The Infra Multiplier

TREASURY BENCHES of the Lok Sabha resonated with loud thumps on Budget day, the moment finance minister Nirmala Sitharaman announced a “steep increase” in FY24 Central capital outlay to ₹10 lakh crore, up 33% from ₹7.5 lakh crore in FY23, in her Budget speech on February 1. While Prime Minister Narendra Modi thumped the desk, welcoming the move, fully aware that investment in infrastructure will serve as the key driver of domestic growth amid a slowing global economy, BJP legislators raised slogans in the name of Modi in the House. Congress party MPs, too, took to sloganeering in the name of Bharat Jodo — the ongoing party campaign led by Rahul Gandhi.

The din gave a chance to the finance minister to take a sip of water before resuming her speech. “The substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowd-in private investments, and provide a cushion against global headwinds,” she added.

“The direct capital investment by the Centre is complemented by the provision made for creation of capital assets through grants-in-aid to states. The effective capital expenditure of the Centre is budgeted at ₹13.7 lakh crore, 4.5% of GDP,” Sitharaman said in her Budget speech.

Experts have given a thumbs-up to the colossal capex plan. “We expected a 10-15% hike in allocation over FY23. Higher allocation is very encouraging. Clearly, there is a firm belief that infrastructure leads to a high GDP multiplier,” says Arindam Guha, partner and leader, government and public services, Deloitte India.

CRISIL’s post-Budget report, too, says capex has got its due. “This time, the push is larger. The government has largely stuck to its medium-term path of lifting the productive capacity of the economy through higher infrastructure spending, rather than directly boosting consumption in a broad-based manner in a pre-election year,” the rating agency said in the report.

Apart from the massive allocation, the Budget also announced key policy drivers, roping in state governments to support infrastructure in the long run. The 50-year interest-free loan to state governments has been extended for another year. This is expected to achieve multiple objectives of enhancing investment, taking some burden off the Centre’s shoulder and making the infra spend more broad-based, while incentivising states for complementary policy actions.

Another policy driver is the setting up of a finance secretariat for infrastructure, which will handhold stake holders for more private investments in sectors such as railways and power. Additionally, 100 critical transport infrastructure projects will be taken up on priority at an investment of ₹75,000 crore, including ₹15,000 crore from private sources. The projects will provide for last- and first-mile connectivity in sectors such as ports, coal, steel, fertiliser, and foodgrains. Regional connectivity through airports, heliports, waterdrome, city infrastructure push through municipal bonds, and a ₹10,000 crore Urban Infrastructure Fund are some of the other initiatives announced in the Budget.

Infrastructure Initiatives

On the sectoral allocation front, railways and highways led the charge, bagging almost half of the FY24 Central allocation at ₹4.98 lakh crore. Capital allocation to the highway ministry stands at ₹2.58 lakh crore, while for the railway ministry it is ₹2.40 lakh crore. While the allocation to the highway ministry is up 38%, for railways, it is a whopping 75% jump over FY23. Allocations for both the ministries have been increased in the budget estimate for FY23 as well (See graphic: Capital allocation to sectors goes up, and so does utilisation).

It is interesting to note that while the highway ministry’s allocation is higher in absolute terms compared with the railways, it is lower than the railways when compared in terms of the annual hike in outlay. This is a trend reversal of sorts and experts believe the government may be committing more funds to the railways since private sector participation in the sector has remained elusive, while in highways, private resources now need to be garnered. This could even be a nudge to the highways sector to tap the public private partnership (PPP) mode of development.

“Today, capex utilisation is overly dependent on the highways despite a much higher scope of private participation in the sector. In railways, there is limited private participation. Initiatives such as railway station development on PPP, and private trains have not taken off. So the government is now clear that railway infrastructure facelift has to be done through public expenditure only,” says Guha of Deloitte India. Virendra D. Mhaiskar, CMD, IRB Infrastructure Developers Ltd.— a major highway developer — sees it as a push for more PPPs in the sector. “With PPP some part of the incremental capex will also come from private sector firms,” says Mhaiskar.

Lower Revised Estimates

Even though the two flagship ministries have been granted higher allocation in the revised estimates for the current financial year, total capital allocation has been lowered by ₹21,972 crore to ₹7.28 lakh crore. Offering an explanation for the cut, finance secretary T.V. Somanathan said the downward revision is on account of lower utilisation by states. “There is a slight deviation. It is mainly on the state capital expenditure, which is going to fall shortly from the budgeted amount of ₹1 lakh crore,” he said. Some portion of their capital spending had ‘reforms’ condition which state governments could not meet, he added, expressing confidence that the capital spending exercise of the last two years has boosted the spending capacity of states. According to Budget documents, the revised estimates for assistance to states for capital expenditure in FY23 stands at ₹76,000 crore, compared with the budgetary provision of ₹1 lakh crore, while the FY24 outlay towards assistance to states for infrastructure has been enhanced to ₹1.3 lakh crore.

Other government departments that have been allocated a higher share in the capex outlay include telecom, housing, and atomic energy. The atomic energy ministry has received a capital allocation of ₹15,981 crore in FY24, against ₹13,140 crore in the revised estimate for the current financial year. Telecom, too, has been a major gainer with an allocation of ₹61,692 crore for FY24, even though the current year’s allocation has been reduced to ₹37,245 crore compared with the budget estimate of ₹54,140 crore. The capital outlay to defence services for FY24 has been increased to ₹1.62 lakh crore, compared with the FY23 revised estimate of ₹1.50 lakh crore.

Capex Utilisation

Allocation, meanwhile, is just one part of the story. The defining features over the last couple of years have been the absorption of budgetary provisions in the economy through various ministries. The current financial year has exhibited robust utilisation, with capex deployment by Central ministries up 25% to ₹4.89 lakh crore in the April-December period, compared with ₹3.91 lakh crore a year ago.

The highway and railway ministries have been the front-runners in capital spending, while telecom exhibited a major comeback compared with the slowdown of the previous year. Both highways and railways have utilised over 80% of their allocation for the fiscal by December itself. Out of the FY23 Budget estimate of ₹1.87 lakh crore, the highway ministry has spent ₹1.49 lakh crore till December 2022, while the railways has utilised ₹1.22 lakh crore out of the total allocation of ₹1.37 lakh crore. Housing, too, has done reasonably well. Out of the total allocation of ₹27,341 crore for the current financial year, the ministry has deployed ₹19,869 crore, or 73%, till the month of December. In case of defence, the ministry has utilised ₹82,580 crore towards capital outlay on defence services, out of the total allocation of ₹1.52 lakh crore.

The Multiplier

The last couple years have been about achieving the ripple impact of infrastructure investment on the economy. Between 2017-18 and 2021-22, Centre deployed ₹19.25 lakh crore in capital expenditure. Sitharaman says investments in infrastructure and productive capacity have a large multiplier impact on growth and employment.

“The multiplier effect in the economy is now visible. One aspect is the direct multiplier. Construction of roads or railway project leads to employment at site. This captures the construction sector growth as part of GDP. That is the immediate effect,” says Deloitte India’s Guha. “The major medium- to long-term effect is when the same infrastructure leads to additional investment by the private sector,” he adds.

“The tangible multiplier effect and services sector growth impact on cement companies, road construction equipment, and steel. Not the overall cement consumption, but perhaps the cement consumption by the road sector,” says Vineet Agarwal, managing director, Transport Corporation of India. The intangible benefits, too, have started accruing in the form of improvement in the turnaround time for commercial vehicles on highways, he adds.

It should be noted that in the five-year period between FY18 and FY22, the total capital expenditure at ₹19.25 lakh crore is almost double of the ₹10.88 lakh crore during the preceding five-year period (FY13-FY17). As a result, during the period, capex as part of nominal GDP has gone up from 2.03% in FY14 to 2.74% in FY23. With the outlay made in the Budget for FY24, it will touch 3.3% of GDP.

The share of capital expenditure in total expenditure, too, has gone up significantly from 13.73% in FY13 to 22.22% in FY24. Despite all the initiatives, the gross fixed capital formation (GFCF) — an indication of the creation of fixed assets in the economy and a key component of GDP — has remained lower than the levels a decade ago. According to the first advance estimates for the current fiscal, GFCF at 33.9% of GDP is lower than 34.1% in FY13.

All these essentially mean that single-handed heavy lifting by the government needs to be complemented with adequate private participation for incremental fixed asset creation in the economy for the GDP multiplier impact of capital expenditure push to kick in.