Budget won’t impact demand

There is an unquestioned consensus amongst mainstream economists that investments in building infrastructure are the best way to generate demand for goods and services. When money is spent on building infrastructure, an entire range of industries gain — steel, cement, heavy machinery, trucks, cranes. Not only do these industries hire more people, but also jobs are generated directly in infrastructure projects for engineers, administrators, supervisors and construction workers.

Big companies in the construction, cement and steel sectors will benefit as they will get government contracts. It will only increase the share of profits in the economy.

That is what seems to be the idea behind this year’s Budget, at least on paper. The government has announced a massive 35 per cent increase in capital expenditure compared to what it had planned in 2021-22. In fact, if one takes out the spending on retiring Air India’s liabilities before handing it over to the Tatas, the hike in capital expenditure is more than 36 per cent. It is almost an additional 1 per cent of nominal GDP.

But there is a catch. Out of the nearly Rs 2 lakh crore of additional capital expenditure planned for next year, Rs 47,200 crore will be used to ‘infuse capital’ into BSNL, so that it can buy 4G spectrum and fund a voluntary retirement scheme for employees. So, a big chunk of this spending will come back to the government as revenue from spectrum sales. Secondly, half of this additional capital expenditure is being given as 50-year interest-free loans to states, for them to spend on ‘PM Gati Shakti-related and other productive capital investments’.

The biggest additional capital spending, of about Rs 66,000 crore, will be on road transport and highways, including about Rs 19,000 crore on building rural roads. If states spend half of the interest-free loans that they are getting on building road transport infrastructure, the total additional spending will be close to Rs 1.2 lakh crore. But, as Neelkanth Mishra of Credit Suisse has pointed out, some of this additional spending is just a book-keeping exercise: some previous spending, that was not recorded in the budget, has now been brought into the Budget itself.

Mishra is sceptical about whether the Centre or states can actually spend what is being allocated. He has pointed to the fact that Central and state governments have together parked Rs 5.5 lakh crore of unspent money with the RBI. That means they might have borrowed, but they just don’t have the capacity to spend it. A big reason for this is that both the Centre and states have a massive shortage of staff. They haven’t filled vacancies in government jobs and now they don’t have people on the ground to implement the projects that they have announced.

There is a bigger question here — even if governments managed to spend all the additional amount that has been allocated in this Budget, will it help generate consumption demand? Infrastructure projects are mainly implemented by giving contracts to private construction companies. They, in turn, hire engineers, managers and workers to complete the projects. The NHAI’s construction cost index tells us that wages account for about 14 per cent of the overall cost of building roads. If we assume that the share of wages is 20 per cent, when one also includes other types of roads, the additional spending on road construction will add about Rs 13,000 crore in wages. If one assumes a similar ratio for all infrastructure projects, we can estimate that the extra spending will result in an additional

Rs 20,000 crore in wages.

On the flip side, the reduced spending on MGNREGA will take away a significant amount of wages from the economy. The allocation for MGNREGA has been cut by Rs 25,000 crore compared to what the government will end up spending in 2021-22. The scheme mandates that 60 per cent of the budget must be used for wages. That means, a drop of Rs 15,000 crore in wages. In other words, the net impact of additional capital expenditure is just Rs 5,000 crore in terms of additional wages.

Of course, there will be some additional wages generated in companies that produce inputs for infrastructure. About 65 per cent of the cost of road construction goes towards buying raw material. Let us take cement as proxy for such raw material. If we look at the costs of India’s largest cement manufacturer, UltraTech Cement, its wage cost is about 18 per cent of its overall costs. So, if out of Rs 1 lakh crore additional spending on roads, Rs 65,000 crore is spent on raw material, only about

Rs 12,000 crore will be spent on wages.

If we now add cost savings for other companies because of better roads, and assume that some of that will be used on additional wages, the total impact —direct and indirect — cannot be more than Rs 20,000 crore in additional wages and salaries. Most of it will go to the poorest Indians, who work on construction sites. There are approximately 15 crore people who work in MGNREGA projects and about 5.7 crore are employed in real estate and construction. There would be an overlap in these numbers, so we can assume that we are talking of about 18 crore workers. Add to this workers in industries that provide inputs to infrastructure projects, then the total number of workers affected will be about 19 crore. So, 19 crore people will get an additional Rs 25,000 crore in wages. That is an average of Rs 1,315 per person.

If we assume an employment rate of about 1.3 people per household, this extra infrastructure spending will generate just Rs 1,710 per household for the entire year. Since household sizes tend to be much higher amongst the poor, we can safely assume that this works out to not more than Rs 350 per head, or an additional Re 1 per day for the poorest people.

It’s clear that such spending is meaningless when it comes to generating additional demand in the economy for consumption goods. Yes, it will be of great benefit to big companies in the construction, cement, steel and heavy equipment sectors, since they will get government contracts. It will only increase the share of profits in the economy.

The author is a senior economic analyst