FM Sitharaman bets on infra to spur growth, with eyes firmly on fiscal math

Finance Minister Nirmala Sitharaman presented the interim budget on February 1.

Finance Minister Nirmala Sitharaman, on February 1, presented a carefully crafted interim budget with a focus on government-led spending on roads and ports to spur economic growth while adhering to the fiscal consolidation glide path.

The interim budget also described as the 'vote on account', the last before the country heads to the Lok Sabha polls due by May, outlined the contours of the macroeconomic framework to turn the country into “Viksit Bharat” (a developed India) by 2047, with a focus on GYAN, an acronym for four key demographics — poor (G for garib), Youth (Y for yuva), farmers (A for annadata) and women (N for narishakti).

Infrastructure creation, along with fiscal discipline, has stood as the signature characteristic of the Narendra Modi government since it assumed power in 2014, riding on a landslide election victory.

In her sixth budget, too, Finance Minister Sitharaman also focused considerably on capital expenditure and fiscal prudence.

HEAVY LIFTING ON CAPEX

The government will continue to do the heavy lifting on investment but at a more gradual pace. Sitharaman projected a capital expenditure of Rs 11.1 lakh crore in the year starting April 1, a growth of 11.1 percent over the current year.

The government expects higher public spending on infrastructure projects to stimulate economic growth and create jobs.

The decision to raise capital expenditure —from Rs 7.5 lakh crore in 2022-23 to Rs 10 lakh crore in 2023-24 and further for the next fiscal year—is primarily driven by the assumption of an economic multiplier effect playing out in the economy.

Highways and ports are long gestation projects but can create jobs, with cascading benefits on intermediate industries such as cement and steel. The government’s decision to do the heavy lifting on capital expenditure appears to be a part of the well-crafted medium-term strategy to not just accelerate the pace of infrastructure development but also to trigger a cycle of private sector investment, or what economists sometimes describe as the “crowding in” phenomenon.

The government’s budgetary focus on infrastructure has been consistent over the past ten years.

In 2014, the year the Modi government assumed office, the total budgetary allocation for road works and the National Highway Authority of India (NHAI) stood at Rs 24,014 crore. This has grown more than tenfold in the past ten years to Rs 2.77 lakh crore in 2024-25.

The length of national highways has also grown more than 60 percent—to 146145 km in 2023 from 91,287 km in 2014.

The focus on infrastructure has not been limited to highways alone. More people are taking to the skies now compared to earlier.

“The aviation sector has been galvanised in the past ten years. The number of airports has doubled to 149. The rollout of air connectivity to tier-two and tier-three cities under the UDAN 19 scheme has been widespread. Five hundred and seventeen new routes are carrying 1.3 crore passengers. Indian carriers have proactively placed orders for over 1,000 new aircraft. Expansion of existing airports and development of new airports will continue expeditiously,” the finance minister said.

The commercial fleet strength in India has gone up from 395 in 2014 to 714 in 2023, an 81 percent jump. The number of passengers handled at Indian airports has gone up by 22 percent—from 16.89 crore in 2014 to 20.58 crore in 2023.

PRIMACY ON FISC

Sitharaman was also on track to meet the fiscal consolidation goals, something that stock markets raised a toast to.

The minister pledged to keep the fiscal deficit — a measure of how much a government borrows to meet its expenses—at 5.1 percent of GDP in 2024-25 from a revised 5.8 percent in 2023-24.

The government’s medium-term target of lowering the fiscal deficit to 4.5 per cent of GDP by 2025-26 would have ideally required a 70 basis point (one basis point is one-hundredth of a percentage point) reduction in 2024-25.

The fiscal deficit target for 2024-25 has been set at 5.1 per cent of GDP, which is achievable given a nominal GDP growth rate of 10.5 per cent.

To finance the fiscal deficit in 2024-25, the net market borrowings from dated securities are estimated at Rs 11.75 lakh crore, from a revised estimate of Rs Rs 11.8 crore in 2023-24. The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs Rs 14.13 lakh crore, from a revised estimate of Rs Rs 15.43 lakh crore in 2023-24.

The finance minister has banked on better revenue mobilisation to keep the deficit under check. For 2024-25, The net tax receipts are estimated at Rs 26.01 lakh crore, up 11 per cent from the previous year’s revised estimates of Rs 23.2 lakh crore.

After three years of strong rise, slower growth in government capital spending, from 33 percent in 2023-24 to 11 percent in 2024-25, has also offered more fiscal elbow room to the finance minister to contain the fiscal deficit within reasonable limits.

These estimates could well be revisited in July when the new government, after the elections, presents its full budget.