As far as Budget expectations are concerned, the government should get back the trajectory of 30% increase in infra Budget of the last many years, excluding FY25. On last year’s capex base of Rs 11.1 lakh crore, there should be a 30% increase in the upcoming Budget.
How are you looking at on-ground activity? We have seen a lot of headway being made in the infrastructure sector. Are things on the ground as rosy as they seem?
Vinayak Chatterjee: There is current concern about the slowdown in government capex in the infrastructure sector. In a very interesting article, Dr Rangarajan published earlier this month that contraction in government capital expenditure in the first half has played a major role in the growth decline. Dr Rangarajan very clearly and explicitly has drawn a linkage between the subdued government expenditure, specifically in public works and infrastructure, and the rather noticeable decline in GDP.
The overriding theme right now is how does one manage the balance six months of this fiscal year? By stepping up capex, both at the central and the state level, and what does it mean for the budget ahead? Now that the fact is well established. There is a run-up to the budget. Without doubt, in the next six months, the government really has to step on the fiscal expenditure pedal. But it is also time for budget formation.
The FY25 Budget had an increase of only 10% in the infrastructure sector allocations. This was in sharp contrast to the last three years, FY24, FY23, FY22, where we have seen a consistent 30% increase in the allocation. The 30% increase in allocation historically came down in this year’s budget to a 10% increase. At that time, many observers of the infra sector, including myself, pointed out the apprehension that this slowdown in increase in government capex has a very strong probability of impacting GDP. In some sense, along with the slowdown in spending, the relatively lower budget increase has impacted GDP growth. Dr Somanathan, who is the cabinet secretary now, when he was the finance secretary had shared with leading channels in a post budget discussion that a one-rupee spent on infrastructure by the government leads to a three-rupee increase in GDP, whereas a one-rupee spent by the government on items like direct benefit transfer (DBT), results in a 90-paisa increase in GDP. So, it is very clear that if the government wants to pump prime the economy and get robust GDP growth, it has to channelise money into infrastructure.
So, instead of spending three rupees as part of a 30% growth agenda on the budget outlay, they have spent only one rupee, because they have just done one-third of the expected spending across the last many years. A three-rupee spend would have given nine rupees of GDP, but a one-rupee spend is now giving three rupees of GDP. So, there is a six-point loss in GDP, which is now manifesting itself.
Therefore, so far as budget expectations are concerned, the very strong plea to the finance minister would be to go back to the trajectory of the last many years, excluding FY25, which is the problem year, and go back to a 30% increase, which means on last year’s capex base of 11.1 lakh crores, we now need to certainly increase by 30% in the upcoming budget. If you want to make up the lag for this year, it is fairly logical to suggest that this budget takes a very aggressive and robust position on increasing the outlay on infrastructure from Rs 11.1 lakh crore of last year to Rs 18 lakh crore allocation this year.
What is the outlook when it comes to India’s private capex? Do you believe that in the second half, we are going to see a bigger pickup and how do you see that impacting the entire sector?
Vinayak Chatterjee: I will restrict myself to the infrastructure sector. The private sector players who put in money into the infrastructure sector are called the infrastructure project developers. I understand that there is a healthy order book of potential spends across specific sectors and they would be renewables, transmission and distribution, ports and airports. If all of these move with the desired speed, both from regulatory angles and from execution angles, there is a very strong possibility of even the private sector joining forces with the government to significantly step up capex in what is clearly just three-and-a-half months left. So that expectation is high but there is also an expectation that Indian corporate sector now has reasonable cash reserves and has used that for de-leveraging their balance sheets, etc, etc. Now, not everybody in the Indian corporate sector has either the inclination or the expertise to invest in the core infrastructure area like power and transportation, and therefore my suggestion to the government would be to very energetically create PPP frameworks and a PPP agenda for social infrastructure which is education, healthcare, and agriculture and infrastructure as distinct from core infrastructure.
If we are able to create very friendly and aggressive and meaningful PPP structures from all the learnings of PPP in the core infra area in sectors like health, education, and agri infrastructure, we will be able to open up new gateways for attracting private capital from Indian and foreign investors into what one would call the social infrastructure sector. I am going to emphasise that point very strongly.
One key point and a longstanding demand of the industry is to reconsider the GST on cement. It is about 28%. You are also of the view that that should be reconsidered given the fact that if it is reconsidered, there are chances that it will also go ahead and aid the infrastructure and the development and the pickup that we are seeing in the infrastructure space.
Vinayak Chatterjee: It has been three years now that I have been shouting from the rooftops about the complete illogicality of a 28% GST on cement, which is a product for the common man, because even a small villager who is building his boundary wall or building the first floor of his house or making his roof a pucca roof, requires cement. At the other end of the spectrum, it is one of the major raw material inputs into the infrastructure sector which you are using to pump prime the economy.
Where do we see 28% GST? We see it in what are called sin products – cigarettes, tobacco, and other tobacco products, Pan Parag, pan masala. These are the areas where we are seeing 28% GST. What is the logic for 28% GST on cement when you anyway have very strong tailwinds on GST revenue buoyancy? So, a proposition can be put up to the GST council for a reduction in the 28% GST. It is not strictly a budget issue, but the budget pronouncements can touch upon the subject and make a point that we will take up this matter with the GST council. A reduction in the GST of cement down to about 12% will have a significant effect on bolstering demand, will certainly empower large sections of our population to be able to afford buying it, and it will stretch infrastructure budgets further by having a cheaper input.
There is a complete body of logic to suggest this and one can send a very strong message to the government that it is about time that cement was not taxed as a luxury or a sin item.