India's big infra bet – pushing hard on physical assets in pursuit of long-term growth

India's infrastructure needs are massive.

In 2016, S&P Global Ratings said infrastructure was key to India sustaining its relatively high rate of growth.

"The country, however, is plagued with a weak infrastructure incapable of meeting the needs of a growing economy and growing population," the ratings agency had noted six-and-a-half years ago.

It is fair to say that progress has been made since then.

India has invested heavily in infrastructure in recent years. The onset of the coronavirus pandemic sparked a staggering increase in the government's capital expenditure, with the Budget for 2023-24 setting a new record target of Rs 10 lakh crore.

Big numbers in public investment are a new phenomenon; it is easy to forget that the Centre's capital expenditure was a mere Rs 3.36 lakh crore as recently as 2019-20.

Since then, things have moved rather rapidly, with the pandemic providing an opportunity to look into the future and not chase immediate and outsized growth rates. As Finance Minister Nirmala Sitharaman noted in her 2023-24 Budget speech earlier this year, investments in infrastructure and productive capacity have a large multiplier impact on growth and employment.

"This 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," Sitharaman had said.

Progress and hurdles

Nothing quite illustrates India's infrastructure push like the money spent and work done by the Ministry of Road Transport and Highways.

In 2015-16, the total allocation for the road ministry was Rs 46,913 crore. The Budget estimate for 2023-24 is more than five-and-a-half times higher at Rs 2.7 lakh crore. But it is not just about increasing expenditure but its quality too: if capital spending accounted for 59 percent of the total allocation for the road ministry in 2015-16, it is seen at 96 percent in 2023-24.

In terms of outcomes, the daily National Highway construction rate is often cited, having hit 36.5 kilometres in 2020-21. Admittedly, that has declined to 24.1 kilometres this year.

However, it is worth mentioning that National Highways make up a mere 2-2.5 percent of India's road network. Rural roads, which account for approximately 70 percent of all roads, are being constructed at a much faster rate – although that too has eased off from 133 kilometres per day in 2017-18 to 71 kilometres per day this year.

Clearly, the decline in road construction rates shows the work is far from over. Later this week on March 23, Minister of Road Transport and Highways Nitin Gadkari can be expeted to shed some more light on this matter at Moneycontrol's Policy Next summit.

The 1,454 infrastructure projects of Rs 150 crore and above that were being monitored as on February 1 had an anticipated completion cost of Rs 25.05 lakh crore. This is 22 percent more than originally anticipated.

Further, key infra sectors are seeing high project delays – 92 percent for civil aviation, 76 percent for water resources, and 64 percent for urban development, to name a few.

A challenge, going ahead, also lies on the monetary front. According to a World Bank report from November, India needs to invest $840 billion over the next 15 years into its urban infrastructure to ensure that the needs of the urban population are met. Assuming an exchange rate of Rs 80 per dollar, this means an annual investment of nearly Rs 4.5 lakh crore on just urban infrastructure.

"Only 5 percent of the infrastructure needs of Indian cities are currently being financed through private sources. With the government's current (2018) annual urban infrastructure investments topping at $16 billion, much of the gap will require private financing," the World Bank noted.

The public sector has pressed hard on the pedal in recent years and various green shoots are visible when it comes to the private capex cycle. The two need to join forces as India pursues long-term growth.