy and the GDP. It was only possible with more investments,” he added. “Our capital expenditure as a percentage of GDP was languishing and we have been focussed more on fiscal deficit. We should now be focused on the quality of the expenditure. I am happy that with help from everybody we have been able to more than double the capital expenditure in the last three years.”

Now, not only is the share of total capex expected to go up significantly as a percentage of the GDP, it is at record high as a percentage of total estimated expenditure as well. To put the capital expenditure target for FY23 in perspective, at 19.01% of the total expenditure of ₹39,44,909 crore in FY23, the allocation is at a record high. Capital expenditure as a percentage of total expenditure was 15.9% in FY22, 13.54% in FY21, 12.58% in FY20 and 12.28% in FY19.

Viewed sectorally, a lion’s share of the infrastructure spending has been entrusted upon the Ministry of Highways and Ministry of Railways, which have cumulatively received ₹3,24,844 crore — almost half of the total budgetary allocation.

The ₹1,87,744-crore allocation to the highways ministry is up 73% from ₹1,08,230 in FY22.. The budget has also announced that the government will build highways spanning 25,000 kilometres in FY23 and will put in place a framework for construction of expressways.

Budgetary allocation to the railway ministry, meanwhile, has gone up 28% to ₹1,37,100 crore in FY23 from ₹1,07,100 crore in FY22. In a massive push to domestic manufacturing, the railways will manufacture 400 trainsets of the Vande Bharat Express — the indigenously developed semi high-speed trains — over the next three years.

“Railways will develop new products and efficient logistics services for small farmers and small and medium enterprises, besides taking the lead in integration of postal and railway networks to provide seamless solutions for movement of parcels,” Sitharaman said in her budget speech.

Capital expenditure allocation of ₹1,52,369 crore has been made towards defence services, up 10% from ₹1,38,850 in FY22. While the amount granted to the housing ministry has been kept almost flat at ₹27,341 crore, the allocation to the Department of Telecommunications [DoT] has been more than doubled from ₹25,933 crore in FY22 to ₹54,150 crore FY23, despite its poor show on utilisation of the allocation in the current financial year.

The budget fineprint also reveals that capex allocations have been enhanced in revised estimates for the current fiscal for the Ministry of Railways, highways, housing and defence services. Only in the case of DoT, the revised estimate has been reduced substantially to ₹5,470 crore.

The railway ministry has received an additional spending of ₹10,000 crore in the revised estimates for FY22, while allocation to the Ministry of Highways has been revised upwards by ₹13,000 crore over the budget estimate.

Along with the allocation, the budget also lays emphasis on the idea of PM GatiShakti — which aims at bringing synergy in infrastructure development. “PM GatiShakti is a transformative approach for economic growth and sustainable development. The approach is driven by seven engines, namely, roads, railways, airports, ports, mass transport, waterways, and logistics infrastructure. All seven engines will pull forward the economy in unison,” the finance minister said in the budget speech.

Additionally, to address funding issues for infrastructure projects at the state level, the Centre has enhanced allocation under the Scheme for Financial Assistance to States for Capital Investment. “For 2022-23, the allocation is ₹1 lakh crore to assist states in catalysing overall investments in the economy,” Sitharaman said, adding, the outlay for the scheme is being enhanced from ₹10,000 crore in the budget estimate to ₹15,000 crore in the revised estimate for the current fiscal.

Hoping for a multiplier effect to kick in with enhanced spending on infrastructure, the government has put a big bet to bring in the desired economic revival, job creation and demand growth. For the second year in a row, the finance minister has avoided any direct stimulus to demand and has, instead, opted for structural push. “Capital investment holds the key to speedy and sustained economic revival and consolidation through its multiplier effect. Capital investment also helps in creating employment opportunities,” said Sitharaman.

The Multiplier Effect

Almost a year after infrastructure emerged as one of the key areas to provide a facelift to the economy, the big question really is when will the impact of the capex push be visible. In short, when will the multiplier effect of the enhanced allocation in FY22 and FY23 come into play?

The government is confident that the impact of the initiative will be all encompassing for the economy. “Capital expenditure is an important initiative to push GDP growth. Once GDP growth is pushed through this mechanism, a lot of things start falling in place. Jobs will fall in place, economic revival will fall in place, businesses and taxes will improve and incomes will go up. Once it starts happening we also expect the private sector to come forward and replace the public sector capex,” Bajaj said.

The multiplier effect demonstrates itself in two ways, says Arindam Guha, leader, government and public services, Deloitte India. “One is the immediate generation of jobs as highways and other construction get started. Secondly, infrastructure creation lowers logistics cost, thereby incentivising companies to set up manufacturing units.”

“It will take around two-three years before the entire multiplier effect is felt, but that gets cushioned to an extent if we look at the employment numbers during the construction period,” he adds.

Pegging the quantum of the impetus provided by the government towards capital expenditure, Sebastian Morris, former professor, Indian Institute of Management-Ahmedabad, says it will be a multiple of government allocation by two in a year and a quarter. This essentially means that the quantum of the output and value created in the economy will be double the amount of the investment in infrastructure.

“I am hopeful that much of the allocation will be implemented. Infra spending is under two heads —direct capex of the Central government and ₹3,17,643 allocated in the form of grants to states for capital assets. States are going to spend and fully utilise the fund, generating growth from the demand side. The Centre, too, has ready institutional mechanisms to utilise funds allocated to them. So the impact of capital expenditure will be there,” he adds.

There are others who think that the impact has started showing up, especially in specific sectors. “The multiplier impact has started taking place in two key areas — highways and railways. Highway construction is taking place and its fallout is being seen. Also, a number of secondary market transactions are taking place in the highway sector. The ability to attract private investment is also a multiplier effect,” Jagannarayan Padmanabhan, director and practice leader, transport and logistics, Crisil Infrastructure Advisory, tells Fortune India.

In the past three years, the government has raised ₹23,000 crore from toll-operate-transfer projects and infrastructure investment trusts [InvITs]. On railways though, Padmanabhan says it will take at least two more years to bear fruit in terms of improved operating ratio, adding that railways need to see how private sector participation can be augmented.

The Implementation Issue

The government's big bet on infrastructure for economic revival calls for a closer look at implementation as it is expected to serve as a major pivot for growth till other engines, including private investment and consumption, fire up. Data from the budget document throws up some interesting observations. In Budget 2021-22, tabled on February 1 last year, the Centre had enhanced capex allocation in the revised estimate to ₹4,39,163 crore for FY21 from the budget estimate of ₹4,12,085 crore. However, under the actuals for FY21 tabled with the budget documents this year, capex has been reduced to ₹4,26,317 crore — a deficit of around ₹12,846 crore.

Going forward, even as the capex for FY22 has been enhanced to ₹6.02 lakh crore in the revised estimate, up ₹48,475 crore, or 8.74%, from the budget estimate of ₹5.54 lakh crore, the devil lies in the details. “RE 2021-22 for capital expenditure includes capital infusion/loans to Air India Assets Holding Ltd/Air India for settlement of past guaranteed and sundry liabilities, not backed by assets amounting to ₹51,971 crore. Excluding this, capital expenditure in the revised estimate is estimated at ₹5,50,740 crore,” according to the budget document. During the strategic sale of Air India, out of the total outstanding debt of ₹61,562 crore, debt worth ₹15,300 crore was taken over by the Tata group, while ₹46,262 crore was transferred to AIAHL. Additional excess liability as on August 31, 2021, too, was transferred to AIAHL. The question that still remains unanswered is: How can debt, which is not even backed by any asset, be treated as capital expenditure? At best, it looks like an accounting gimmick to window dress the fiscal deficit numbers.

The government, however, says the marginal dip in the revised estimate for the current fiscal after adjusting Air India's dues are “statistically insignificant”. “Capex budget estimate was ₹5.54 lakh crore. Revised estimate is ₹6.03 lakh crore. Even if you remove Air India sundry dues repayment it is ₹5.51 lakh crore, against the budget estimate of ₹5.54 lakh crore. That is statistically insignificant,” expenditure secretary T.V. Somanathan said in a post-budget interaction with the media.

Implementation issues have been dogging ministries as well. Taking note of the sluggish infra spending, the finance minister wrote to a number of ministries in December to push the pedal.

On the macro front, in the current financial year, against the total allocation of ₹5.54 lakh crore, the Central government has utilised ₹2.73 lakh crore till November 2021 — not even 50% of achievement even after eight months of FY22. Interestingly, capital expenditure dipped drastically from ₹57,483 crore in September 2021 to ₹23,919 crore in October and ₹20,360 in November, according to data from the Controller General of Accounts.

How Ministries Performed In FY22

Ministries, too, exhibit a mixed bag on the utilisation of capital expenditure allocated for the current fiscal. While some such as the Ministry of Road Transport and Highways, railways, and housing have utilised the amount well, others, including telecommunications, information and technology, and defence services, have been laggards.

The transport ministry has spent a total of ₹73,797.95 crore during April-October FY22 against the budgeted target of ₹1,08,230 crore — a 68% utilisation of the annual capex allocation. Buoyed by the good show, the Centre has now allocated an additional ₹13,000 crore for the ministry in the revised estimate for FY22. In April-October FY21, the utilisation was 58% of the allocations worth ₹81,974 crore at ₹47,690 crore. The actual deployment of funds by the ministry, therefore, has gone up by 35% in April-October of FY22, compared with the same period in FY21.

All said, a strange dichotomy is also visible in the form of divergence between utilisation of funds by the transport ministry and actual implementation on ground. Data reveals that even as fund utilisation is high, it is not reflected in the construction of roads and highways.

The Economic Survey 2021-22 tabled in Parliament a day ahead of the budget points to the same. According to the survey, a total of 3,824 kilometres of roads have been built during April-September (first half) of FY22, which translates into an average per day construction of 20.89 kilometres, against a construction of 36.5 kilometres per day in the lockdown hit 2020-21. A record 13,327 kilometres of roads were constructed in 2020-21, despite the country being under lockdown for over two months. At a pace of 3,824 kilometres in the first half of the current fiscal, highway construction may fall short of last year’s achievement by a little over 5,000 kilometres.

The actual expenditure by the Ministry of Railways during April-October period stands at ₹60,434.31 crore against the budgetary allocation of ₹1,07,100 crore for the entire year. This translates into an utilisation of 58% of the budgetary allocation. For the current fiscal, the allocation of new lines, gauge conversion, doubling and track renewals have been enhanced to ₹68,360 crore in the revised estimates, up 25% from ₹54,536 crore in the budget estimates for FY22, indicating a good absorption of funds.

The housing ministry, too, has utilised 54% of its allocation of ₹25,759.01 crore for the year. During April-October FY22, the ministry spent ₹13,816 crore.

DoT, meanwhile, has been an extreme laggard with only 12% achievement during the April-October period at ₹3,158 crore, against FY22 budget estimate of ₹25,933.56 crore.

The Way Forward

Experts call for a larger funding participation by states, Centre-state coordination and close monitoring of their implementation to make the capex initiative successful.

“It is not enough that only the Centre invests, states, too, have to come up with matching contributions. So financing continues to be an issue. The Central government can do it through National Highways Authority of India [NHAI] and the railways ministry,” says Deloitte’s Guha.

“The second issue that needs to be addressed is Centre-state coordination. States have to agree to common priority areas and work in synergy. That is where the essence of GatiShakti initiative comes in. A priority project now has to be seen in terms of an entire corridor keeping in mind the supply chain rather than individual projects, otherwise the effort will be piecemeal,” he adds.

Crisil’s Padmanabhan thinks strict monitoring is the need of the hour. “In the highways sector, due to a bigger project pipeline and relaxation in bidding criteria, a large number of EPC players have bid aggressively. Project execution needs to be monitored closely. As far as the railway ministry is concerned, they need to take a middle path to slowly bring the private sector in."

It may be safely concluded that capital expenditure is one of the key pivots on which the country's economic revival hinges especially with consumption and private investment remaining subdued. That’s what explains the keen top level interest and necessary intervention in the initiative as highlighted by the finance minister in the speech — “Budget 2021-22 had provided a sharp increase in provision for public investment or capital expenditure. Throughout the year, with the Hon'ble Prime Minister guiding the implementation, our economic recovery is continuing to benefit from the multiplier effect.” In fact, in his address to BJP party workers a day after the budget, PM Modi said, “In 2013-14, public investment was at just ₹1.87 lakh crore. In this year's budget, the government has pegged it at ₹7.5 lakh crore.”

With so much stress on infrastructure for bringing about economic growth, close monitoring is necessary for desired outcomes. Infrastructure is a long-term play and along with allocations the government will have to ensure sustained monitoring and develop not only inter-ministerial, but Centre-state synergies as well. Hopefully, the PM GatiShakti will bring in the desired synergies for the infrastructure route to economic revival.