The infrastructure sector forms the core engine of any economy. It has significant linkages to all the other sectors of the economy and powers the GDP of the country. Capital Spending on the Infrastructure spans highways, power plans (solar, nuclear, Hydrol, wind), telecommunications, rail corridors, airports, seaports etc.
‘Tangible’ Infrastructure Buildout Driven by Public Spending
The government has identified priorities to make India a $5 trillion economy. These include developing manufacturing facilities within India with ‘Make in India’ and many Production Linked Incentive (PLI) schemes. The government also wants to reduce reliance on imports. This again calls for building domestic manufacturing capabilities and building logistics facilities that make the movement of goods easier.
The foundation for stronger economic growth backed by infrastructure development in India has been built by a number of structural changes for the country’s infrastructure sector. Various initiatives like the Ujala scheme, rural electrification have been accelerated. More schemes have been launched and we will cover a few of them below given the major impact they have in creating infrastructure.
- The Smart Cities Mission was launched to work intensively on the city’s social, economic, physical, and institutional infrastructure.
- The Pradhan Mantri Aawas Yojna aims to affordable housing to all urban poor households with 103.17 lakh houses being initiated, and 62.31 lakh houses completed.
- Another scheme to promote air connectivity between major cities (hubs) and small/medium cities (spokes) is the UDAAN Scheme “Ude Desh Ka Aam Nagrik” (“Every citizen flies”). This aims to bring down the cost of an hour’s flight f upto 500 km to just Rs 2500.
- The Jal Jeevan Mission aims to provide every rural household with working taps (ie 55 litres of potable water per person per day). By the end of August this year, nearly 7 crore households have been connected with water under this mission.
Each one of these calls for massive infrastructure build out across the length and breadth of the country, with an aim to foster economic growth and improve quality of life.
In addition to the hard, tangible infrastructure, India has made several strides in building intangible assets. There are reforms such as GST that also make the movement of goods between various states smoother. India has invested heavily in “digital infrastructure” such as ‘Aadhar’ which is the world’s largest identity database. We also have the Unified Payment Interface (UPI), which is akin to a digital highway powering online commerce. Newer platforms, such as Open Network Digital Commerce (ONDC) are also getting launched. ONDC in itself has the potential to revolutionize ‘hard’ eCommerce.
Infrastructure Spending Trends
The overall infrastructure investment is anticipated to grow between FY21 and FY26 at a CAGR of 11.4%, thanks to spending on urban infrastructure, transportation, and water supply. Infrastructure investment was around 5% of GDP in the 10th five-year plan compared to 9% in the 11th plan.
In the Union Budget of 2018-19, the government announced a massive Rs 134,572 crore (US$ 16.9 billion) for the transportation sector alone. The National Infrastructure Pipeline was also announced with an objective to build world class infrastructure across the country. Since merely building infrastructure is not enough, a massive plan to ensure smooth inter-connectivity between railways, roadways, riverports, seaports and airports was launched about a year ago. This plan has been titled as the PM Gati Shakti National Master Plan.
At the beginning of the plan period, one trillion dollars in investments were announced by the Indian government, with the private sector providing 40% of the funding. Additionally, the government permitted 100% foreign direct investment via an automated process that ensured little intervention from governmental bodies. The Department for Promotion of Industry and Internal Trade (DPIIT) estimates that the amount of FDI that entered the infrastructure sector between April 2000 and March 2022 was US$ 54.12 billion.
In the current financial year, so far in the first five months, the Railways Ministry and Road Transport & Highways Ministry have spent nearly 3.24 lakh crores, which is nearly half of the budgeted 7.50 lakh crores, mostly as CAPEX. Other sectors that, along with these, contributed cumulatively to 72% of spending are telecommunications, housing, and urban affairs. Affordable housing is another priority sector.
Infrastructure and Economic Growth
Historically, more than 80% of the money spent on infrastructure in the country has gone toward expenditures related to transportation, electricity, water, and irrigation. All of these are critical to infusing new assets that enable economic activity. It has been well established that infrastructure directly contributes to GDP growth.
By encouraging the establishment of related businesses like cement, real estate, and building development projects, the infrastructure sector stimulates India’s economic growth. This leads to more investments in those regions – a notable example has been increased industrial activity in Uttar Pradesh due to the rollout of massive highways across the state.
Infrastructure build out results in more investment, more businesses to be set up, which leads to both direct and indirect job creation. With more jobs there is more consumption of goods and services, thereby resulting in a virtuous cycle.
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