The Budget’s three-pronged growth drive

Amish Mehta | Updated on: Feb 17, 2022
Good transport systems engender a raft of economic efficiencies

Good transport systems engender a raft of economic efficiencies | Photo Credit: RAJU V

India’s long-term growth seems predicated on the engines of mobility, digital and capex

Budget 2022 seeks to propel India’s long-term growth by focussing on three engines — connectivity, digitalisation and buildout of physical infrastructure. It sets the ball rolling on connectivity with the Gati Shakti plan. Good transport systems engender a raft of economic efficiencies, and provide jobs and access to health and education. These will also help India integrate better with the global economy and engender holistic development.

The government’s outlays and targeted outcomes are ambitious. For instance, in roads, it plans a 25,000-km expansion in the national highways network next fiscal. That is around 30 per cent more than what was constructed this fiscal (6,185 km in the first nine months) and the previous one (13,200 km). Gross budgetary support to the sector of ₹1.88-lakh crore marks a 55 per cent increase on-year.

Significantly, it takes an integrated approach, combining all transport modes and their ministries, be it roads, railways, airports, ports, mass transport, waterways, and logistics infrastructure. This is a smart move that will improve inter-ministerial coordination, enable end-to-end solutions, and synergise investments.

Gati Shakti also brings the rural and local economies into its ambit. It leans on the railways to provide efficient logistics services for small farmers and firms, integrates the postal and railway networks for seamless movement of parcels, announces a ‘one station-one product’ concept to aid local businesses and supply chains, and proposes 100 Gati Shakti cargo terminals for multimodal logistics facilities.

To improve sustainability of railways, the Centre plans to roll out 100 new-generation, energy-efficient Vande Bharat trains that promise better and safer passenger experience, and bring 2,000 km of rail network under ‘Kavach’ technology. This is expected to improve the operating ratio and passenger retention of the railways.

Digital push

On the digital side, the big push began with Digital India in 2015, which spawned the broadband revolution, especially in the rural areas, prepared ground for the imminent 5G rollout, and granted infrastructure status to data centres. The brilliant UPI platform then engendered a quantum leap, even as it furthered the cause of financial inclusion.

The ecosystem that evolved has spawned hundreds of fintechs, and the Centre’s focus on this space is evident in the tax incentives announced for start-ups, the plan for a digital rupee and the Production-Linked Incentive (PLI) and other schemes to push manufacturing of electronic goods.

The third Budget theme looks deeper into the future. With around half of India expected to be urbanised by 2050, it proposes development of model Tier 2 and 3 cities with multi-modal transport and green energy generation. Connectivity between mass urban transport and railway stations is expected to get top priority.

Clean energy

The leap towards clean energy, through the PLI (Production Linked Incentive) scheme in the solar sector as well as the electric vehicle (EV) adoption linked policy push, augurs well for India’s net-zero commitments.

The in-principle approval of ₹24,000 crore for PLI towards high-efficiency photovoltaic modules is expected to lead to the setting up of 30-35 GW of solar module capacity and 25-30 GW of cell capacity by 2024. This will reduce dependence on imports, which stands at 90 per cent for cells and 75-80 per cent for modules, and also open export opportunities for Indian module manufacturers.

Given that batteries account for around 40 per cent of the cost of an EV, policy measures standardising battery swapping infrastructure will accelerate economies of scale and hasten EV adoption. A ubiquitous battery-swapping infrastructure will also reduce range anxiety for three-wheelers and taxis, which face limitations on home charging.

The inclusion of energy storage in the harmonised list of infrastructure will facilitate quick and cheaper finance to EV battery makers. Consequently, the share of domestic battery makers in total EV battery sales could rise to 35-40 per cent by fiscal 2030 from less than 10 per cent at present.

The issuance of sovereign green bonds as part of the government’s market borrowing next fiscal will also help align financing with these energy transition ambitions.

Capex boost

The Budget once again brings to the fore the importance of government spending, especially after an event of such magnitude as the pandemic. Large government outlays in the past couple of years have acted as bulwarks of stability, helping the economy claw back. The focus on hard capex and investment growth is expected to sustain, with the infrastructure capex for the next year budgeted to rise 11 per cent over this fiscal’s revised estimates (RE).

Further, the Centre has acknowledged the importance of boosting capex funding capacity of states — the larger of the two capex-bearers in the mix. The significant incentive of ₹1-lakh crore from the Centre to States in the form of interest-free loans with a tenure of 50 years, up from ₹15,000 crore in fiscal 2022RE, should boost States’ fiscal capacity to catalyse capex in Pradhan Mantri Gram Sadak Yojana, Gati Shakti and the National Transit Oriented Development Policy, among other schemes.

Despite this infrastructure push, the government is expected to largely maintain its fiscal consolidation path. The fiscal deficit is estimated at 6.9 per cent of GDP for this fiscal revised, as against 6.8 per cent budgeted. It is pegged at 6.4 per cent for the next fiscal, consistent with the broad path set out last year to reach a fiscal deficit of below 4.5 per cent by fiscal 2026.

The large government spending is expected to trigger the private-sector investment cycle, especially in infrastructure. The setting up an International Arbitration Centre in GIFT City for timely settlement of disputes under international jurisprudence underscore this thinking.

In sum, the three engines in focus are appropriate in the context of the long drive ahead. In that sense, the Budget pronouncements this time go well beyond the annual frame. Focus now should be on relentless execution so that India’s potential growth rate is lifted.

Amish Mehta is Managing Director and CEO, CRISIL Ltd

Published on February 17, 2022
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