Saturday 31 October 2020

Infrastructure projects get capex booster

States on the forefront of industrial development — such as Andhra Pradesh, Maharashtra, Gujarat, Tamil Nadu, and Uttar Pradesh — will find it easier to absorb the central funds

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Finance minister Nirmala Sitharaman on 12 October announced a Rs 37,000 crore additional capital expenditure, Rs 25,000 crore for the union government and 50-year interest-free loans of Rs 12,000 crore for states. The latter can also be used for settling dues to contractors. The union government’s latest capital expenditure plans will boost new and ongoing infrastructure projects, especially in India’s industrialised states, believe economic observers.

“If you look at the east coast economic corridor, Delhi-Mumbai industrial corridor, multimodal logistics parks, state governments require a substantial contribution. Given that these loans are interest-free and will only require bullet repayment, it’s definitely attractive,” said Arindam Guha, a partner at Deloitte.

States on the forefront of industrial development — such as Andhra Pradesh, Maharashtra, Gujarat, Tamil Nadu, and Uttar Pradesh — will find it easier to absorb the central funds, Guha said. India already has a large number of projects listed under the National Infrastructure Pipeline. “The problem all this while was of getting resources. The government has probably done a reassessment and it is comfortable with the funding, without expanding the fiscal deficit,” he said.

Capital expenditure is generally seen as productive as it involves spending on land, buildings, machinery (in short, infrastructure) and assets for growth.

“Capital expenditure has a high multiplier effect and raises not only current gross domestic product (GDP) but also future GDP, making debt more sustainable. It will further give a new thrust to the states and the union,” the union finance minister said in Monday’s virtual briefing.

However, it remains to be seen whether the additional Rs 25,000 crore now available can be fully utilised in the last two quarters of this year, especially given the restrictions on the proportion that can be spent in the last quarter, said Aditi Nayar, principal economist, ICRA. “The government of India’s capital spending in the first five months of FY21 stood at Rs 1.3 trillion, which mildly trailed the year-ago level. Moreover, there was huge headroom left within the budgetary allocation of Rs 4.1 trillion,” she said.

Though a break-up of the additional capex is unclear, the government’s decision is a welcome move, said Deepak Thakur, partner at Delhi-based legal firm L&L Partners, since the long-term effect of such investment is expected to give the pandemic-affected economy a demand-side boost. “It is, however, equally important to have checks and balances in place, keeping the implementing agencies accountable for the taxpayers’ money,” Thakur said.

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