New Delhi: Though the centre of gravity of infrastructure spending has shifted to states, a persistent fiscal squeeze, result of the economic downturn, could potentially limit expansion of states’ investment capacity in the coming days, rating agency Crisil Ltd cautioned in its Infrastructure Year Book 2019 released on Tuesday.
Crisil said capex of states nearly quadrupled to ₹6 trillion from ₹1.7 trillion between fiscals 2011 and 2019, as a result of which the share of states in the combined capex of the centre and states jumped to 65% from 52%. During the same period, capex of the centre rose to ₹3.4 trillion from ₹1.6 trillion.
“For over a decade through fiscal 2015, tax buoyancy and fiscal prudence helped states channel a greater share of resources towards development. However, fiscal position of states has come under stress in recent years. The immediate-term fiscal outlook for states remains muted in the face of a growth slowdown, delays in GST stabilisation, and impact of recent corporate tax cuts," the rating agency said.
The current economic downturn may force the 15th Finance Commission (FFC) to assume low nominal GDP growth, which would mean a smaller share of tax revenues for states, Mint reported on 12 September. Since the Centre has the power to impose cess, it may have more legroom to deal with the situation than the states. India’s nominal GDP growth in the June quarter stood at a meagre 8%—the lowest in the current GDP series—while the budget for the current fiscal assumes nominal GDP growth at 11.5%.
To kickstart economic growth, the finance ministry has set up a taskforce under economic affairs secretary Atanu Chakraborty to identify a priority pipeline of central government projects worth ₹100 trillion to be rolled out in next five years till 2024-25.
“Getting there ( ₹100 trillion capex) and moving forward on that trajectory calls for lifting the GDP growth to 7.5%, and sustaining it above that level through the next decade, and taking the infrastructure spend to about 6% of GDP. A glide path to these levels in the next few years will get us to thereabouts of ₹235 trillion of infrastructure investment, or about ₹23 trillion per year, on average, during the next decade," Crisil said.
The rating agency said slowdown of the past couple of quarters has heightened concerns regarding capital expenditure by states. “States have the hard task of balancing the need for continued capex stimulus with keeping their fiscal position in check," it added.
Fiscal position of states has come under stress in recent years. States are facing stickiness of revenue deficit while their fiscal deficit remains elevated which is crowding out space for capex. A sharp rise in outstanding liabilities, including debt and guarantees, have put limits on fiscal space for capex.
Crisil said despite fiscal slippages, it is somewhat creditable that states managed to keep capex levels reasonably high during recent years. “However, when the stress becomes unmanageable, the axe invariably falls on productive capex and infrastructure investment. For instance, capex of all states taken together dropped 18% to ₹4.3 trillion in fiscal 2018 from ₹5.2 trillion a year earlier, although it picked up in the year thereafter. Reverting to and sustaining fiscal health is a necessary condition for resource flow into infrastructure investment. States face some hard times in the immediate term and tough choices to achieve that," it added.
The rating agency has recommended that states should expand fiscal space to invest through asset monetization and expenditure reforms; tap avenues for commercial financing and adopt appropriate PPP models; and implement structural reforms, including in land and labour sectors.