Higher expenditure will be needed to sustain recovery
The surge in new infections has increased risks for the ongoing economic recovery. A rapid rise in cases has forced state governments to bring back restrictions on public mobility. The Delhi government, for instance, has decided to impose the curfew during weekends, aside from other restrictions. A surge in cases and lower public mobility are bound to affect economic activity. Although, as witnessed during the second wave in 2021, the impact may not be as severe as that in 2020, it would still result in output loss and weaken the overall recovery. As more clarity emerges in the coming days, the government would need to focus again on both handling the pandemic and minimising output loss. The upcoming Union Budget will need to bear in mind this imperative.
In this context, it is encouraging to see that the government is pushing infrastructure projects. As reported in this newspaper on Wednesday, the Gati Shakti panel, led by the cabinet secretary, has asked the Department for Promotion of Industry and Internal Trade to identify high-impact projects that can be included in the Budget. Projects related to rail, roads, and airports may be included. The department has also been asked to make sure that projects are completed on time. Besides, it is expected to review the infrastructure gap for long-term needs. Infrastructure investment with better planning and focus would yield higher returns and make Indian businesses more efficient. The need for higher infrastructure investment in general and in times like these, in particular, cannot be overstated. Covid-related uncertainty would continue to affect output and growth.
In the given circumstances, private investment, which has been weak for quite some time, is unlikely to pick up. As the Reserve Bank of India’s recent “Report on Trend and Progress of Banking in India” noted, non-financial companies in the private sector have been net savers for the past three years. They are unlikely to make large investments in the near term because of existing capacity and weak demand. Thus, it is important for the government to push capital expenditure. It would not only help sustain the recovery but also make it more durable by crowding in private investment over time. The government to its credit increased the allocation for capital expenditure by over 30 per cent in the current fiscal year. However, the actual spending has been lagging. The government has increased expenditure in other areas, and it will be critical to ensure that it doesn’t affect capital expenditure.
Further, it will be important to keep the momentum going over the medium term. Since the government has to progressively reduce the fiscal deficit, it will need to calibrate overall expenditure to sustain higher capital expenditure over the medium term. It is also worth noting in this regard that the government must make sure projects are not delayed. The latest report of the Infrastructure and Project Monitoring Division showed that delays in projects costing over Rs 150 crore had resulted in a cost overrun of more than Rs 4 trillion. This must be avoided through better planning and coordination. The Gati Shakti platform, hopefully, would be able to minimise delays. Cost overruns and delays will undermine the benefits of these projects and affect India’s growth over the medium term.