Tight Fiscal Space Can Constrain Infrastructure Spending By States, Says Crisil
Indian states have increased their spending on infrastructure substantially over the last five years. But it’s come at a cost.
Over the past five years, Indian states have increased their spending on infrastructure substantially. But pressure on their fiscal position due to loan waivers and schemes such as UDAY would hurt the ability of states to maintain that spending.
The cumulative investment in infrastructure by state governments was Rs 31 lakh crore—or 41 percent of the total expenditure by the Centre and private sector, which stood at Rs 77 lakh crore—rating agency Crisil said in a report.
State governments, according to the revised estimates for FY19, spent nearly Rs 24 lakh crore on development expenditure compared with Rs 11.9 lakh crore by the Centre.
And state governments will have spent around Rs 25.8 lakh crore on development expenditure compared with Rs 13.4 lakh crore by the centre, as per revised estimates for FY20, the report said.
Capital expenditure by state governments have quadrupled over the past eight years to Rs 6 lakh crore as of FY19 (revised estimates). The centre spent Rs 3.2 lakh crore on capex in the past fiscal.
“That ‘centre’ of gravity is now shifting to states, especially facilitated by two seminal developments,” Crisil said, adding the first was the devolution of taxes afforded by the Fourteenth Finance Commission. The second development, the report said, is factor market reforms in labour, land and taxation, which has been spearheaded by states as they become more competitive and “cooperative federalism takes root”.
Eight sectors accounted for 83 percent of all infrastructure spending in FY19, with transportation accounting for the highest at 20 percent. Irrigation came next at 18 percent, followed by energy (16 percent), agriculture & rural development (11 percent), urban development and housing (6 percent), water and sanitation (6 percent), education (3 percent) and health (3 percent).
Performance Of States
The report also said that the 15 largest states accounted for 83 percent of all capex spending by state governments, which in the four years through March 2019, doubled to Rs 17 lakh crore from that in the preceding four-year period.
West Bengal, Punjab, Odisha, Bihar and Uttar Pradesh witnessed the highest growth in capex between FY2015-19 and FY2014-10, whereas the corresponding growth in Maharashtra, Tamil Nadu, Haryana and Madhya Pradesh was the slowest in the same period.
That was supported by a 73 percent growth in their revenue receipts, which rose from Rs 16 lakh crore in FY15 to Rs 28 lakh crore in FY19, the report said.
Revenue receipts of Telangana, Uttar Pradesh, Bihar and Haryana rose around 85 percent between FY2014-10 and FY2015-19, whereas that of Andhra Pradesh, Tamil Nadu, Gujarat and Rajasthan witnessed modest growth.
Higher Spending Adds To Fiscal Woes
For infrastructure spending to increase to 6-6.2 percent of the gross domestic product in the coming decade, around Rs 235 lakh crore will need to be spent on infrastructure, the report said, which is thrice the average in the past decade. And state governments will need to contribute at least half of this.
Several states have improved their individual tax buoyancy since FY15 and fiscal prudence has helped mend some of the spending issues of the past, Crisil said.
In recent years as a result of financing their capex and development projects—apart from the burden of farm loan waivers—the fiscal position of states has come under pressure, the rating agency said.
Eight out of the 15 states reported a revenue deficit in FY19 while seven have reported a revenue deficit for three years in a row and, with one reporting the same for two of the last three years.
Around six states had a gross fiscal deficit higher than 3 percent in the past fiscal, which is the threshold as per the Fiscal Responsibility and Budget Management Act, 2003, Crisil said.
As many as 11 states had an outstanding liabilities-to-gross state domestic product ratio of over 20 percent, with only four below the 20 percent threshold through the past five years.
“Given these fiscal slippages on the three critical indices described, it’s somewhat creditable that states managed to keep capex levels reasonably high during this period,” the report said. “However, when the stress becomes unmanageable, the axe invariably falls on productive capex and infrastructure investment.”
Crisil said states need to enact several reforms around fiscal management, state capability and policy and regulatory ecosystem. They include:
Fiscal Management
- Simplify the goods and services tax regime and overall tax administration to increase revenue collection, enhanced compliance and timeliness of filings and returns.
- Identify and offload state-owned assets for monetisation which can recycle capital to newer infrastructure projects, without adding debt to state finances.
- Bring expenditure reforms by creating a medium-term expenditure strategy and improve targeting of direct subsidy transfers..
State Capability
- Create credit-worthy public institutions and address counter-party risks to enhance external funding and private participation.
- Bring about a framework for benchmarking and standardising the governance of all infrastructure providers.
- Expand avenues to attract private sector and commercial finance through innovative structures and sector-specific public private partnership models.
- Empower cities and city governments to tap capital markets.
Policy and Regulatory Eco-System
- Implement sectoral reforms and improve investment climate through single-window frameworks and defined time limits for permissions and approvals.
- Structural reforms in land and labour sectors.