Can Budgeted Infrastructure Investment Drive Growth and Job Creation?

Spending on Housing for All, road construction and other infrastructure projects is likely to create jobs, but it remains to be seen whether this alone will be enough.

India was the fastest growing large economy of the world with its 7.6% GDP growth rate in 2015-16. This is the fastest the Indian economy grew in the five years since 2011-12. Growth may lower by at least 0.5% and perhaps by one percentage point in 2016-17, the Ministry of Finance’s Economic Survey admits. But will it continue to grow at this pace in 2017-18? What can we say on the basis of the Budget for 2017-18?

Equally importantly, economic growth is meaningful not for its own sake, but mainly because it creates the possibility of new non-agricultural jobs. Job growth leads to an increase in consumer demand, which has the effect of sustaining GDP growth and in turn encouraging greater private investment and reducing growth volatility.

More people, less jobs

New non-agricultural jobs created between 1999-2000 and 2004-5 were 7.5 million per annum (but then the increase in entrants to the labour force was 12 million per annum). However, between 2004-5 and 2011-12, the additions to the labour force were only 2 million per annum. Meanwhile, due to sustained private investment, GDP growth was 8.4% per annum between 2004-5 and 2011-2. An additional 7.5 million new industrial and service sector jobs were created between 2004-5 and 2011-12. In other words, if the economy continues to grow rapidly India has already demonstrated an ability to generate at least 7.5 million new jobs annually over a 12 year period from 1999-2000 and 2011-12.

The new entrants to the labour force is not 12 million per annum, unlike what most people believe. The additions to the labour force had fallen sharply after 2004-5 because a growing number of children (6-14 year olds) were in school and higher numbers of 15-16 year olds were remaining in school. Secondary enrolment (classes 9-10) rose from 62% in 2010 to 79% in 2015. Since 2011-12, India is probably adding only 5-7 million better educated youth to the labour force per annum. In addition, since 2004-5, some five million are leaving agriculture, looking for non-agricultural work. Creating two different types of jobs for these two groups is the challenge facing the government. These two groups have rather different aspirations: the latter, with limited or no education or skills, are best absorbed in infrastructure-driven construction. The former, on the other hand, are better educated and may have some formally acquired skills, albeit limited. They will only look for modern services or manufacturing-related jobs. Has the Budget done anything to create jobs for these two groups?

The role of infrastructure investment

One of the most important sources of increased consumer demand since the turn of the century was the increase in infrastructure investment. Starting with the Golden Quadrilateral Highway network, which began construction in 2001, infrastructure investment picked up. As a result the number of workers in construction rose from 17 million in 1999-2000 to 26 million in 2004-05. Investment in infrastructure rose strongly thereafter and during the 11th five-year plan (2007-12), infrastructure investment in the public and private sector together grew by $475 billion or nearly $100 billion per annum. The result was that employment in construction jumped from 26 to 51 million, tripling compared to the turn of the century.

That is why the Rs 396 lakh (Rs 3.96 lakh crore or about $ 57 billion, up from Rs 3.48 lakh crore the previous year) investment in infrastructure in various sectors announced by finance minister Arun Jaitley announced on February 1, 2017 is welcome. However, that is nowhere close to the nearly $100 billion worth of infrastructure investment that was taking place during the 11th five-year plan period, which drove construction job growth at a historically unprecedented rate.

Job growth has been much slower since 2012. The labour bureau of the Ministry of Labour compiles statistics for job creation in eight major labour-intensive, non-agricultural sectors each quarter since the 2008 global financial crisis. In these eight sectors, the latest figures show that 1.35 lakh jobs were created in 2015, the lowest figure since 2008, lower than the 4.9 lakh new jobs in 2014 and 12.5 lakh in 2009.

The good news is that infrastructure public investment had picked up in 2015. The government acted to clear 42 stalled projects worth Rs 1.15 lakh crore since February 2015, which activated the idle investments locked in the projects. This began yielding results in 2016-17. Further unlocking of stalled projects will accentuate the GDP and construction job growth.

This is good news for the five million per annum who leave agriculture to look for work in construction. It is also good news for the underemployed  persons aged 15 years and above who were available for work for all the 12 months of the year, but only 60% of them found work for more than six months (as the fourth annual survey of employment in 2013-14 noted).

What’s next

The railway infrastructure investments announced by the Budget 2017-18 include: 3,500km of railway lines to be commissioned in 2017-18 (as against the 2,800 km in 2016-17), 25 stations to be redeveloped and solar power for 2,000 stations. Roads will see an increase in allocation from Rs 52,447 crore (revised estimates) in 2016-17 to Rs 64,900 crore n 2017-18. In particular, 2,000 km of coastal connectivity roads will be constructed. The Optical Fibre Network (under BharatNet) has been laid in 1,55,000 km; from nothing the allocation for BharatNet is Rs 10,000 crore in 2017-18, with the objective of ensuring high-speed broadband connectivity on optical fibre in more than 1,50,000 gram panchayats.

Especially important for jobs in rural areas is the budgetary increase in investment in the Pradhan Mantri Grameen Sarak Yojana (PMGSY). Compared to the Rs 7,000-8,000 crore allocation to PMGSY in 2012-13 and Rs 9,000 crore in 2013-14, the allocation increased to Rs 19,000 crore in 2015-16 from the Union government. However, equally importantly, this is only 60%, since the remaining 40% is to come from the state governments; as a result the annual allocations will be Rs 27,000 crore total, taking into account both central and state expenditures. This same sum will be available for each of the next three years, until 2018-19; this has been assured to the Ministry of Rural Development by the finance ministry.

Such an increase in allocations automatically means rural roads will be constructed much faster than they were being done over 2011-14, the last three years of the UPA regime. The average construction of rural roads under PMGSY was 73 km per day over 2011-14; over 2014-16 that number had already gone up to about 100 km a day. With the increased allocation in the current financial year, it is expected to rise to 130 km a day, according to reliable senior sources in the Ministry of Rural Development. In 2017-18 and 2018-19 it is targeted to touch even higher. This is not unthinkable, as in earlier years, at its peak in 2009-10, construction of rural roads under PMGSY had reached 145 km a day.

Equally important is the focus on ‘Housing for All’, especially on low-income housing. In 2015-16 a total of 18.27 lakh houses were constructed under the rural housing scheme, the Pradhan Mantri Awaas Yojana (the erstwhile Indira Awaas Yojana). The government will have to construct around 35 lakh houses a year to meet its 2019 target. The Socio-Economic and Caste Census has been used toidentify close to three crore beneficiaries under the scheme.

In this context, the increase in allocation per house from the erstwhile Rs 35,000 per house for BPL families to Rs 1 lakh, should speed up the building of houses in rural areas by BPL households. However, for the Awas Yojana the challenge will to go beyond financial resources to limited labour and material availability. To double the pace of construction of houses, the Union government is recommending to states to use local material and technology to meet any shortage. The Budget announced a rural mason training programme to supply the workforce to expand these construction activities.

Similarly, the significant ramp up in spending on sanitation through the Swacch Bharat Abhiyan is also going to cause much more work creation in rural areas, in the building of toilets. Thus, expenditure on the Nirmal Bharat Abhyaan was Rs 2,250 crore in 2013-14. It had increased to Rs 2850 crore in the first year of the Swacch Bharat Abhiyan; but it jumped to Rs 6,524 cr in 2015-16. The allocation for 2016-17 is Rs 12,800 crore (RE) and last week’s Budget has increased it to Rs 16,248 crore in 2017-18.

Construction employment is, however, of limited important value for the 5-7 million young school-leavers who are joining the labour force, for whom the open unemployment rate is ten times higher than that of those 30 years and above. The unemployment rate for 15 to 17 year olds is 10.2% and for 18 to 29year olds is 9.4% in 2013, but 0.8% for over 30 year olds.

Private investment was down in the first half of 2016-17, 27% of GDP compared to 31% the previous year. Demonetisation has clearly reduced economic activity sharply since then and capacity utilisation is running at 70% in industry currently. With the ‘twin-balance sheet problem’ of over-leveraged companies and non-performing assets in banks, there is no possibility of an increase in private investment for the next three-four quarters. Given this situation, will public investment in infrastructure alone be able to carry the burden of sustaining GDP and job growth in the economy?

Santosh Mehrotra is professor of of economics at Jawaharlal Nehru University and ex-director general of the National Institute of Labour Economics Research (of the NITI Aayog).