Central Government Caps Infrastructure Spending at 3.4% of GDP

Newsreel Asia Insight #295
July 28, 2024

The central government’s infrastructure spending, or capex, will remain at 3.4 percent of GDP, Economic Affairs Secretary Ajay Seth said in an interview with ThePrint. This decision, outlined during the announcement of the Union Budget 2024, signals a significant shift in strategy. Seth said it’s now up to state governments and the private sector to step up their investments in infrastructure. Is this move good for the country’s growth and beneficial for its people?

To answer this question, let’s first get a clear understanding of the concept.

Imagine you’re planning to build a massive, beautiful house. You’ve set aside a good chunk of your savings for the project, but suddenly, you realise it’s not enough to finish the job. What do you do? Maybe you ask your family to chip in, or perhaps you invite some investors who see potential in your project. This scenario is somewhat similar to what the central government is doing with its infrastructure—only, on a national scale.

The central government has a plan. It wants to build and improve roads, schools, hospitals and more, but it has decided to keep its own spending on these projects steady at 3.4% of the country’s total economic output, or GDP.

The strategy shifts the responsibility for further development onto two key players. First, state governments—think of them as your family members in our house-building example—need to spend more from their pockets. Second, the private sector, which includes businesses and investors, is expected to invest in projects that can make money, like warehouses or logistics parks.

One challenge is the varied capabilities across states. Just as some of your family members might be better off financially than others, Indian states are not all equally equipped to increase their spending. Some states might struggle due to less money in the bank or less expertise in managing big projects. This could lead to uneven growth—some areas might boom while others lag behind.

Another consideration is the priorities of the private sector. Investors and businesses look for profit. They are unlikely to invest in projects that don’t promise returns. This means essential but not-so-profitable projects (like rural roads or small-town water supply systems) might get sidelined unless there are incentives to sweeten the deal.

There is also the issue of equity and access. In our house example, if only the richest family members get to decide the plan, the new house might end up with features that not everyone needs or can access. Similarly, relying heavily on private investment might lead to infrastructure that doesn’t necessarily meet the needs of the broader public, especially the poor.

To tackle these issues, the government could offer smarter incentives, such as special rewards or financial benefits, to encourage businesses to invest in less attractive but crucial projects. For instance, tax breaks or subsidies could make it more appealing for a company to build a bridge in a remote area.

The government could also lend helping hands to states that need it, much like you might help a less handy family member with their part of the building work. This could be in the form of money, expertise, or even technology, helping ensure that every state can contribute effectively to the national project.

Finally, it’s crucial to ensure fair play in development. Just like ensuring that every family member’s room needs are met in the new house, the government should ensure balanced development across different regions. This might mean extra help or incentives for less developed areas to catch up.

India needs to build infrastructure that not only boosts the economy but also creates a more balanced and equitable society. It’s about making sure that the grand house we’re building has a space for everyone—not just in terms of space but in the quality of life it offers.