Importance of Infrastructure Outlays in the Union Budget
Understanding the impact of infrastructure investments in the Union Budget necessitates grasping three key public expenditure principles:
1. Economic Impact of Infrastructure Spending
- According to government data, every Rs 1 spent on infrastructure contributes Rs 3 to the GDP.
- Conversely, Rs 1 spent on direct benefit transfers (DBT) adds only 90 paise to GDP.
- This highlights the significance of focusing on infrastructure capital expenditure to stimulate economic growth.
2. Gross Capital Formation in Infrastructure (GCFI)
- Mainstream political consensus suggests that India should aim for a GCFI of at least 7% of GDP.
3. Complementary Contributions
- Union Budget outlays for infrastructure are generally supplemented by contributions from states, private capital, and extra budgetary resources, including public sector undertakings.
The table provided quantifies the necessary outlays for India through 2029-30, predicting a Rs 13 trillion allocation for infrastructure in the 2025-26 Budget, targeting an overall spend of Rs 26 trillion to meet the 7% GDP objective.
Current Economic Concerns
- The RBI’s Systemic Risk Survey indicates low expectations for private capital expenditure revival due to geopolitical tensions, commodity price risks, and other factors.
- GDP estimates for Q2 of FY25 cast doubt on economic growth stability, with reduced government capital expenditure cited as a contributing factor.
- CMIE data shows a 22.1% decline in new project commencements and notable reductions in project completions and capital expenditure, both in government and private sectors.
Future Strategies and Recommendations
- Government may consider an 18% increase in infrastructure allocations to Rs 13 trillion.
- For a more aggressive economic boost, a Rs 15 trillion allocation might be pursued, potentially relaxing the fiscal deficit target by 0.5% for asset creation and economic revival.
- Additional funding could enhance social infrastructure sectors like health and education.
The content reflects the personal views of the author, an infrastructure sector expert and chairman of the CII’s National Council on Infrastructure.