Interim Budget, an arithmetic exercise; Expect higher infra allocation in full budget, says Vinayak Chatterjee

A hike in capex but restricted capital expenditure. From an infrastructure standpoint, in terms of projects, how’s the on-ground execution looking ahead of elections?

It's actually the most relevant question for infrastructure. Let me step back and do some stage setting for you so that we understand the Interim Budget. Remember that we have a medium-term history of very high allocations. For example, in the FY22 budget, Capex increased by 30 percent from Rs 5 lakh crore toRs 7. 5 lakh crores. That was followed by the FY23 budget, 23-24 budget, where Capex increase was even larger. It was a 35 percent growth, taking the budget allocation from Rs 7. 5 lakh crore to 10 lakh crore.

So, you've got a history and a momentum of 30 percent and 35 percent growth. Against this, what we have seen in the Interim Budget is an 11 percent growth. Now, 11 percent growth at current prices, if you just factor in the cost of various kinds of construction material, that's used in infrastructure. Let's say that that is at 6 percent. Effectively, you've got a real increase of 5 percent.

The signaling is very simple. As you would have noticed, the increases in road and rail are reasonably minuscule, practically flat. So, the signaling is pretty clear that this is an Interim Budget- It's a carry-on budget. It's an arithmetical exercise. It's also to demonstrate great fiscal governance. So, there is no fresh thinking, there is no fresh big burst allocations that were either expected or given in this budget.

Now what does this mean? This means that in the full and final budget that will be presented whenever in June or July, you are going to see a far larger increase in infrastructure spend, and my guess is that the 10 lakh crore grows, or the 11.1 will be taken to 13.5 lakh crore or 14 lakh crore.

You will get a new government; you are going to get a 30 percent- 35 percent higher allocation. And people may not believe this, but maybe even a 40 percent increase in the allocation for Capex. My signal to all your viewers is, don't read too much into the Interim Budget.

The new government will probably have a fresh view on development for the next 10 years on road, rail, port, airport, irrigation, river linking. A whole burst of fresh thinking will emerge.

Remember from 2014 when this government came into power, it has had a very consistent economic mantra, which is that GDP in this country is going to be turbocharged, boosted, picked up by the bootstraps by massive expenditure on public or massive public expenditure on infrastructure and capex allocation for infrastructure and this simple economic mantra has worked well for the government, has worked well for India and we have seen infrastructure push consistently turbocharged GDP growth.

Now, if you, for example, take a view that the allocation for infrastructure is going to remain at 11 percent. Then I'm afraid economists will have to go back to the drawing board, look at the reverse multiplier effects and actually calculate the extent that it will be a dampener on GDP growth. My thesis is very simple, the government cannot rest on an 11 percent growth in infrastructure allocation.

We have got a 7 percent growth. We have got 7.5 percent GDP growth on the back of 30 and 35 percent increases in capex in public expenditure. Some economists are arguing that no, this creates space for private capital to come into infrastructure. I'm sorry, I don't agree with the here and now. It is possible that private capital may come in in the medium term, but right now in corporate boardrooms in India and abroad, there is still not very much appetite for putting private capital into greenfield infrastructure projects.

So, in the foreseeable future in the medium term, certainly in the next two to three years, you are going to see GDP growth requiring to be boosted by massive spends on infrastructure.

A small piece of information in the post budget interactions last year - Dr. Somanathan made a very interesting comment, which has stuck with me, which is the fact that one rupee spent on infrastructure results in three rupees of GDP and one rupee spent on direct benefit transfer translates into 90 paisa of GDP. So, the economic thinking is very clear. Massive outlays in infrastructure expenditure in the absence of a significant rise in private spending in capex which will require complete reformatting of PPP formats, etc. The government honestly will not have much choice in the full budget but to increase capex by about 30 percent.

If the government were to allocate another 2 lakh crores. Will it not come in the way of the fiscal math? But how about the private capex? How will the fiscal math work out if we were to assume that another 40 percent or 30 percent has to come in in the next budget?

See, budgets are based on the political economy, and it is political correctness at the end of a 10-year term to demonstrate to India, to economists and to the rest of the world who's watching, that this government is conscious about fiscal prudence. It has demonstrated that it can run one of the fastest growing economies of the world with great fiscal prudence.

So that point is made, accepted, and full marks for that. Now let's look forward, right? Once you buy the thesis that you have to power economic growth with spends on infrastructure, the question is, what is so sacrosanct about continuing with fiscal prudence at levels of 5.1 and 5.2.

If you remember after Covid or during the period when the economy kind of went into a downturn because of Covid, most economists argue that there is no hard and fast rule about constantly decreasing fiscal deficit. The argument is that if productive assets are built and you are not wasting public money, you're not giving freebies, you are not indulging in wasteful expenditure in the budget, you are not indulging in loan melas and write offs, if productive assets are created in the economy, that helps not only boost GDP, but in the competitiveness of the nation, then nobody minds a higher fiscal deficit.

I mean, I would argue that the government should be allowed and encouraged to increase the fiscal deficit to 5.5, 5.6 levels and create the fiscal space to raise infrastructure expenditure by about 30 to 40 percent, somewhere in between, so that the GDP and the economy get a massive boost.

And believe me, no government in its final year does that, but many governments or most governments in the first year of their five-year term will take such a bold and aggressive step. So that's my answer for you.

So, setting fiscal deficit target at 5.1 percent and taking it to 5.3 percent would have its bearing? So, what is your sense of when we will start to see the benefits of infrastructure spending to flow into the GDP for the Finance Minister to really take this bold call, if at all?

First point, I think the markets will be very happy when the markets see that infrastructure spend is being projected or refashioned to a 30-35 percent increase from the current 11.1 percent, the markets will be happy too, because a few decimal points increase in the fiscal deficit is not going to worry the market, worry economists, worry analysts when they see that it is going into nation building and to productive expenditure.

Also, this will boost stock markets because the extra spending will result in demand for a vast array of goods and services, which will only benefit the share market. And people who are investing in infrastructure. And I don't think that the Finance Minister who does this needs to be embarrassed at all by increasing the fiscal deficit by a few decimal points to accommodate a higher infrastructure spend. There needs to be no embarrassment because you're doing it for nation-building.
And then your last point that it takes time - believe me, it doesn't take that much time. After all, your 30 and 35 percent increases in the last two years have certainly helped look at the performance of, you know, steel, cement, various infrastructure commodities, and the infrastructure build out that's happening in the country. It doesn't take very much time. It takes about a few months to convert the cash available into construction and order execution.