Budget 2022 | Infrastructure push is the holy grail for India’s $5 trillion target

When then United States President Franklin D Roosevelt authorised the New Deal in 1933, little did he know that it would become the poster child of Keynesian and neo-Keynesian economics. Legend has it that in the aftermath of the 1931 Great Depression, the US, a staunchly capitalist State, realised that a compromise with socialism exists without diluting the concept of free enterprise.

What followed was a record flexing of the fiscal muscle, resulting in significant job creation, and economic expansion. Importantly, this was achieved via massive investments in public works programmes such as infrastructure creation for much of the 1930s, rendering the US its current superpower status.

Similar conditions exist today as India emerges from the economic destruction left behind by COVID-19. Indian policy makers must realise that for India to regain its economic momentum, steps like that of the New Deal must be taken with utmost urgency. Nevertheless, sectors focusing on infrastructure creation that have significant multiplier effect on the larger economy should take precedence over any other form of inconspicuous investment. Thankfully, these features appear to be present in the Budget 2022-23, given the expected increase of 30 percent in allocation for the Ministry of Road Transport and Highways (MoRTH) along with similar increases for other related ministries.

How does this work, and what makes infrastructure the holy grail for rapid economic expansion? This is especially relevant given that India is expected to become a $5-trillion economy by the year 2026-27, attaining the $10 trillion threshold by the year 2033-34. The answers lie in the equation of the GDP itself. In other words, for a deeper understanding, one must analyse how a country’s GDP is calculated, especially from the aggregate supply perspective.

For the uninitiated, the GDP is nothing but the sum of the annual Gross Value Added (GVA) by an economy with net consumer taxes. In a domestic consumption-based economy such as India, while the GDP calculations from the aggregate demand perspective become paramount, it is the annual value added that gives us the real picture of economic strength. Incorporating inflation, the metric’s calculation based on current prices instead of constant prices can help standardise the understanding.

At its very core, India’s GVA is no longer calculated at factor cost, and is, therefore, a function of ‘depreciation’, ‘profits’, ‘cash in hand’, ‘wages paid’, and, importantly, ‘net taxes (net of subsidy)’. These variables are vastly dependent on infrastructure-related capex, which is both capital as well as labour-intensive, and provides long-term sustainability to economic growth.

Historically, all nations that have attained durable economic growth via infrastructure creation have primarily focussed on the above-mentioned variables to turbo charge their growth numbers. In fact, under the Marshall Plan, Germany and Japan were the pioneers of this form of economic expansion, incorporating capital goods (eligible for depreciation benefit), wage growth (employment potential of the economy) and deficit financed order books (driving cash-in-hand and margins). Given this background, if India is serious about attaining its targets over the next 10 years — front-loading infrastructure spending is the only way forward.

Looking at India’s infrastructure pipeline, over a 10-year period, the country will be collectively spending nearly $507 billion on urban transport solutions and interstate expressways alone. Out of this quantum, $151 billion is going to be used to build sub-urban and metro systems impacting almost 100 Indian cities, and over $100 billion in building high -speed rail network across the western and eastern industrial corridors. Additionally, expressways, which will become the lifeline of India’s low waste economy, will see an incremental investment of over $256 billion.

When combined with other sectors such as education, healthcare, railways, power, and urban renewal schemes, this sum can easily reach a figure of $700-800 billion. Since most economists believe that the infrastructure multiplier for India is around ‘3’, the actual impact of this spending on the overall economy will be to the tune of $2.2 trillion. What this means is that, if one assumes that the nominal GDP growth is 11 percent (incorporating 4 percent inflation, and 7 percent real growth), India will create an incremental gross value added of nearly $6.5 trillion over a 10-year period. Consequently, on an annual basis, 34 percent of the $650 billion incremental value added will be made up of infrastructure spending alone.

Of course, for this to become a reality, the Union government must focus on the quality of public expenditure and maintain a one-track focus on the outcome. Care must be, however, taken that capital expenditure (as per budgetary allocations) must grow at 20 percent on average for the next 10 years, until the $10 trillion GDP threshold is attained. Now that India’s private industry clearly needs a hand to hold, the country’s very own ‘New Deal Moment’ has arrived, and the government must not shy away from firing all cylinders to safeguard India’s economic potential.