Budget signals shift in infra strategy as govt pushes states, private sector to pitch in

India has earmarked Rs 11.1 lakh crore for capex in Budget 2024-25, representing 3.4 percent of GDP.

Finance Minister Nirmala Sitharaman announced that the capex budget for 2024-25 would be Rs 11.1 lakh crore, or 3.4 percent of GDP, maintaining it at the same levels as announced in the interim budget. Despite the seemingly substantial allocation, infrastructure expert Vinayak Chatterjee notes the government’s shift towards decentralizing infrastructure investment, emphasizing a bottom-up approach to spur economic growth.

In her  budget speech on July 24, the FM identified infrastructure as a top priority, highlighting its strong multiplier effect on the economy. She emphasized on the Central Government’s significant investments in the past and committed to maintaining robust fiscal support for infrastructure over the next five years, balancing this with other priorities and fiscal consolidation.

“This budget marks a strategic shift in mindset of how microeconomic policy is panning out. From 2014 till last year, the governing mantra was that large infrastructure and public works outlays were pump-priming the economy and GDP. To that extent, we saw a consistent government policy over the years of increasing the budget allocation significantly, increasing by 25 percent-30 percent in the last few years. Investment in infrastructure was touted to have the highest multiplier effect and was creating assets for the nation. Now we find a significant underplaying of the infrastructure sector where we have just got 11.1 percent increase,” Vinayak Chatterjee, Chairman, CII infrastructure council and founder and managing trustee The Infravision Foundation, told Moneycontrol in an interview.

The Economic Survey 2023-24, which was tabled on July 22, was a precursor to this change in stance, he said. The survey called upon the private sector to create jobs and scale up investments and the need to minimise the role the government plays.

No Big Bang Infra Announcements

Continuing the trend set by the interim budget on February 1, 2024, FM Sitharaman refrained from announcing major infrastructure projects. This was a shift from previous budgets, which were replete with bigbang initiatives for roads, power generation, renewables, airports, and more. Railways, traditionally a budget key point, received only a brief mention.
“The FM, in her speech, was rather candid when she said that they have had to reduce aggression to accommodate fiscal consolidation and making resources available for other priority needs,” Chatterjee said.

“The broad messaging that is coming through is that there is a conscious attempt to strategically downplay central government involvement in doing the heavy lifting in infrastructure and, instead, pushing it through states, private sector and even multilateral development banks,” he said.

Keeping the coalition politics in mind, the finance minister made major commitments to states where its National Democratic Alliance (NDA) partners Telugu Desam Party (TDP and Janata Dal (United) are in power– Andhra Pradesh and Bihar, respectively.

Financing Challenges

Chatterjee believes that while the government had a top-down approach of taking the lead in infrastructure investments, it is now looking at states, private sector and multilateral agencies to pump in resources for building infrastructure.

“Traditionally, the belief is that every one rupee spent on infrastructure results in three rupees of GDP. Construction has the highest multiple,” he said.

The FM said that the government will encourage states to provide comparable infrastructure support and made provisions for Rs 1.5 lakh crore in long-term interest-free loans. Private sector investment in infrastructure will be promoted through viability gap funding and enabling policies and regulations, with a market-based financing framework set to be introduced.

“This bottom-up approach is going to take at least four or five years to fructify. It takes time for MSMEs and others to start delivering growth,” Chatterjee said.

Reliance on multilateral agencies comes with its own challenges given the times they take in approving funding.

“The sudden step back in infrastructure investments in terms of reducing the percentage of outlays leads to an apprehension that this may cost India substantial basis points in GDP growth in the near-, short- to medium term. There is apprehension that it will take time to play out. In the meantime, they have drastically reduced the pace of growth of infra outlays, so this will have a certain impact,” he said.