Two of the largest democracies have embarked on a massive capital investment plan
over the next few years
US President Biden recently announced a two-part plan to invest in the USA: first part of the plan details a USD 2.2 trillion investment in “hard” infrastructure and second part, the families plan, puts in USD 1.8 trillion in “soft” infrastructure. The combined plan, at around USD 4 trillion over ten years, is for investment in an economy whose CY2021 GDP is expected to be USD 22 trillion.
India had announced an ambitious investment agenda called National Infrastructure Pipeline (NIP) for a six-year period ending FY2025 of Rs 111 trillion (or USD 1.5 trillion) in 2019, before the outbreak of Covid-19. This plan seeks to make investments across a wide range of hard infrastructure and social sectors. For an economy of USD 3 trillion GDP in FY2022, this plan is a substantial commitment to an investment-led growth.
It is instructive to compare the Biden plan with India’s NIP as both plans seek to invest significantly in their countries. Their motivation, composition of the plans, focus areas, and financing strategies offer insights into the similarities and differences of how the two countries approach investments.
The Biden plan calls out two distinct important factors for these investments: China and climate change. While all other aspects of investments like job creation, upgradation of infrastructure, re-energizing the economy, especially after a pandemic, etc. hold, the clear focus is on the two Cs. The focus is driven by a clear guidance to “out-compete” China. Climate is referred to twenty times in the fact sheet briefing document for the plan. Investment in climate change is seen both as a force for the good of the planet and a source of innovation.
India’s NIP focusses on improving the quality of living of its citizens. Ease of Living has been given as much of importance as Ease of Doing Business in India. Economic growth in India has propelled millions of households into a vibrant, middle-class consuming segment – massive investments in basic infrastructure is needed to keep the virtuous cycle of growth continuing.
Composition and focus
India has detailed a sector- and sub-sector-wise list of investments over the next six years with a broad pathway laid out over time. The key sectors of India include energy (including renewable energy), roads, railways, urban and rural infrastructure, and irrigation. There is a special call out for social infrastructure which includes school and higher education, health and family welfare, sports, and tourism – this accounts for USD 52 billion of India’s USD 1.5 trillion plan. There are many of other sectors like ports, airports, agricultural infrastructure, and industrial infrastructure which make up for the rest.
The Biden plan is explicitly broken into two broadly equal components as mentioned above. There is a specific focus on the families: a key underlying idea is that as childcare, education, and in-home care for elderlies becomes more available, it will free up time for caregivers, especially women. The Biden plan also has an explicit focus on innovation: investments in National Science Foundation, R&D, innovation and competitiveness, disaster resilience — all find a mention. There is also a USD 50 billion allocation for the semiconductor industry, an interesting move given the global headlines being created by this industry.
Some of the spending (USD 800 billion) listed under the Biden plan are increase in tax credits. This is not investments in the way India counts under its NIP: this is the equivalent of targeted benefits that India offers under say PM-Kisan Samman Nidhi Yojana. Incidentally, the Biden plan also matched increased tax credits with an USD 80 billion investment in the Internal Revenue Service (IRS) to collect more revenue.
Both the countries have followed unique approaches in financing such a roll-out of investments.
The Biden plan is clear is that a large part of these investments will be financed by increased revenue. There is now a global appeal by the Biden administration to increase minimum corporate taxes. Locally too, the capital gains tax is expected to increase as are the general levels of taxes, especially for high earners. Given that corporate, income, and capital gains taxes are largely determined at the federal level, the collection and investment under this plan is largely going to be a federal matter.
India, on the other hand, has created a wide mix of financing options. While the Central Government will be undertaking around two-fifths of the investments (39%), the State Governments must find a similar quantum of resources (40%) under the NIP. The remaining one-fifth of the investments are expected to come from the private sector. The Central Government has created a significant headroom for itself by updating the fiscal deficit trajectory for India.
In a previous article we had noted that the relaxation of the fiscal deficit targets amounts to USD 550 billion of increased fiscal space for the government. Depending on how and where the excess fiscal space is channelized, this creates enough room for the Indian Government to meet its commitment under the NIP. Interestingly, the revenue realizations for the Government have been higher than expected in the months of March and April, before the second wave of Covid-19 struck. If the earlier trend continues, the resources available with the governments for investment could spark a significant capex-led economic growth.
Financing for capital investment by Government can be driven by increasing revenue or expanding fiscal deficit: what is more appropriate for a country also depends on their debt-to-GDP ratio and the ability to service such debt. India’s sovereign debt-to-GDP ratio, while having increased due to the sharp fiscal expansion and growth contraction in FY2021, is still less slightly than 90%. The USA, on the other hand, has a debt-to-GDP ratio of around 130% in Q4CY2020. India has chosen a deficit-and-spend policy while USA has a tax-and-spend.
Two of the largest democracies have embarked on a massive capital investment plan that will be implemented over the next few years. As the focus is to build back better to create ease of living, investments in new technologies and innovation are also expected to receive a leg-up. This should create fantastic opportunities for infrastructure investors.
The author is with National Investment and Infrastructure Fund (NIIF). Views are personal.