Many economists and analysts expect the Indian Finance Minister to unveil a massive spending programme to boost the core sector. But finding the money to finance such a large outlay will prove to be a challenge.
When Indian Finance Minister Nirmala Sitharaman rises to present her third Budget at 11 am on February 1, her speech will be analysed closely for what it has for boosting and sustaining the uptrend in consumption demand seen in the economy since October last year.
Since she is unlikely to announce a direct cash transfer scheme – though this cannot be completely ruled out given the imperatives of driving demand across the length and breadth of the economy – her next best option would be to provide an additional boost to the Modi government’s ongoing programme to spend $1.4 trillion on building infrastructure – in sectors such as airports, ports, roads, railways, inland waterways, digital services, urban development, energy, education, healthcare and agricultural infrastructure.
Most economists agree that infrastructure building has the highest multiplier effect and gives the biggest bang for every buck spent. Not only does it provide direct employment to millions of semi-skilled and unskilled workers – besides, of course, technically qualified personnel – it also guzzles up steel, cement, energy and also generates demand for the logistics sector, capital goods makers, equipment suppliers, etc., and touches almost every other sector of the economy either directly or indirectly.
Sectors such a roads & highways and urban development, for example, can quickly ramp up capacities and, therefore, generate jobs much faster than most other large sectors.
Then, once ready, the infrastructure created supports other activities in every other sector of the economy.
“Because infrastructure has very high multipliers of the economy, infrastructure will boost aggregate demand and hopefully crowd in private investment. It will fill some of the jobs vacuum. Infrastructure also boosts potential growth, so there is a good reason in my mind for the next two years for growth to be driven by infrastructure,” Sajid Chinoy, Chief India Economist at JP Morgan and Part-time Member in PM’s Economic Advisory Council, wrote in Indian Express recently.
Sitharaman has already declared that boosting infrastructure will be one of her priorities. “We shall definitely sustain the momentum of public spending in infrastructure. Because that is the one way, we assure that the multipliers will work and the economy’s revival will be sustainable… I am conscious that the forthcoming Budget will have a vibrancy that is so required for the economy’s sustainable revival,” she had said at the Assocham Foundation Week in December 2020.
There will be another “push” factor in the Finance Minister’s mind as well. The Modi government has unveiled an ambitious production-linked incentive (PLI) scheme for the smartphones and 10 other sectors to attract investments from foreign companies looking at alternatives to China.
This is part of its big picture plan of increasing the share of manufacturing in the Indian economy to 25 per cent from about 16-17 per cent now and sustaining a GDP growth rate of 9 per cent – and higher, if possible – over the long time to become a $5-trillion economy in the foreseeable future.
But the fact remains that because of a legacy of decades of neglect and corruption, Indian infrastructure is simply not good enough to support a world class manufacturing sector across multiple industries and regions.
This is proving to be the biggest issue holding back foreign investors. But largescale shift from agriculture to manufacturing is a must to cater to the aspiration of the millions of young people entering the country’s workforce every year as well the needs of the growing middle class.
A combination of favourable factors has, however, presented Sitharaman with what can be called a “Goldilocks moment”. The current global revulsion towards China, the low interest rates in the developed world, the humungous sums of money being printed by the US and European central banks and the expected high returns generated by infrastructure development in Emerging Markets have all combined together at a very opportune time for India.
However, policy makers in New Delhi will have to bear in mind that India is not the only fish in the pond and that global investors have options to invest in other countries as well.
Sitharaman will, therefore, have to significantly dilute the Modi government’s hawkish fiscal stance and loosen its purse strings even if it means exceeding the fiscal deficit target by a wide margin – which risks upsetting global ratings agencies who might then downgrade Indian paper to junk status.
Therefore, “the million-dollar question is, how do you pay for it, given all the fiscal issues we spoke about? In my mind, the obvious answer is aggressive asset sale. There is no shortage of assets to sell in India — infrastructure assets, land assets, public sector enterprises… This is a good time to do it, Chinoy wrote in the same article referred to above, adding: “With a fiscal deficit of 10 per cent of GDP and debt-to-GDP at 72, India does not have unlimited fiscal space. Now, India’s fiscal deficit will increase by about 4.5-5 per cent of GDP, so we keep saying that there is no fiscal stimulus, but deficit goes up by 4.5 per cent of GDP. In ordinary times you would look at that increase and say, that’s a fairly substantial fiscal injection…”
Raising taxes will squeeze consumption and hit sentiment quite badly. As Chinoy hints above, there is only so much scope for the Reserve Bank of India (RBI) to print additional money, which also carries with the risk of stoking inflation.
The government will, therefore, have to take a very serious look at selling assets – in other words, sell its shareholdings in various public sector undertakings (PSUs). And this time, it cannot be confined to one PSU buying shares in another and handing over the proceeds to the exchequer. The government will have set in motion a series of steps, including, possibly, setting up a Ministry of Disinvestment, a la Atal Bihari Vajpayee’s NDA-I government, to sell state-owned companies lock, stock and barrel to private domestic and foreign investors.
Given the Covid-19 pandemic-induced fiscal strain on government finances, that seems one of the few viable means of financing a huge outlay on infrastructure building – that could swell to more than $250 billion this year – if India is to have any chance of achieving its GDP, growth and employment targets.
Then, with Chinese companies effectively barred from the Indian market – though there is not official ban on them – the Modi government’s infrastructure push will offer billions of dollars of business opportunities to US, British, EU, Japanese and South Korean companies.
Of course, the Finance Minister has many other fishes to fry as well. She will have to spend big on healthcare, especially on rolling out the Covid vaccine, on the social sector, on providing relief to industry, services and agriculture, all of which have been impacted by the pandemic. And she will also be under pressure to provide relief to the long suffering middle class, which has lost an estimated 19 million white collar jobs over the last nine months.
How she balances all these equally pressing needs with a limited pool of resources will finally determine how much she can spend on infrastructure.
For an answer to these questions, we will have to wait for her address to the Lok Sabha next Monday.