infrastructure picks: Sectors linked to electrical, green energy, and railways may see a disproportionate increase in business: Vinayak Chatterjee

Vinayak Chatterjee, Co-founder, The Infravision Foundation, says in the next five years, public expenditure of a level close to targeting 8% of GDP will continue to be the pump primer of the economy, with high benefits to specific sectors. Chatterjee says: “If I ignored the Interim Budget as merely an arithmetical exercise, then the expectation of 2024-2025 full-year budget is that the finance minister will allocate around Rs 13 lakh crore, 30% over the last full year’s budget’s Rs 10 lakh crore in the forthcoming budget.” Do you expect that we will see a pickup when it comes to the overall private capex cycle in infrastructure?
Vinayak Chatterjee: I have had the privilege of participating in a specific pre-Budget consultation with the finance ministry in the infrastructure sector. And as you would realise, there are a vast number of budget expectations across many sectors. Let me give you what I would consider the top five cross-cutting highlights, things that will impact across sectors.

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1) The quantum of the outlay. Now let us roll back to the last full-year budget, which is 2023-2024. I am not counting the Interim Budget. There the outlay for infrastructure was Rs 10 lakh crore and that came on the back of two years of consistent very heavy increases in outlays ranging from 25% to 30%. If for a minute I ignored the Interim Budget as merely an arithmetical exercise, then the expectation of 2024-2025 full-year budget is that the finance minister will allocate around Rs 13 lakh crore, 30% over the last full year’s budget’s Rs 10 lakh crore in the forthcoming budget.

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So, the expectation of total outlay for the infrastructure sector from the industry watchers is Rs 13 lakh crores or a 30% increase minimum. Now, this is important because as we all know we are still waiting for private capex to, in a sense, galvanise itself. So, public expenditure in infra is expected to continue to pump-prime the economy, and if we are pushing for a 7.5% to 8% GDP growth, then the 30% increase, all the mathematics points to the direction that this 30% increase in public spending through the union budget is possibly the way to go, so that is point number one.

2), It is strictly not a Union Budget issue and affects the infrastructure sector. It is a GST Council issue, but it has wide ramifications on the infrastructure sector and the government’s budgets which is the 28% GST on a commodity called cement. Now, it seems quite irrational that an aam aadmi product plus a crucial infrastructure intermediate will be taxed at the same rate of 28% and we have very strongly from the infrastructure sector recommended to the Honourable Finance Minister that the budget speech use the opportunity to send a policy statement that the matter of reduction of the high duty on cement is dysfunctional to the nation and will be suitably taken up in the GST Council, that is point number two.

3) An issue that all infrastructure developers and EPC contractors are facing, is that every infrastructure project by law or by regulation needs to be structured as an SPV, a special purpose vehicle. For your lay viewers, an SPV is equal to a company. Now, if you have a normal company that makes biscuits, metal pipes, and let us say does real estate, then all of these can be done in the divisions of the company and the tax implications across the different business verticals can be netted off with each other on the profit and loss account.

But in the infrastructure sector, each project requires both the regulatory and the banking system to structure itself as a standalone company called an SPV. Now, this is very dysfunctional because infrastructure players have anywhere upwards from 40 to 80 SPVs and to keep submitting individual income tax returns, as well as the inability to cross-subsidise between profit and loss-making is a significant damper.

So, while the effort is on to increase the ease of doing business for private capital to come in, it is important that the finance minister set up a task force to take a hard look at introducing what is called the group taxation regime for the infrastructure sector; that would go a long way, that is point number three.

4), We have, in a sense, been watching the developments internationally on the multilateral development banks wanting to play a major role in helping countries to manage and transition to the green energy challenge. We understand that the World Bank particularly is keen to work with the Government of India to structure a green energy transition fund and rope in other multilateral development banks, sovereign funds, etc, along with participation from the central government and private players, including various sovereign funds. So, the idea is to once again suggest that the issue of transitioning to a green regime comes with very serious costs to several players across the chain, whether it is generation, transmission, storage, hydrogen, or ammonia.

So, a strong recommendation is to set up a task force to consider setting up a green energy transition fund with the help of the World Bank.

5), I have noticed that across most of the presentations that were made to the finance ministry by various sectors – social, core infra, and industry – there is a very strong emphasis on getting a renewed focus on urban infrastructure financing specifically by saying the time has come to have some very clear targets with the help of the union ministry, finance and urban, to have at least a certain acceptable minimum quantity of towns and cities raising municipal bonds. I think that a target of Rs 10,000 crore or 20,000 crore should be an aspirational target to help galvanise Indian cities to take care of their infrastructure needs, which is sorely lacking.

These are my five broad overarching points. As I said in the beginning, various numbers of tax concessions, tax support, and tax rectification proposals have been brought up. They are matters of detail, and I am sure the finance ministry would consider them. But I am just outlining for you five broad areas that impact cross-sectorally.

I want to start with the very a basic number, which is that expenditure as a percentage of GDP was less than 2%, now it is almost 3.5%. Do you think there is scope for the expenditure to go higher as a percentage of the GDP? Do you think there is merit that the government should keep on increasing its total allocation to the entire expenditure side?
Vinayak Chatterjee: Look, I cannot talk about total infra, but it is across political dispensations from the UPA to NDA. There is a consensus, officially, that India’s aspirational target is 8% GCFI, gross capital formation, and infrastructure, as a percentage of GDP, so that is my starting point. If in this budget year, you are going to try and reach that aspirational target of 8% GCFI, you need to spend Rs 13.5 lakh crore. I will tell you how the arithmetic shapes up.

Our thumb rule in infrastructure says that across the years if you monitor the investments in infra sector, when the central government spends Rs 10, a balance 10 rupees is spent by three other constituents, states, extra budgetary resources, and private capital. So, if the central government spends Rs 13.5 lakh crore in the forthcoming budgets for it, then you will get another Rs 13.5 lakh crore in investments galvanised and catalysed by the three other constituents, which will take the infrastructure outlay for the nation to Rs 27 lakh crore.

Now, when you take that to Rs 27 lakh crore, you will find that the nominal GDP expected at current prices this year is about 333 lakh crores. So, 27 upon 333 gives you exactly 8%. So, the math holds. I hope that answers your question.

Now, let us look at the multiplier. For example, defence turned out to be a multiplier for the economy. Railways turned out to be a multiplier for the economy. Where do you think the big multiplier effect of Rs 50,000 crore or Rs 1lakh crore will get created in five years?
Vinayak Chatterjee: One has been told by very senior finance ministry officials last year after the pre-budget discussions that they have a confidential document in the finance ministry that one rupee spent on infrastructure leads to three rupees of GDP. And one rupee spent on direct benefit transfer, DBT, results in 90 paisa of GDP. So, at a broad macro level, it is very clear what is the right strategy to galvanise the GDP and pump-prime the economy. Re 1 on infra spend leads to Rs 3 of GDP. Now, remember, Rs 3 is an average. So maybe I am just hypothesising. It might lead to a one or two multiplier on manufacturing of people who make goods and services for infrastructure and construction sector is well known to have multiples of upwards of five, six. The average is three. So, the implications of a high allocation to infra is very very clear. There is no debate on that.

Just like defence and railways have seen parabolic moves, from the government standpoint, where will the new multiplier come from within the government spending?
Vinayak Chatterjee: You are pushing me to answer this question and I think it has some overtones of what it will mean to the stock market in terms of people who supply goods and services. The big push to green energy means that the allocations will demand a huge degree of manufactured goods and services that go to setting up not just generation capacity, because that is obvious that solar, wind, hydrogen electrolysers will have to be manufactured, that is obvious. But even it will create huge demands for storage, pump storage, battery storage, transmission, substations, cables, insulators, transmission towers.

So, to answer your question, one of the big beneficiaries is going to be all the industries that are associated with providing goods and services to the energy sector. Obviously, steel and cement is a no-brainer because they constitute the bulk of infra on the construction side. I feel that this year there is going to be a higher emphasis on allocation to railways over historical roads. Roads for the last two-and-a-half decades have ruled the infrastructure roost by garnering a significant portion of the budgetary allocations. Roads have now reached a level of maturity and I think the signals are coming through pretty clearly that railways might just overtake roads in terms of allocations.

Now, that has very serious positive implications for people who are involved in supplies of goods and services to the railway establishment, not just electrification but coaches, wagons, lines, safety equipment across the board. So, I will highlight for you that, in my view, the sectors that are linked to electrical, green energy, and the sectors that are linked to railways are likely to see a disproportionate increase in their business.

If one has to look at the entire focus on the infrastructure sector, can I say that four to five years at least, this entire government spending and driving the economy through infrastructure spending trend will continue?
Vinayak Chatterjee: It will, unless we are pleasantly surprised with a surge of private sector investment. But as of now, the interest seems to be really restricted to InvITs and other measures that monetise existing investments. Brownfield assets are monetised, which seems to be the private sector, large private sector appetite. So, you are right in your assessment that in the next five years, public expenditure of a level of close to targeting 8% of GDP will continue to be the pump primer of the economy, with specific high benefits to specific sectors, as was just discussed.

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