Nirmala Sitharaman’s Atmanirbhar 3.0 heavily relies on multiplier potential of infrastructure, real estate to drive growth

Finance Minister Nirmala Sitharaman

Over the past few weeks, amid encouraging signs of sprouting green shoots, the Narendra Modi government’s economic brain trust may have been occupied to deal with specific challenges to keep the momentum going.

There are two broad areas that required immediate policy attention. The first, which in many ways forms the edifice of the India growth story, is how to sustain the spurt in household spending beyond the current festival season.

This could happen when consumer spending rapidly gathers pace shortly after the restrictions move away because of pent up demand. The torrent in household spending over the last few weeks have helped companies empty out the inventories, and the challenge is to spur demand strong enough to push companies to add more capacity lines.

Any business decision to invest and expand are predicated on two primary premises: one, anticipated demand, and, two, the capacity and conditions to invest.

To be sure, Finance Minister Nirmala Sitharaman has avoided temptations, if not persistent demands, to address these by giving out direct cash handouts. Instead, the ‘Atmanirbhar Bharat Package 3.0’ has sought to address these by triggering the ‘multiplier effect’ in some key sectors that have strong income and employment generation potential.

A positive multiplier effect in a sector would imply that investment in expansion in that line of business will have secondary round ripple effects by spinning new jobs and pushing up income levels.

More specifically, the minister’s focus on road, infrastructure and housing projects as vehicles to spur economic activity needs pointing out. These segments, put together, account for about 12 percent of India’s gross domestic product (GDP) and are the largest creator of direct and indirect employment, employing about 75 million people.

These sectors have a strong multiplier effect. For instance, according to some estimates the roads and infrastructure sector can potentially create 2.7 new jobs indirectly for every Rs 100,000 invested, with major forward linkages to sectors such as real estate, and manufacturing, and backward linkages to steel and cement among others.

Sitharaman’s set of 12 measures on November 12 included relief for home buyers and realty developers, boost to rural employment and fertiliser subsidy, among others. The stimulus adds up to Rs 2.65 lakh-crore, or 15 percent of India’s GDP.

Among these, four measures stand out from a multiplier effect potential. The minister announced an additional outlay of Rs 18,000 crore over budget estimate towards PM Awas Yojana (Urban), which will help complete 1.8 million houses.

In the government’s estimates this will create an additional 7.8 million jobs, besides pushing up production in intermediates such as steel and cement.

On real estate again, the government increased the differential between circle rate and agreement value in real estate income tax from 10 percent to 20 percent with effect from November 12 till June 30, 2021, for primary sale of residential units up to Rs 2 crore, a move that will likely lift a restrictive barrier in home buying decisions.

The minister also said that the government would make a Rs 6,000 crore equity infusion into the debt platform of the National Investment and Infrastructure Fund (NIIF), which will help the NIIF in raising Rs 1.1 lakh-crore by 2025 for infrastructure projects financing.

Besides, performance security on contracts in the construction/infrastructure sector will be reduced to 3 percent from the existing band of 5-10 percent.  Earnest Money Deposit (EMD) will also not be required for bid tenders and will be replaced by bid security declaration till December 31, 2021.

Both these steps, in terms of intent, are aimed to make more capital available with infrastructure developers that will enable them to deploy more funds in ongoing projects, rather than cash getting locked up for months in government departments in anticipation of projects being awarded.

The vast consuming middle class may feel a tad disappointed because there were no visible cash incentives in the form of tax breaks to raise their spending ability. That said, the pre-Diwali package does seek to address some structural infirmities, although the results may not be visible in footfalls in shopping malls and car showrooms.

Gaurav Choudhury is Consulting Editor, Network 18. Views are personal.