Commenting on the strong infrastructure push in the 2021-22 Budget, Sarmistha Pal argues that an emphasis on investment in infrastructure may not necessarily bring India out of the current economic recession – with the Budget’s negligence of the education sector and insufficient health expenditure, making matters worse.

The 2021-22 Union Budget, announced on 1 February 2021, made a definitive turn to the right as it turned its back on providing any direct fiscal stimulus. Instead, it focussed heavily on investment in infrastructure to bring the Indian economy out of the current recession. After experiencing faltering growth since 2016, India’s GDP (gross domestic product) growth rate hit -10.3% in October 2020 (as per IMF’s (International Monetary Fund) World Economic Outlook), making India among the worst-hit emerging economies in the Covid-19 crisis. Instead of boosting the shrinking aggregate consumption demand or private investment in the economy, the Modi government’s new budget seems to be driven by the belief that supply creates its own demand. This is, however, not guaranteed – in the presence of deficient aggregate demand, all income earned from producing output is not necessarily used to purchase it.

Investment in public infrastructure

There is no doubt that high-quality public infrastructure supports economic growth, generates jobs, and improves the well-being of the citizens. The budget proposes investment in national highway projects, especially for the four poll-bound states (namely, Assam, Kerala, Tamil Nadu, and West Bengal), road transport, and power distribution, among others. Yet, infrastructure investment is complex, and getting from conception to construction and operation, is a long road fraught with obstacles and pitfalls. Poor governance is a major reason why infrastructure projects often fail to meet their timeframe, budget, and service delivery objectives, and often get stalled. As such, it is argued that the strong ‘multiplier effect’¹ of infrastructure spending can be realised, only if it is delivered in a timely manner and is effectively targetted. 

Meeting these criteria may, however, be a challenge, especially during a recession triggered by the pandemic. Infrastructure construction projects take a few quarters to a few years to even get off the ground due to implementation lags in planning and permissions, including environmental permits, and issues of land acquisition.² This means that the boost to infrastructure investment may not be well-timed and may actually amplify, rather than smoothen, economic cycles.³ 

Targetting such spending effectively may also be problematic. In order to stimulate the economy, money needs to get into the hands of the most vulnerable people who would spend it quickly to multiply its impact. It is however difficult to achieve this by investing in infrastructure that typically targets the heavy construction industry, which may not be particularly hard hit in a recession. However, sectors that have been most adversely impacted by the pandemic, such as exports and tourism, including many micro, small and medium sized firms (MSMEs), are not easily reached through this stimulus. Furthermore, investment in infrastructure is highly localised – there is no reason to expect that the regional distribution of infrastructure needs will necessarily coincide with the geographic distribution of its impact. This can create tension between the goal of economic stimulus and the actual public need for infrastructure, especially in a recession. For some authorities, however, investment in infrastructure is a popular form of fiscal stimulus because it is something visible for the voters to see. 

Besides, the actual budget allocation towards infrastructure is rather modest: it is around Rs. 1.77 lakh crore of the additional economic stimulus for 2021-22, which is just 0.8% of GDP. This extra spending will be divided amongst projects to build highways and roads, to provide safe drinking water under the Jal Jeevan Mission, to build a new development finance institution called National Bank for Financing Infrastructure and Development (NaBFID), and also to offer credit to MSMEs. More specifically, a comparison of the budgetary allocation to the Ministry of Highways and Road Transport in 2020-21 (Rs. 91,823 crore) and 2021-22 (Rs. 118,101 crore) indicates an impressive growth rate of 28.6% - although the budgeted spending on highways and road transport is still only about 3.4% of total budgeted expenditure of Rs. 34,83,236 crore in 2021-22. Insufficient funding for capital expenditure may stall projects especially if they run over time and may, ultimately, fail to boost income or employment to the levels required to pull the economy out of the recession.  

Even in pre-Covid economic slowdown, premature infrastructure projects were an important factor for the growth of non-performing assets (NPAs) on the banks' balance sheets. If a road is built in anticipation of a new industrial sector that will use the road and pay the user fee, but the industry takes too long to materialise, the firm that built the road under a public-private partnership goes belly-up, creating a NPA in a bank that issued the loan. 

Expenditure on health and education

In contrast to the infrastructure thrust, this budget has failed to prioritise investment in less risky and more labour-intensive, traditional public goods such as basic health and education – as governments around the world have done to tackle recession currently and historically. There has been considerable hype about the 137% increase in healthcare spending in 2021. However, in reality, these increased healthcare allocations are arrived at by adding the following budget heads: Health Ministry, AYUSH (Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy) Ministry, Department of Drinking Water and Sanitation; allocations by the Finance Commission for health, water and sanitation, and a new head of money for Covid-19 vaccination. For 2021-22, India's Health Ministry has been allotted Rs. 73,931.77 crore. This is up 10.16% from the budget estimate for 2020-21. A 10% increase in health allocations this year – in a country that has always been underspending on health – does not seem sufficient. Moreover, the amount allocated towards Covid-19 vaccination accounts for only 9% of the extra spending intended to tackle a recession that has been caused by the pandemic. 

The role of investment in education in a recession is difficult to ignore as it can directly contribute to more productivity, efficiency, and hence higher earnings, and less vulnerability to unemployment. Hence, a government with an ambitious investment and growth programme is expected to invest significantly in education and skills training. Contrary to everyone’s expectations, however, the 2021-22 Budget has slashed education allocation by about 6%. The government has proposed 100 new ‘Sainik’ schools⁴ to be managed under public-private partnership, and has emphasised spending on single-teacher (Eklavya) schools instead of those with full-fledged facilities for children. While the Education Ministry rationalised the cut on account of Covid-19 exigencies, the sharp dip in the education budget highlights the utter negligence of the sector at a time when schools and universities – that have remained shut for over 10 months – are in desperate need of a special package to get back on track. 

While the government of India quickly recommended schools to move to online teaching, it was easier said than done. India has an immense digital divide, with embedded gender and class divides: only 42% (14.9%) of urban (rural) households have access to internet, where males are the primary users. Most teachers are ill-equipped for online teaching too. Technology has the potential to achieve universal and high-quality education and improve learning outcomes. But in order to unleash its potential, digital capabilities, the required infrastructure, and connectivity must reach the remotest and poorest communities. Unfortunately, the 2021-22 Budget on education has not addressed this.

Concluding thoughts

India is among the countries that have been worst affected by the Covid-19 crisis, and yet the size of its fiscal stimulus package (2.2% of India’s GDP as opposed to 4.7% for developing countries and 8.5% for developed countries, on average) has been meagre in relation to the size of the drop in its GDP growth rate after the pandemic. Instead, the 2021-22 Budget has gone for a strong infrastructure push (albeit still modest shares of infrastructure spending in total expenditure and GDP), accompanied by a cut in the education budget and insufficient investment in health The sprawling construction sites that public infrastructure spending creates are visible reminders to voters that the government is working to address a crisis – in line with the “New Welfarism” of the Modi government – in a year when four states go to polls. Leaving aside this political dividend, the expected contribution of infrastructure investment to pull the economy out of this deep recession crucially depends on whether it can generate timely, well-targetted, and inclusive growth. While the budget has made the stock market happy – largely because there has been no new tax or increase in existing tax that many feared – serious doubts remain about its adequacy to steer a ‘V-shaped recovery’ as claimed by the government.

I would like to thank Sugata Ghosh for helpful discussions and constructive feedback.

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Notes:

1. The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending.
2. Delays in land acquisition for industrial projects were threatening investments worth US$100 billion all over India as of 2009. According to an assessment report released by the Indian Steel Ministry, 22 major steel projects in the country worth US$82 billion are being held up because of several reasons, including public protests.
3. One possibility is that the spending is held up during a time when the economy is suffering and then later overstimulates the economy when it is not needed, thus creating a procyclical pattern.
4. The Sainik Schools are a system of schools in India established and managed by the Sainik Schools Society under the Ministry of Defence.