Can Centre’s capex frenzy continue unabated?

How sharply has spending risen?

In the 2016-17 budget, the Centre allocated just ₹2.47 trillion for infrastructure. In 2023-24, this had quadrupled to ₹10 trillion. As a share of GDP, it has more than doubled in this period from 1.6% to 3.4%. That apart, the Centre pushed states to allocate more for capital expenditure (capex). To enable them to do so, the Union government offered 50-year interest free loans. In 2022-23, it disbursed such loans worth ₹81,195 crore. For this fiscal, it has allocated loans worth ₹1.3 trillion. It has also released extra instalments of devolution funds to motivate states to front-load capital expenditure.

Why was the spending increased?

With major engines of growth—private consumption, private investment and exports—sputtering post-pandemic, it was left to the government to do the heavy lifting. It significantly increased public investment in infrastructure for two reasons. One, public capex has a higher multiplier effect on economic growth. In 2022-23, India’s economic growth was a strong 7.2% and the government’s first advance estimate puts 2023-24 growth at 7.3%. Two, the hope that it will catalyze private investment that has been muted for a while. Private investment has increased but only marginally so far.

How does India’s spending compare with others’?

India’s per capita infrastructure investment of $ 91 pales into insignificance compared to Japan’s $1,124, the US’ $938, China’s $622 and Brazil’s $256. If the country has to achieve its ambition to become a developed nation with a $30 trillion economy (it is $3.4 trillion now) by 2047, it needs to invest a lot more to enable a faster pace of economic growth.

Can the Centre continue this frenzy?

Under the Fiscal Responsibility and Budget Management Act, the Centre has to eliminate revenue deficit and limit fiscal deficit to 3% of GDP. While it had narrowed the fiscal deficit to 3.4% by 2018-19, the pandemic forced it to pause fiscal consolidation. In 2020-21, the fiscal deficit was 9.2%. It is expected to drop to 5.9% in 2023-24. The Centre has promised to reduce it sharply to 4.5% by 2025-26. The higher deficit gave it room to spend heavily on infrastructure, but that luxury won’t be available any longer.

Is there a way out of the squeeze?

The government has been cutting back on revenue expenditure to ensure funds for capex. It cannot do so beyond a point. At the same time, aware of the continued need to invest heavily in infrastructure, it has announced the ₹102 trillion National Infrastructure Pipeline assuming a private sector share of 21%. This needs to be increased. Private players, who avoid infrastructure projects for their long gestation, could be offered tax breaks, better public-private partnership arrangements and cheaper long-term funds.