BUDGET EXPECTATIONS : INFRASTRUCTURE SPENDING

23 Jan 2023 , 01:14 PM

The infrastructure sector is not just a sector or an industry. It is the base that underlies the Indian economy. Nearly 25 years back, the Rakesh Mohan Committee on Infrastructure had estimated that India would require an infrastructure investment of $200 billion to bring Indian infrastructure to Asian levels. In the last 25 years, there have been a lot of investments in roads, highways, ports etc. However, the serious investments in irrigation, water supply, sanitation are yet to happen. It is currently estimated that the total investment required for infrastructure would be around $2 trillion. 

It is in this context that the infrastructure investments will have to be seen. Despite the urgent need to cut fiscal deficit to 5.8% in the current year, the government needs to heavily focus on infrastructure. It can either be direct allocation or via public-private partnerships. But, investments have to happen nevertheless. Here are some of the key expectations of the infrastructure sector in India from the Union Budget 2023-24. Nirmal Sitharaman will present the Union Budget 2023-24 on the floor of the house on 01st February 2023.

1. A deep and broad debt market for infrastructure financing

It is impossible to just depend on financial institutions and banks to fund the long term infrastructure projects, as their risk appetite would be limited. It is time to tap the bond markets. Despite being a trillion dollar market, the debt market in India is still about G-Secs and T-bills and less about long term infrastructure bonds. There has to be a market mechanism and that has to come via debt. While there is domestic and global appetite for such paper, the challenge is the breadth and depth of Indian debt markets. 

Among other things, the government will have to focus on getting the Indian bonds included in the global bond indices. India missed out last year, but this fiscal, that should be a priority. That gives global visibility to Indian bonds among global passive investors. It will also facilitate pension funds and sovereign funds to participate in the long term infrastructure bond market. 

1. Government must catalyse technology in infrastructure

In China and in most of the developed markets, the large infrastructure projects rely more on technology and automation and less on manual labour. In India, labour being cheap, it has been used as a substitute for automation. This impairs efficiency to a great extent. In fact, China gave a big push to infrastructure through the skilful use of modern technology, smart machines and robotics. For Indian companies to also invest in such infrastructure, government must offer adequate incentives. This can come in the form of tax holidays, rebates, or even a point-based priority system for awarding government projects. 

In addition, the government can also consider accelerated depreciation benefits for such high technology equipment which can act as a financial incentive for the use of such technology. One of the challenges for the infrastructure sector is persistent time and cost overruns. Budget 2023-24 must devise a system where capital is freed up from such projects so that more pressing projects can be funded. That would go a long way.

1. Focus on broader range of urban infrastructure services

One of the shortcomings of the current focus of urban infrastructure is that it has been overly tilted towards urban housing and metro rail. That is a very small part of the overall urban infrastructure services that requires serious government attention. For instance, critical areas like adequate clean water supply, urban sanitation, solid waste management and similar services do not get the attention they deserve. It is time that the budget looks at more directed and focused allocations to these sub-segments of urban infrastructure. 

In the previous year, the government had initiated projects like AMRUT 2.0 and SBM 2.0 to focus on such sub-segments. That must be strengthened and also closely monitored. Also, at a macro level, the overall funding for urban infrastructure is just about 0.7% of GDP. That is substantially lower than comparable countries and must be raised to a minimum of 2% of GDP to be really meaningful. However, this will have to come in the midst of the pressure on the PMAY scheme.

1. Time for relook at smart and green cities

The concept of smart cities was well ahead of its time when it was first announced, but the progress has been rather spasmodic over the years. Now, it is important that when Budget 2023-24 makes the allocations, it must also weave in the green agenda properly into these smart cities. The focus of the budget must be on allocating special budgets for climate mitigation and adaptation efforts. The idea of the smart cities must be to build climate-smart and climate-sensitive cities. This also calls for the use of digital technologies such as artificial intelligence and machine learning to deliver long-term and large scale improvements in urban services. 

1. Government must lead the way on mobility infrastructure

The EV push could well saturate at a level if the government push does not come in adequately. The government, though Budget 2023-24 must take the initiative to boost EV infrastructure by subsidizing EV points, charging stations, charging infrastructure etc. However, it is not just enough to focus on EV infrastructure. The EV push has to happen at multiple lateral levels, both direct and indirectly accretive. 

For instance, the budget must allocate adequate funding to development of non-motorized transport for smaller towns; apart from adequate electric vehicle (EV) charging infrastructure for all categories including two-wheelers / passenger cars / buses. With the National Green Hydrogen Mission being approved by the cabinet, the Union Budget must also initiate GH2-based bus and train transport projects, at least on a pilot basis with a clear time table for eventual implementation.

1. Expand the infrastructure financing franchise

There is only so much that the government can support, either as actual funds or as guarantees, considering its limited resources. The focus must on encouraging public private partnerships (PPP) as well as to develop robust long term debt markets and a perennial funding funnel for infrastructure projects. This cannot be done by the centre alone and the states must also buy into this idea. These joint shifts include property tax reforms, GIS-based urban planning, preparation of city mobility plans / transport studies etc. 

1. De-bottlenecking land acquisition for infrastructure projects

Unfortunately, land acquisition and getting adequate approvals and environment clearances has been one of the big bottlenecks for infrastructure projects. That needs to be unclogged urgently if there has to be progress on the infrastructure front. These factors have been one of the biggest reasons for time overruns, cost overruns, extra budgetary resource requirements and chronic slippages on urban projects and missions. This may not be simple as many of these items are state subjects. But, the Budget 2023-24 can make a start by laying down a broad policy framework with closer time and cost overrun monitoring.

For a long time, weak infrastructure had imposed a huge cost on the ease of doing business in India. Fortunately, the building blocks are now in place. The challenge is to take it to the next level to actually cut down the cost of doing business.