Given the significant slowdown in investments from the private sector — because of over-leveraged balance sheets as well as lower availability of credit, thanks to the distress in the banking sector — the revival of capital expenditure hinges on increased public spending. The principal positive measure initiated in this year’s budget was the significant outlay for infrastructure spending. The budget focuses on public investment, which, if implemented effectively, will have large spillover effects on growth. Despite the pressure on fiscal consolidation, the budget has created enough room for infrastructure spending using its own resources as well as public-sector units.
The budget envisages that, compared to 2014-15, infrastructure investment will increase by Rs 70,000 crore in 2015-16. Given the budgetary estimate for infrastructure spending in 2014-15 — Rs 2,10,000 crore — this is an increase of 33 per cent. Add to this the annual budget inflow of Rs 20,000 crore to the National Investment and Infrastructure Fund (NIIF) — an allocation of Rs 1 lakh crore over the next five years. This capital infusion will enable the trust to raise debt, which can in turn be invested as equity in infrastructure finance companies such as the Indian Railway Finance Corporation and the National Housing Bank. Given the 10 per cent overall capital adequacy ratio of financial intermediaries, the NIIF’s Rs 1 lakh crore can be leveraged about 10 times. The multiplicative effect has been facilitated by the government’s intention to permit tax-free infrastructure bonds for projects in some sectors.
The budget has primarily focused on investment in four sectors — roads, railways, power and rural development. Investments for the development of national highways have been proposed to almost double year-on-year to about Rs 86,000 crore. For railways, the total outlay has been raised by about 50 per cent to Rs 1 lakh crore. In the railway budget, there were many announcements of public-private-partnership projects for coastal connectivity, gauge conversion, dedicated freight corridors and the Mumbai suburban rail. The general budget has created room for these projects.
But how is the government going to raise the funds for such significant increases in public spending? The relaxation of the fiscal deficit target for 2015-16 by 30 basis points releases about Rs 40,000 crore for funding projects. The budget has raised additional excise duty on petrol and diesel, which is levied as road cess, to Rs 6 per litre from Rs 2. This increases the available funds for roads and railways to about Rs 40,000 crore in 2015-16 from approximately Rs 20,000 crore in 2014-15. In addition, to fund infrastructure development, the government had increased the basic excise duty on petrol and diesel by around Rs 7 to 8 per litre. The incremental revenue accruing from this is estimated to be about Rs 80,000 crore in 2015-16. Also, the budget plans to collect divestment revenues of Rs 70,000 crore on account of stake sales as well as Rs 40,000 crore from spectrum auctions. A sharp 34 per cent increase in investments by Central public-sector enterprises is also envisaged. In contrast, there was a 10 per cent drop in the last fiscal. To fund this increase, Central public-sector enterprises will have to raise resources from the bond market. Of the total estimated to be raised in 2015-16, nearly 40 per cent is expected to be raised from internal profit generation, about 35 per cent from the capital markets and approximately 25 per cent from external commercial borrowings.
How will these investments impact the economy? First, the emphasis on strengthening transportation infrastructure will help to boost manufacturing. Investments in these sectors can have the significant multiplier effect of creating demand for steel, cement, capital goods and commercial vehicles. Second, investments in these sectors can also spur capital expenditure in the manufacturing sector. In other words, the budget is attempting to “crowd in” private investment by focusing on these key areas. At a time when private-sector interest in infrastructure development is low, the increase in budgetary support holds the potential to kick-start capital investments in the economy. Finally, the significant increase in public funding for roads has the potential to boost the execution of national highway projects.
While the budget is definitely looking to provide an impetus to infrastructure, ultimately, it is the quality of execution and the time taken for implementation that determine the bang for the buck. Addressing essential issues such as environmental clearances and land acquisition becomes critical to ensuring the timely implementation of infrastructure projects. Given the current opposition to the modified land acquisition bill, careful political manoeuvring by the government on the floor of the House is essential. Land acquisition for executing infrastructure projects will be extremely onerous under the law passed by the earlier government.
The writer teaches finance at Indian School of Business, Hyderabad.