Infra spending doesn’t have multiplier effect

What stops India from being a manufacturing powerhouse like China? Most experts will give two key reasons. The first is that China is an authoritarian country, where workers can be forced to toil for long hours for low pay, while India has “too much democracy.” The second, bigger, reason is that China has top-of-the-class infrastructure, which India sorely lacks.

Manufacturers need good roads to be able to quickly transport raw materials and to ship their finished goods to different markets. Good ports help them import crucial inputs and also export their products. A dense network of airports helps companies move people and cargo both within and outside the country.

Infrastructure spending is also supposed to have a mega multiplier effect, by generating demand for inputs like coal, cement, steel and heavy machinery. It is also supposed to create many jobs, not just directly, but also indirectly in industries that feed infrastructure projects. Finally, infrastructure spending is supposed to have a beneficial effect on investments in the economy.

Infrastructure projects have long gestation periods and require inputs over many years. This creates a stable demand environment, which encourages entrepreneurs to take risks and invest in building capacities. A World Bank study estimates that every one rupee spent on building roads generates an additional Rs 7 in economic value.

That is why economists have been so enthusiastic about this year’s Budget. The Centre has earmarked Rs 10 lakh crore as capital expenditure for 2023-24.

A little over a quarter of the capital outlay will be spent on constructing new roads and highways. Another quarter will go to the Indian Railways to lay new tracks, run new trains, and upgrade train stations. And another large chunk will be given to states as interest-free loans for them to spend on infrastructure projects. In all, nearly 3 per cent of the GDP has been assigned to building infrastructure.

But does infrastructure spending really achieve the economic effects it is supposed to? The reality is very different.

Take the effect on GDP, for instance. Between the Budget of 2014-15 (when PM Narendra Modi first came to power) and the latest Budget of 2023-24, the capital allocation to the Ministry of Roads has gone up at an annual rate of 20.6 per cent, when adjusted for inflation. As a proportion of the GDP, it has tripled, from 0.3 per cent to 0.9 per cent. Surely, this should have boosted our GDP growth rate. Instead, the opposite has happened; real GDP growth has dropped from the 8 per cent-plus range to the 6-7 per cent range now.

Clearly, higher capital expenditure has done nothing to boost India’s GDP growth rate. What about the investment rate? Has higher capital expenditure resulted in more investments?

One way to look at it is to see the change in the Gross Fixed Capital Formation as a proportion of the GDP. This ratio, which is a proxy for the investment rate, has actually dropped from 33 per cent in 2014-15 to 29 per cent in 2022-23. In this same period, capital expenditure by the Centre has risen from 1.7 per cent to 2.7 per cent of the GDP. That means that as the government’s investments in infrastructure have increased, the overall investment rate has fallen. This suggests that private investments have fallen at an even faster pace than the investment rate tells us.

In other words, increased spending on building infrastructure has had no positive impact on investments.

Finally, let us look at jobs. Here we have to rely on surveys by the Centre for Monitoring Indian Economy (CMIE). We have annual data from 2016-17 to 2021-22. In this period, the total capital outlay on roads and highways, in real inflation-adjusted terms, has increased by 84 per cent. We do not have separate data for jobs in the road-construction sector, so we will have to use construction jobs as a proxy. Between 2016-17 and 2021-22, there has been a 6 per cent decline in construction jobs. So, not only has higher infrastructure spending not generated any new jobs, they have actually fallen, even as more people have joined the workforce.

Of course, mainstream economists would say that infrastructure spending also creates jobs in other industries, which provide inputs and raw material, such as cement, steel and mining. Even here the data paints a discouraging picture. Between 2016-17 and 2021-22, there has been a whopping 62 per cent decline in jobs in the cement industry, employment in the metal sector has dropped by 10 per cent and mining jobs have gone down by 28 per cent.

Not only has the additional infrastructure spending not created direct or indirect jobs, employment has actually reduced in all connected sectors.

There is absolutely no reason to believe, therefore, that the huge capital outlay for roads and railways, will make any difference to demand, investment or employment — each of which need to be tackled on a war footing.

Surely, the Finance Ministry, with its access to tons of data and large teams of number-crunchers and policymakers, is fully aware of this myth of the infrastructure-multiplier. So, the question is — why do successive governments continue to not only propagate this myth but also fund it?

The answer lies in the neoliberal framework within which economic policy has been made in India for the past three decades. It is oriented towards foreign capital and domestic big business. The objective is to provide foreign investors coming to India with a standardised global experience, when they land in our airports, drive down the highways to their five-star hotels, or take expressways to the familiar tourist spots in Agra and Jaipur.

Government expenditure on infrastructure is a great captive source of revenue for big infrastructure players, cement and steel manufacturers, who have no need to cater to the general consumer. It also gives India’s rich — who fly from the swanky airports and drive down the toll roads — a feeling of being in the first world.

The rest of India would be better served if capital expenditure was diverted to agriculture, hospitals, schools and colleges. But, the neoliberal economic policy wasn’t made for that.

The author is a senior economic analyst