Budget 2023: Seven Suggestions To Boost Infrastructure Sector — Infravisioning

Vinayak Chatterjee's Infravisioning video series analyses and explains developments in India’s infrastructure sector to the BQ Prime audience.

Edited excerpts of the video:

As we all know, the Union Budget is due on Feb. 1, and it has traditionally had a significant impact on the infrastructure sector and infrastructure development across India.

Here are seven suggestions:

First is the issue of total outlays. The last few years have demonstrated a certain consistency in prioritising infrastructure outlay and recognising it to be the primer of economic growth.

For example, the outlays in FY22 were Rs 5.54 lakh crore. But in FY23 budget, the one that is currently in place, that was raised to Rs 7.5 lakh crore, a 35% increase and that was applauded.

Based on the Rs 7.5 lakh crore of the current Budget, it is expected that the FY24 budget will be to the order of Rs 10 lakh crore for the infrastructure sector, an increase of 33% over last year. This seems to be the view of most analysts that such a kind of expenditure will go a long way towards demand creation and employment.

A confidential report by the top Finance Ministry officials during post-Budget discussions last year, states that for every Rs 1 spent on direct benefit transfer-type scheme results in 90 paisa of economic growth, whilst Rs 1 spent on infrastructure and public works add Rs 3 rupees to gross domestic product. With this view dominant among Finance Ministry mandarins, Rs 10 lakh crore outlay or Rs 10 trillion outlay, representing a 33% increase over last year, is very much in order and is expected.

Second is the area of financing of urban infrastructure. Two recent reports—the maiden report by the Reserve Bank of India on municipal finances and the World Bank's report of financing India's urban infra needs points to serious deficiencies.

The World Bank report estimates that India will need to invest $840 billion or Rs 69 lakh crore or Rs 69 trillion over the next 15 years into urban infrastructure.

With municipal capacity building measures emphasised in the Finance Minister’s Budget speech of last year, this Budget is widely expected to come up with a special package for promoting municipal bonds. It could possibly have incentives for municipal bonds like central government participation, credit enhancement and interest subvention as measures to kickstart this vital capital market instrument.

Third is the serious concern currently vis-a-vis the slowdown in the combined investments of states on public works. As a thumb rule, states contribute about 50% of all infrastructure and public works spending as against the central government's 50%.

While central government investments have been robust, data points to a worrying slowdown of capex by states in the first eight months of this fiscal. The Union Budget needs to take cognisance of this.

It did have Rs 1 lakh crore support scheme for sponsoring state infra in the earlier budget, and such a provision could now be tweaked to incentivise states to really spend far more—say by a scheme like a cashback or 10% of the project cost of every completed state-level project, given back to the state to be used for fresh projects.

Fourth is the challenge in getting the private sector to invest heavily in infrastructure again. Barring telecom, data centres and renewable energy, the private sector's appetite to invest in greenfield projects remains subdued.

In her last Budget speech, the FM had said measures will be taken to enhance financial viability of projects including public-private partnerships. The visible measures taken to date on PPP revival include setting up of Infrastructure Finance Secretariat, as an extended arm of the Department of Economic Affairs. The Infrastructure Finance Secretariat, or the IFS, could this year step up to take a more aggressive role in PPP revival, especially in crafting a PPP framework to address the requirements of the health and education sectors.

The FM has already indicated that health and education would be in focus in this forthcoming Budget. It is acknowledged that budgetary outlays will be insufficient to address the humongous needs of these two sectors. Hence, the IFS should strive to construct a scheme where Rs 1 of government expenditure is leveraged by Rs 5 of private contributions.

Fifth is the issue of sustainability. On sustainability, the Budget needs to recognise its role in setting out a national action agenda. It needs to consider setting up a specialised development financial institution for financing, climate change mitigation and adaptation, or encourage the National Bank for Financing Infrastructure Development—the DFI—to do the same with the support of a concessional line of financing and credit.

A Task Force to examine the concepts of carbon tax and carbon credits trading system relevant to India is in order, as a follow-up to the mandate given to the government by Parliament's note to the Energy Conservation Amendment Bill, 2022. Such a move will be very much in order if mentioned in the Budget.

The Budget should consider a production-linked incentive scheme for electrolysers to encourage production of green hydrogen, and include green ammonia and green hydrogen installations under the harmonised list of infrastructure sub-sectors.

Sixth, we come to the Railway Budget. After the abolition of the standalone Railway Budget, details of railway finances have been less than forthcoming.

A CAG report on the finances the Railways candidly pointed out that the operating ratio does not reflect the true financial performance. For example, it reported that against the stated OR of 98 in 2019-20, it should realistically have been 114, if the actual expenditure on pension payments was taken into account. There have been other issues, too, in the past regarding booking expenditure under different heads, such as safety and maintenance, etc.

It is heartening to note that the Railway Minister has committed to making the OR number transparent in all respects. The Union Budget should provide greater depth and analysis, considering that the allocations to the Railways are expected to rise at a faster rate than roads.

Seventh is the matter of GST on cement. Cement GST is the elephant in the room. It is an aam aadmi commodity as well as a crucial input for large-scale infrastructure buildout.

The Union Budget would do well to pronounce whether it is desirable to continue taxing cement at the highest slab rate of 28%, now that there is a revenue buoyancy in the goods and services tax collections.

Individuals use more than 65% of cement produced and the non-availability of input tax credit hurts the segment the most. Decreasing the cost of public works and providing widespread relief on smaller construction works may be far more impactful in terms of economic development than the short-term revenue foregone. The Budget speech could mention referring this aspect to the GST Council.

With the consideration of these seven suggestions, the Union Budget could once again seek to re-energise the infrastructure sector.

Vinayak Chatterjee is founder and managing trustee, The Infravision Foundation; and chairman, CII Mission On Infra, Trade & Investment.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.