UNLOCKING INDIA’S ECONOMIC POTENTIAL: THE MULTIPLIER EFFECT OF INFRASTRUCTURE DEVELOPMENT IN FY24
Saturday, Mar 4, 2023
Infrastructure development has always been a crucial driver of economic growth and development in India. It refers to the construction or improvement of physical assets such as roads, bridges, airports, seaports, railways, power plants, and water supply systems. In FY24, the government has announced a massive 33% increase in the capex outlay to 10 lac crores, which amounts to 3.3% of GDP. This will have a significant multiplier effect on the Indian economy, especially in sectors such as infrastructure, cement, and steel. The multiplier effect of infrastructure development refers to the way in which the initial investment in infrastructure creates a ripple effect throughout the economy, resulting in additional economic activity and job creation.
The multiplier effect works in the following way:
1. Direct impact: The initial investment in infrastructure creates direct jobs for workers involved in the construction and maintenance of the infrastructure.
2. Indirect impact: The new infrastructure enables other industries to operate more efficiently, such as transportation and logistics companies that can now move goods more easily and at a lower cost.
3. Induced impact: The increased economic activity resulting from the improved infrastructure generates additional spending by consumers, leading to increased demand for goods and services across a wide range of industries.
As a result of these three impacts, the multiplier effect of infrastructure development can be significant. For example, a new airport such as the soon to be developed Navi Mumbai International Airport can create direct jobs during construction and operation, but it can also generate indirect jobs in industries such as tourism, hospitality, and logistics, and induced jobs in retail and other service sectors. In addition to job creation, infrastructure development can also lead to increased productivity, higher GDP, and improved quality of life for residents.
Under the “Saptrishi” mantras, the government has identified infrastructure as a key sector for development. The government has initiated major projects such as the Delhi-Mumbai expressway, Navi Mumbai International Airport, and Delhi-Katra Expressway. Additionally, the National Highways will be expanded by 25000 Km, creating more job opportunities and facilitating efficient transportation.
One of the most significant impacts of this infrastructure development will be on the rural economy. The capex will be used to boost tier 1 and tier 2 cities, creating a ripple effect on rural areas. This will help in increasing the income levels of people living in rural areas, and improve the standard of living. The government has also focused on affordable housing under the Pradhan Mantri Awas Yojana. The outlay for this scheme has been increased by 66%. This will not only help in fulfilling the housing needs of people but also provide a boost to the real estate sector.
Another significant factor that will contribute to the multiplier effect is the continuation of the 50-year interest-free loan to state governments. This will aid the sector by providing adequate financial support for the completion of projects. The multiplier effect of infrastructure development will also have a positive impact on the cement and steel industries. However, the main constraint for these industries is the 28% GST that the raw materials attract. The government needs to address this issue to ensure the smooth functioning of these sectors. The establishment of an Infrastructure Finance Secretariat is also an important step towards crowding in private investments. This will help in mobilizing resources for infrastructure development and attract more investments from private players.
Ultimately, the multiplier effect of infrastructure development in India in FY24 will be significant, and it will create a positive impact on various sectors of the economy. The government’s focus on infrastructure development will not only boost the economy but also help in fulfilling the needs of people and creating more job opportunities.
Growth factors in the Indian Economy
INTRODUCTION
India’s economy is expected to grow by 6.1% in FY24, despite global economic headwinds, due to a resilient domestic chain of demand. In January 2023, GST collections grew by 10.6% YoY, indicating that the Indian economy is continuing to show an upward growing trend,
The government has set a medium-term target to bring down the gross fiscal deficit to 4.5% by 2025-26. However, the current target until March 2023 is 6.45%, which is expected to be surpassed due to higher revenue expenditure.
The Indian government is taking steps to boost tourism by promoting the One District One Product and Geographical Indications products. Additionally, 50 destinations will be developed as complete tourist packages. This is good news for the hospitality industry, as the stock prices of India’s top four hotel companies by market capitalization – India Hotels, EIH, Lemon Tree, and Chalet – have outperformed the indexes.
The financial services sector in has also made significant strides in recent years. The ratio of deposits to income has risen from 15.8% in 1972 to 71.2% in 2022. Furthermore, the number of bank branches has increased from one per 40,000 citizens in 1972 to one per 9,000 citizens in 2022.
SECTORS WITHIN THE SAPTRISHI MANTRAS
The infrastructure, cement, and steel sectors are the main focus of the “Saptrishi” mantras, with a 33% increase in capex outlay to 10 lakh crores in FY24, which is 3.3% of GDP. Major projects, such as the Delhi-Mumbai Expressway, Navi Mumbai International Airport, and Delhi-Katra Expressway, will be undertaken, and National Highways will be expanded by 25,000 km. The capex will also boost the rural economy in tier 1 and tier 2 cities, with a particular focus on affordable housing through the PM Awas Yojana.
The continuation of a 50-year interest-free loan to state governments will aid this sector. However, the 28% GST levied on raw materials like cement and steel remains a major constraint. Private investment will be encouraged through the establishment of the Infrastructure Finance Secretariat.
The railways sector will receive a 2.4 lakh crore outlay, which will benefit 800 crore passengers who travel annually. The higher outlay will be used for Vande Bharat Trains, manufactured from four sites rather than the current one in Chennai, which will have an impact on steel, containers, wagons, and logistics. The aim is to reduce the cost of manufacturing a Vande Bharat train from one week to 2-3 trains per week. The railways sector has reduced the cost of earning Rs. 100 to Rs. 98 and aims to further reduce it by electrifying railway tracks. The logistics cost in developed countries is 6-7% of GDP, while in India, it is 13-14% of GDP.
One hundred infrastructure projects for ports, coal, steel, fertilizer, and food grains have been identified. Additionally, 50 aircraft landing sites comprising airports, heliports, water aerodromes, etc., will be revived to improve air connectivity, which will also benefit the hospitality and tourism industries.
DIGITALIZATION
India is rapidly advancing in the digital space, with the establishment of three new centers of excellence focused on artificial intelligence (AI). These centers are aimed at promoting research and development in the field of AI and providing a platform for the development of cutting-edge technologies.
In addition to this, India has also launched a national e-commerce platform called ONDC (Open Network Digital Commerce) to facilitate easy and secure online transactions. This platform is set to revolutionize the way e-commerce is done in the country.
India has also been a pioneer in the adoption of digital technologies, with initiatives such as Fastag and UPI (Unified Payments Interface). These have enabled seamless and secure transactions, making India one of the fastest-growing digital economies in the world.
The eCourt Project is another landmark initiative aimed at modernizing the delivery of judicial services in the country. This ambitious project, with a budget of 7000 crores, seeks to leverage technology to ensure swift and efficient justice delivery.
The digital ecosystem in India is also set to receive a boost with the establishment of a national digital library, which will provide access to quality education. Additionally, research in cutting-edge areas such as 5G applications, agriculture, and healthcare will be supported through the establishment of 100 labs in engineering institutions across the country.
The fintech sector is also set to benefit from initiatives such as access to Digilocker, which will provide a secure digital platform for storing and sharing documents. A farmer-centric platform similar to UPI is also in the works to support the agriculture sector.
All these initiatives are expected to contribute significantly to India’s digital economy, which has already grown 2.4 times faster than the overall economy. AI alone has the potential to add $400-500 billion to India’s GDP by 2025. This is reflected in the increasing adoption of digital payments, which has seen a 76% increase in transactions and a 91% increase in value. India is well on its way to becoming a digital superpower.
CAPITAL GOODS INCLUDING CAPEX AND 5G
The Indian government has allocated a 13 percent increase in funds to the defense sector, signaling a strong focus on strengthening the country’s defense capabilities. This move is expected to provide a boost to private companies that produce defense equipment, and will allow for 100% private sector participation and foreign direct investment (FDI) of up to 74%.
India has significant domestic expertise in key areas of defense production, including fighter aircrafts, helicopters, submarines, and armored vehicles. This focus on domestic production will likely benefit companies like Bharat Forge, which is already a key player in the Indian defense industry.
Furthermore, India’s move towards 100% private sector participation and higher levels of FDI in the defense sector is in line with other developed countries who have witnessed growth in their defense industry through similar measures. This shift is expected to further boost the country’s capabilities in the defense sector and promote technological advancements in areas such as artificial intelligence and cybersecurity.
Overall, this increased investment in the defense sector is expected to strengthen India’s security and provide a boost to the country’s economy through the development of new technologies and increased employment opportunities.
ETHANOL INDUSTRY
The sugar sector in India is set to receive a significant boost due to the reduction of custom duties on intermediate chemicals used in ethanol production. This move is expected to result in an increase in the availability of alcohol for ethanol blending, which is a key component of the country’s efforts to promote the use of renewable energy sources.
In fact, India has already achieved its ethanol blending target of 10% by November 2022, five months ahead of schedule. The country is now aiming for a 20% blending target by 2025, which will require a significant increase in ethanol production capacity.
To achieve this goal, the Indian government has approved 11 more ethanol projects under the new Ethanol Interest Subvention Schemes. This is expected to increase the overall production capacity in the country by 25%, resulting in a total production of 1250 crore liters.
India is also exploring potential partnerships with countries such as Brazil, which has 40 years of experience in ethanol production. The establishment of a “Centre of Excellence on Ethanol” in partnership with Brazil is expected to further enhance India’s ethanol production capabilities.
Hence, the reduction of custom duties on intermediate chemicals used in ethanol production, along with the approval of new ethanol projects and potential partnerships with other countries, are expected to significantly boost India’s renewable energy efforts while also supporting the country’s agricultural sector.
SHRIMP INDUSTRY
India’s fisheries export sector has been steadily growing, and shrimps are the biggest contributor to this growth. In fact, shrimps make up a significant portion of the $7.8 billion that India’s fisheries sector exports.
It is interesting to note that almost all of India’s shrimp production is exported to other countries. This indicates that the demand for Indian shrimps is high in the international market, and that Indian shrimp farmers have the potential to expand their business further.
To further support the growth of the shrimp farming industry, the Indian government has reduced custom duties on fishmeal and other shrimp feed from 15% to 5%. This move is expected to make it easier and more affordable for shrimp farmers to access the necessary feed to sustain their operations.
CONCLUSION
India’s economy is displaying resilience in the face of global challenges. The government’s efforts to decrease the fiscal deficit and encourage tourism are contributing to this growth, and these initiatives are expected to continue in the future. Additionally, India’s focus on digitalization, industrial development, defense, and agriculture investments is expected to further promote economic growth and foster innovation in the country. All of these factors together are creating a positive outlook for India’s economy in the coming years.
Author Bio– Shreesh Singh is a financial market expert and analyst with case study skills and knowledge. His work clearly shows his passion and enthusiasm and we can feel it through his articles.
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