Infra plan lacks prudent investment assumptions

Months after Prime Minister Narendra Modi laid out an optimistic target of Rs 100 lakh crore investment on infrastructure in his government’s second term, Finance Minister Nirmala Sitharaman added Rs 5 lakh crore more to make it sound even more robust at Rs 105 lakh crore.

She also unveiled a detailed roadmap of investment, promising generously to almost all infra sectors comprising rail, road, energy, digital, rural, urban infra, health and education. The only thing missing from her assurance appeared to be a realistic assumption of funds.

At a time when both the Centre and states were staring at steep fiscal slippage originating from a decline in tax revenue, lower nominal GDP growth and higher expenditure, the latest infra investment plan expected nearly 40% contribution each from the centre and the federal bodies.

Around 22% is expected to come from the private sector, which has in the last six years, not invested more than Rs 2.5 lakh crore each year on infrastructure.

And, of late, although sitting on a pile of cash, it has not been opening its purse strings due to uncertain market conditions, procedural delays and an absence of efficient dispute mechanism, which results in locking their funds.

The contribution from the Centre is based on the assumption that the nominal GDP will grow in between 11% and 13% in the period from 2021 to 2025, capital outlay by the Centre will witness 18.8% CAGR over the same period and the budgetary support will keep growing at 21% every year.

Constraints

The nominal GDP in the first half of this year has grown less than 8% as against a 12% target for the full year (2019-20). To achieve 12%, the nominal GDP will have to grow at 17% in the second half of the year. With the corporate revenues and the tax collection of the government (both which are intricately linked to the nominal GDP), growing at such a low pace, there is a worry that India may not even achieve 8% nominal GDP growth in the second half of the year. This will automatically upset the fiscal ratio.

Stagflation worries

Added to that, the economy is now fraught with a new risk – that of oil price rise, which appears to last longer in the aftermath of Iran vowing revenge for US attack that killed its top military commander.

Oil prices have risen about 15% in between October and December due to reasons such as the extension of a production cut by key producers, including OPEC. Friday’s US airstrike has shot up oil prices by 4% in one go. Any escalation of tensions in West Asia will choke a third of the globe’s oil supply. India’s economy is intricately linked to oil.

In the wake of weak consumer demand, high oil prices will present a perfect recipe for stagflation – a situation when inflation is persistently high and demand is stagnant – because India is a net importer of oil and, at present, its exports are down, too.

In such a situation, higher imports will raise current account deficit, and it will impact corporate profits and margins, who in turn, will pass the production cost on to consumers, raising inflation significantly. So, a new problem for infra investment.

Now, the state of the state revenues. The tax revenues of all states were estimated to grow 11.5% to Rs 22.15 lakh crore in 2019-20. However, due to the economic slowdown, neither their GST collection has kept pace nor the VAT on petroleum products and other duties. Their share in central taxes, budgeted to grow at about 14% in 2019-20, has contracted 2.7% in April-October, exerting pressure on the fiscal deficit of the states.

On the GDP growth side, the states have assumed 11% nominal GDP growth in 2019-20. However, they have grown only 7%, in the April-September period, calculations by India Rating and Research suggest. As the tax revenue growth moves in tandem with nominal GDP growth, state governments are expected to face a significant shortfall in their tax collections from the budgeted level.

Will states, with such feeble revenues, be able to contribute about 40% to the infrastructure pipeline laid down by the Centre in the next five years?

Challenges

Next, the task force set up to identify the source of financing for infrastructural projects has flagged serious concerns about the strictness of regulatory regime and loading contracts with difficult conditions, which leads to insolvency among developers.

It has also asked the government to throw open pension and insurance sectors to finance infrastructure and monetise assets of ministries, public sector enterprises to aide the infra finance. This will require a lot of regulatory changes and hence, time-consuming.

The task force has also asked for building up the capacity of banking institutions, including IIFCL and SBI, to provide long-term infrastructure finance. However, the current state of the bank credit growth is that it has slowed to less than 7% in December 2019 from 15% in the corresponding period of the previous year. Banks are simply not lending to industry for the fear that it might lead to an increase in NPAs.

In the wake of such serious challenges, does the Rs 105 lakh crore investment pipeline in the next five years look feasible?