Budget 2023: Look Beyond Roads, Rail In Capex

IN LAST FIVE YEARS, the Union government has spent ₹19.26 lakh crore on capital assets to keep growth ticking when almost all other engines of the economy were running in slow motion. With global recession looming, the coming Union Budget is again expected to announce huge capital spending to prevent the economy from stalling.

This is not incidental. Since FY19, Central government has made a strategic shift in infrastructure spending. Instead of treating capital expenditure as just an accounting entry under expenditure budget, it decided to use it to fire up the economy. The result: Total revised allocation of ₹17,07,404 crore between FY19 and FY22 exceeded the total Budget estimate of ₹16,05,331 crore during the period. While this has helped India wade through many challenges in last four years, namely uncertainties of U.S.-China trade war, economic slowdown of 2019 and the mother of all crises, Covid 19, experts say there is a need to refine the strategy. The reason: Most of this expenditure has gone into building road and railway assets at the cost of segments such as health and urban infrastructure that are equally important for country’s holistic development (See ...But Highways, Railways Get Special Treatment).

Capex Focus

Until FY17, Union governments used to reduce capital expenditure whenever their accounts were under pressure to maintain fiscal balance. Union Budget FY19 was a turning point. Since then, capital expenditure has never been reduced to bring down fiscal deficit in the hope that infrastructure-led growth will eventually attract private investment.

With private investment still tepid and exports likely to be under pressure due to global slowdown and likely recession next year, there is no doubt that Union Budget FY24 will again bet big on capital expenditure. Finance minister Nirmala Sitharaman said during a pre-Budget consultation in November that capital expenditure can "guarantee" growth. "We would continue to push capital expenditure. We are well on course to meeting this year's target. States have shown extraordinary absorption capacity for taking the money and spending on capital assets. The government sees the capital expenditure route as one which can guarantee good growth," she said. Out of ₹7.5 lakh crore allocated for capital spending in FY23 Budget, 55%, or ₹4.09 lakh crore, had been utilised till October 31 compared with 46% in corresponding period of previous fiscal.

Need for Diversification

Experts welcome the attention being paid to building assets but say there is too much focus on highways and railways. They say other infrastructure segments also need more attention. Allocation for highways and railways as percentage of capital expenditure has risen from 35% in FY18 to 43% in FY23 (₹3,24,844 crore out of ₹7,50,000 crore capital expenditure). The percentage of allocation to other significant sectors such as defence, urban development and health has been coming down over the years. For example, allocation to defence as percentage of capital expenditure has come down from 28% in FY18 to 20.31% in FY23. The share of health has dipped from 1.13% to 0.75%, while that of urban infrastructure has fallen from 6.25% to 3.64%.

An analysis by Fortune India shows ₹26,63,362 crore outlay for capital expenditure in past five years (against ₹11,49,179 crore in previous five years). Of this, highway ministry (₹5,63,622 crore) and railway ministry (₹4,88,097 crore) accounted for ₹10,51,719 crore. Sectors such as health, urban development and telecom lag with ₹17,184 crore, ₹1,29,540 crore and ₹1,19,141 crore, respectively.

Experts say government needs to give more attention to urban infrastructure. "Government focus has been on roads and railways. Logistics parks are new areas. They will have a multiplier effect. Industrial corridors will not succeed unless accompanied by supporting urban infrastructure," says Arindam Guha, partner, Deloitte India. He says health, education and urban infrastructure segments are largely under state governments or municipal authorities with limited role for Central government, while a number of important infrastructure segments such as energy are part of National Infrastructure Pipeline and being dealt by the private sector. Abhishek Gupta, sector head and vice president, ICRA, says while higher focus on railways and highways is a good strategy due to their high multiplier effect, other segments, too, have potential. "Drinking water and sewage treatment infrastructure need increased focus given the importance of public health for citizen well-being. Rural infrastructure like access to clean water and sanitation services is one area where we see substantial investment potential," he adds.

But allocations are not evenly spread out even within roads and railways.

Flagship Projects

Expenditure trends for highway and railway ministries show large funding for single flagship projects rather than projects for different geographies. Highway ministry did not respond to request seeking details of projects undertaken from Central capital expenditure but a recent statement by transport minister Nitin Gadkari gives a sense of the ministry’s spending patterns. "The expressway between Delhi and Mumbai would be almost complete in December. It will be 1,382 kms long. It is worth ₹lakh crore. With this, the distance between the two cities can be covered in 12 hours," he says. The ₹1 lakh crore capital cost is around 20% the spending of ₹5,40,469 crore over last five years. This means a big part of the outlay has been used for one project.

Railway ministry also did not reply to mail seeking details of key projects built from Central funds over last five years. But Railway Minister Ashwini Vaishnaw has indicated in the past that railways' infrastructure requirements are huge and at the same time paramount considering high logistics costs in the country. "India should be investing significantly more into railways. We have to invest ₹3 lakh crore consistently to meet aspirations of the people and lower logistics costs. Competing economies have been investing around ₹9 lakh crore for last 30 years," Vaishnaw said at a recent event in New Delhi.

Funding Issues

With over ₹10 lakh crore spent on railways and highways over last five years, it is now paramount for both the sectors to find new funding models to reduce dependence on Budget allocations. Central government has limited space for continued support with fiscal deficit crossing the red line and segments such as urban infrastructure, health and education requiring more hand-holding. Railways need to come up with a tariff policy for dedicated freight corridors, revive reforms such as introduction of private trains and rejig its freight tariff policy. Highway ministry should speed up its road monetisation programme and revive the build operate and transfer model of public private partnership without depending only on Central funding.

Monitor Spending

Apart from finding new models to bankroll projects that have received good funding in the past, central government also needs to monitor utilisation of funds as actual capital expenditure over past five years has lagged revised estimates. The revised estimate between FY18 and FY22 comes to ₹19,80,849 crore. The amount spent was ₹55,158 crore less at 19,25,691 crore. Spending by states has also been lacklustre. For example, they had utilised only ₹34,034 crore (30%) out of their ₹1,11,899 crore capital outlay till October-end. "Overall higher spending by Centre is offset by weak state spending. Considering buoyant receipts, such low spending growth (especially capital expenditure by states) is puzzling. However, we note that 60% of annual spending by states occurs in the second half, and thus, one could hope for a pick-up in 2H FY23," says Motilal Oswal’s research report, EcoScope–The Economy Observer, released in November.

Budget Agenda

Key issues that the Union Budget can address are narrow spending focus, lower fund utilisation, making railway and highway segments self-sufficient through new funding models and encouraging both states and the private sector to participate in the infrastructure story in a big way. "Bulk of the infrastructure funding is still coming from banks, leading to asset-liability mismatch. Securitisation has worked in other countries and could be adopted in India, too," says Guha. According to him, under this model, government could set up institutions to take infrastructure loans from banks. Different types of loans can be pooled and converted into securities. "These bonds will be backed by cash flows from these loans and rated by agencies. This can create liquidity and attract non-government financial institutions," says Guha.

The Budget could also encourage setting up of an institutional mechanism at state level to implement big projects. "There is no nodal agency for infrastructure in states. Centre needs to create a framework with an infrastructure body to which states can transfer all surplus assets," says Guha.

Kotak Mutual Fund's market outlook for 2023 says India is at the "cusp of a multi-year capex cycle." For that to happen, headline allocation numbers will not be enough. If not pruning infrastructure allocations from FY18 was a strategic shift, time has come for more effective monitoring, increasing fund flow to sectors like health and education and finding innovative models to encourage private sector to take part in infrastructure-led revival of the Indian economy.