India’s infrastructure push is the exception to the global norm. The government has decided to pursue a public investment-led growth strategy, even though it means going slow on fiscal correction. It’s an opportunity that rich nations, which can borrow far more cheaply than New Delhi, are missing.
A planned reduction in the fiscal deficit to 3 percent of GDP has been delayed by a year. Instead, Finance Minister Arun Jaitley promised in his annual budget to plough savings from cheaper oil into infrastructure. Roads and rail will be the big beneficiaries of a 26 percent boost to capital expenditure, the sharpest jump in five years.
There’s no question that India needs better infrastructure if higher growth rates are to be sustained. Yet some Western countries that are also in need of an upgrade can afford it a lot better. For governments in advanced nations, the cost of long-term borrowing is a fraction of the near-8 percent yield on Indian sovereign bonds.
And while sprucing up its rickety transport and power networks will allow India to supply more goods, richer countries could use investment in infrastructure to boost sluggish domestic demand.
Developed economies, though, appears to have outsourced the task of boosting employment and wages to their overworked central banks. Jaitley can’t go down the same route. The Reserve Bank of India will be unwilling to make deep cuts in interest rates unless the government can give a permanent boost to production capacity and put inflation on a lower path.
The big risk to Jaitley’s budget is from hot money. If U.S. interest rates start rising and investors judge India’s fiscal policy to be too lax, capital might flee as it did in mid-2013. With a little bit of luck, however, the rewards may be well worth the risk. Indian private companies are unwilling to undertake large infrastructure projects. The commercial and regulatory risks have ballooned in recent years, stalling projects and dragging down these companies’ borrowing capacity. Government-sponsored projects have a higher chance of completion.
After decades of neglect, India’s infrastructure is now appallingly inadequate by world standards. But if the country can sustain its big push to public investment, it might just become the West’s envy.