Column : The problem with spending

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Column : The problem with spending

: Everybody loves to have government spend more. In the environment of an impending downturn, pleas for government spending on infrastructure have become universal. However, given the fiscal constraints and inefficiency of the government, efforts in this direction will not materially influence the macroeconomy in calendar 2009. A more useful strategy for the government is to focus on the fundamental bottlenecks holding back infrastructure projects and infrastructure financing. Alleviating these bottlenecks will yield a sustained impact on infrastructure spending.

How big is the shock to the macroeconomy? The gloomy outlook for exports and for prices has reduced the profitability of many investment projects. It is, hence, not unreasonable to think of a reduction in corporate investment from 15% of GDP to 10% of GDP. The macroeconomy may get an adverse shock of roughly 5% of GDP.

In principle, more infrastructure spending could help partly stem the problem. But it is difficult to envisage sufficiently large responses coming about quickly. One of the most successful infrastructure programmes of the government, ever, was the NHDP. This was announced in October 1998, more than a decade ago. It took a long time to get going. In 2006-07, the resources flowing through NHAI were Rs 11,041 crore or roughly 0.2% of GDP.

A grand scale of infrastructure construction is very important for India’s long-term growth, and reasonable bottom-up plans involve spending 50% of GDP on infrastructure construction so as to endow India with a reasonable set of roads, railway lines, airports, pipelines, and urban infrastructure. But getting these projects up and running is slow. If the goal is to achieve short-term macroeconomic stabilisation, countering the business cycle, then infrastructure spending is a poor tool. The most outlandish fantasy would involve doubling the resource flow through NHAI in 2009 when compared with 2008. This would get us from 0.22% of GDP to 0.44% of GDP. This is just not big enough to matter.

This is not to say that this should not be attempted. Every little drop helps. With the fall in prices of steel and cement, and with the reduced prices that will be charged by construction companies, we will get a good bang for the buck. With mature projects such as the Delhi Metro, the NHDP, and the Bombay-Delhi Industrial Corridor, every incremental lever should be utilised to push them to a bigger scale of operation. But the significance of this effort for the macroeconomy is quite limited.