The new axis of infrastructure

India’s infrastructure gambit for the coming decade will see states take the centre stage of investments. 

With the centre walking a fiscal tightrope, and the economic slowdown hobbling private investment, we estimate that states will need to marshal Rs 100-110 trillion, or approximately 45 per cent of the total infrastructure investment requirement of Rs 235 trillion in the next 10 years. This is imperative to sustain India’s gross domestic product (GDP) growth at around 7.5 per cent and infrastructure spend at over 6 per cent of GDP annually through the next decade.

 
Formidable as that sounds, it is eminently doable — given that states accounted for about 41 per cent of total infrastructure spend (including Centre and private sector) in fiscals 2011-20, and their share in capex surged to 65 per cent.

In fact, 15 large states with growing economic heft and determination to address infrastructure gaps, are well-placed to muster about 85 per cent of the expected investment.

Crisil’s latest Infrastructure Yearbook 2019 identifies these states and pinpoints differentiated strategies for them to action, in order to realise these targets: “The investment trajectory of 15 large states will be crucial in this context. But given differences between them in terms of economic output, prosperity and fiscal capacity, they will need customised actions and sequencing to make material progress.”

To crystallise these prescriptions, we grouped these states into three clusters, based on their gross state domestic product (GSDP) size and per capita incomes (PCIs).

The four “frontrunner” states —Maharashtra, Karnataka, Tamil Nadu, and Gujarat — are endowed on urbanisation, industrial base, and PCI fronts. But they show some fatigue with respect to capex growth in recent years. 

These states will need to be intrepid to push through structural and sectoral reforms, as this will be key to create new triggers for capital allocation and growth. They need to expand capex from about 27 per cent share (in all states, fiscals 2015-19) to about 37 per cent.

Five “middle-of-the-pack” states —Andhra Pradesh, Kerala, Punjab, Haryana, and Telangana — with lesser population weight, mirror front-runner states on endowments. They can legitimately aspire to be growth leaders, provided they punch above their weight and up their capex game (as Telangana has managed to do).

 
Six climber states — Bihar, Madhya Pradesh, Odisha Rajasthan, Uttar Pradesh, and West Bengal — have seen sharp capex growth in the last five years, despite lower incomes per capita. However, an accompanying debt surge could come in the way of sustaining this. Continuous upfront institution building to improve investment capacity in social and physical infrastructure would help them create better conditions for growth.

Finally, states not only need to crank up spending quantitatively, but also improve efficiency through institutional strengthening and capacity building, to tap commercial financing and private investment. 

Despite the strides, three broad factors interfere with a sustained investment lift off in states: (i) Fiscal squeeze, in the form of persistent revenue deficits, debt surge, and high fiscal deficits in several large states; (ii) weak institutional capacity, reflected in mounting losses and operational deficiencies of utilities in power, water and urban transport sectors; and (iii) inadequate reforms and programmatic impetus to scale commercial financing and public-private partnerships (PPPs).

Based on this, we identify three vectors for states to drive action and steer transformation: 

  • Expand fiscal space to invest: Stabilise goods and services tax; tap asset monetisation; deploy medium-term expenditure frameworks; move to direct subsidies
  • Enhance state capability to implement: Nurture counterparty public institutions; build project development rigour; tap commercial financing and PPPs
  • Engender conducive policy and regulatory dexterity to lift investment momentum: Deepen sectoral reforms; make land available; remove labour market distortions; improve ease-of-doing business.

On its part, the Centre needs to pro-actively engage in areas requiring inter-state coordination and drive decision-making consensus, including critical sectoral and structural reforms (such as in the power sector, factor markets, and inter-state water resources sharing).

The Infrastructure Yearbook 2019 also releases the latest InfraInvex scores for major infra sectors — power, roads and highways, airports, ports, and urban. This one-of-a-kind index tracks, measures, and assesses the investment attractiveness and development maturity of infrastructure sectors, based on their “drivers” and “drags”.

The key takeaway this year is that scores have declined for most sectors vis-à-vis the previous year.

Airports and railways were the only sectors that saw some positive action at the start of this fiscal, with the successful award of contracts for modernisation of six airports, and increased outlay and cost recovery in railways. Conversely, the renewable energy sector — which was among the leaders of InfraInvex last time — has seen a substantial decline in score this year, on account of increased counter-party risk, renegotiation of power purchase agreements, unviable tariff caps during auctions, and land acquisition issues. 

 
Ports continue to face the brunt of the flux in global trade and slowing exports. Persistent weakness in power distribution, including increased gap in tariff recovery, and institutional bottlenecks to investments in urban infrastructure have kept scores low for these segments.

The latest scores only goes to reiterate that India’s infrastructure build out and investment targets in the next decade will need all cylinders to fire simultaneously, with states assuming a central role. Achievable, if armed with vision and will. 

The author is president, CRISIL Infrastructure & Risk Solutions



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