Infra outlays: Key expectations from the Union Budget allocations

l The CMIE data also points to a worrying 57.1 per cent year-on-year decline in the value of government projects completed and a 40 per cent decline in that of the private sector

To fully grasp the importance of infrastructure outlays in the Union Budget allocations, it is important to understand three fundamental public expenditure tenets.

 

One, during a post-Budget interaction in February 2023, a senior finance ministry official revealed on national television that the government had confidential data indicating that every Rs 1 spent on infrastructure contributed Rs 3 to gross domestic product (GDP), whereas Rs 1 spent on any form of direct benefit transfer (DBT) added only 90 paise to GDP. Thus, the case for large dollops of public expenditure on infra capex to pump-prime the economy must continue to be part of the core economic strategy. 

Two, mainstream political parties now widely agree that India’s target for investments in infrastructure, or gross capital formation in infrastructure (GCFI), should be at least 7 per cent of GDP. 

Three, the thumb-rule in infra spending is that the Union Budget outlays are typically matched by the combined contributions of states, private capital and extra budgetary resources, including public sector undertakings. 

The table attempts to use all these perspectives to provide a quantification of the outlays India would need to allocate through 2029-30. As seen in the table, the forthcoming Budget (for 2025-26) is expected to allocate around Rs 13 trillion for infrastructure. This should, hopefully, result in an overall spend of around Rs 26 trillion, thereby faithfully adhering to the 7 per cent of GDP requirement. 

The Rs 13 trillion outlay would mean an 18 per cent increase over the current year’s allocation. The trillion-rupee question is whether that would be enough “pump-priming” in the context of the current sluggishness of the economy.

Consider the following. 

• Over half the respondents in the Reserve Bank of India’s (RBI’s) Systemic Risk Survey (published on January 2) do not expect a revival in the private capital expenditure in the coming year. This is due to concerns over geopolitical conflicts, commodity price risks, tightening interest rates, tariff hikes, capital outflows and their impact on the rupee, and fears of a consumption slowdown.
• Estimates of GDP for Q2 of FY25 have raised concerns about the robustness of economic growth for the year. In a December 4, 2024, article in businessline, C Rangarajan (former RBI governor) opined that “contraction in government capital expenditure in the first half played a major role in the growth decline”.
• The data from the Centre for Monitoring Indian Economy (CMIE) showed a disappointing 22.1 per cent year-on-year decline in new project commencements in the December 2024 quarter, reversing the 64 per cent rise recorded in September.
• Announcements from both the private and public sectors do not point to any meaningful pick-up in capex.
• The CMIE data also points to a worrying 57.1 per cent year-on-year decline in the value of government projects completed and a 40 per cent decline in that of the private sector.
• Almost all Indian corporations and commercial lending institutions are wary of investing in greenfield public private partnerships (PPP) projects, while foreign investors prefer operating brownfield assets. However, it should be noted that in sectors such as telecom, ports, airports, electricity transmission, and renewable energy, private capex has continued, though sporadically.
• The data from states shows a greater slowdown in capex spend compared to the Centre. Therefore, finance ministry officials are trying to motivate states to borrow more against their entitlements for state-level infra spend.

With all of these to contend with, what will be the stance of the government in using infra outlays to pump-prime the economy once again? 

Well, if it sticks to the past knitting, then we can expect an 18 per cent increase in infra allocations to Rs 13 trillion. But if there is real keenness to turbo-charge the economy, it may well consider a Rs 15 trillion allocation in the Budget, and take a bold public-investment-led-growth stance, similar to the post-Covid strategy. 

Even conservative public finance experts and economists would likely not grudge a 0.5 per cent relaxation of the fiscal deficit target if it is used for national asset creation and to revive the economy! In fact, this extra Rs 2 trillion can be used for social infra sectors like health and education, which will be hugely appreciated by the public. 

 

The author is an infrastructure sector expert as well as chairman of the CII’s National Council on Infrastructure. The views are personal