Interest-Free Loans Unlikely To Revive Capex, To Help States Settle Dues

Interest-free loans could help states clear supplier dues even as the stimulus measure is unlikely to provide any meaningful push to fresh capex.

Along with other steps to boost demand ahead of the festive season, Finance Minister Nirmala Sitharaman announced Monday special interest-free 50-year loans to states for capital expenditure worth Rs 12,000 crore. The assistance is split in three parts:

• Rs 1,600 crore for northeastern states.
• Rs 450 crore each for Uttarakhand and Himachal Pradesh.
• Rs 7,500 crore for other states, in proportion to their share in the Finance Commission devolution.

While 50% will be disbursed initially, the rest will be given after the first instalment is used. The total amount will have to be spent by the end of the ongoing financial year ending March 2021.

• Rs 2,000 crore will be allocated to states that meet at least three out of the four reforms announced in the Atmanirbhar fiscal deficit package.

States could use these loans to settle supplier bills, Sitharaman said.

The announcement is unlikely to spur capex, said Devendra Pant, chief India economist at India Ratings.

According to Aditi Nayar, principal economist at ICRA, the size of this scheme pales in comparison to the expected shortfall in central tax devolution of Rs 2.8 lakh crore relative to the amount budgeted by the Government of India for 2020-21. “The relatively small magnitude of the long-term loans to be provided by the government to the states, is unlikely to provide any meaningful boost to capex in FY2021, although it may allow for an accelerated settlement of pending dues of contractors or suppliers.”

Indian states saw steep cuts in capex since the onset of the pandemic. According to an analysis by India Ratings, capex of 18 states collectively fell 41.9% in first half ended September. A recovery in capex, Pant said, remains a long way off.

Shubhada Rao, founder at QuantEco Research, however, said using loans to settle supplier dues will help augment liquidity by easing locked-up funds in the system. State governments could also possibly use these interest-free loans for initiating small public works programmes that are relatively more employment intensive, she said.

The finance minister also announced that the central government will step up spending on roads, defence, water supply, urban development and domestically produced capital equipment by Rs 25,000 crore.

For the big-ticket government sponsored fresh capex, unfortunately fiscal constraints will continue to prevail in the current year, Rao said.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said the capex plans are welcome as these have a higher multiplier effect, if implemented fully. “However, while we have been advocating for a capex stimulus especially in roads, railways, defence, and rural-urban infrastructure, the plans need to be expanded and front-loaded to ensure growth recovery.”