Private sector investments key to India’s ambitions, economists say

The focus on infrastructure spending began post-pandemic.
The focus on infrastructure spending began post-pandemic.

Summary

  • Experts want to see incentives extended to the sector in the form of sops and tax breaks

CHENNAI : In the last seven years, between 2016-17 and 2023-24, the allocation for infrastructure in the Union budget has quadrupled from 2.47 trillion to 10 trillion. As a proportion of GDP, it more than doubled from 1.6% to 3.4%.

Now, with all eyes on the 1 February interim budget, experts say the government must renew its focus on infrastructure spending, but with a twist this time around: the budget, they say, should include proposals that will boost private sector investment.

They want to see incentives by way of sops and tax breaks.

The focus on infrastructure spending began post-pandemic. With the engines of economic growth—private investment, public consumption and exports—having ground to a halt, the government opted to revive growth through a large dose of public capital expenditure.

The government also hoped public spending will, in turn, catalyze dormant private investment. It has achieved the first objective, but had less success with the second.

Economic growth has revived and has gathered pace. In the first quarter of 2023-24, GDP growth was 7.8% and in the second quarter 7.6%. The government has estimated 2023-24 growth at 7.3% after hitting 7.2% in 2022-23.

Experts, including former Reserve Bank of India (RBI) governor Raghuram Rajan, have credited the government’s enormous infrastructure investment for the faster pace of economic growth.

The Centre also ensured that states did their bit in terms of capital expenditure. It offered them a 50-year interest free loan to fund infrastructure projects and front-loaded devolution of funds so that states could spend on infrastructure. In the eight months from April to November last year, 26 states spent 3.18 trillion on capex—45% of what they plan to spend in 2023-24.

“The government’s focus on capex and infrastructure spending has many benefits. It has a higher multiplier effect on the economy. As infrastructure improves, logistics costs reduce and this makes private sector competitive globally," said Vishal Kotecha, director and head, global infrastructure group, India Ratings & Research.

“A capex push will also kick-start private investment and feed growth," he added.

Private investment has seen some revival, but corporate India is yet to unleash its animal spirits.

Experts say there’s a need for the private sector to play a bigger role in infrastructure development. “India needs to invest heavily in infrastructure for the next couple of decades if it has to post consistently high economic growth," said C Rangarajan, former RBI governor.

Despite a recent spurt in the infrastructure development, India fares poorly in most parameters. According to India Ratings & Research, India’s per capita infrastructure investment at $91 is far lower than the US’ $938, China’s $622 and Brazil’s $256.

The task assumes importance in the context of the government’s ambitious target of making the country a developed economy by 2047, by when finance minister Nirmala Sitharaman expects India’s GDP to scale $30 trillion (it is $3.4 trillion now). To achieve that India will need an annual economic growth of 7.5% to 8% and such growth needs capacity creation.

“Consistent policy focus on capacity creation is justified as the marginal returns of public investments are high and the asset creation will prepare the economy well for non-inflationary growth when there is a more structural pick-up in demand," Madhavi Arora, lead economist at Emkay Global said.

But governments alone cannot make such large investments.

“Eventually, the government will have to ensure that the fiscal deficit comes down to 3% of GDP as mandated by Fiscal Responsibility and Budget Management Act and it will be forced to cut back on the spending. The private sector will have to take over," Arora added.

That will be the challenge for the next government that comes to power, experts said.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App