With implementation of private investment expected to significantly lag the spurt in project announcements, Government spending on infrastructure (capex) is likely to remain a critical engine of economic growth, prompting calls for a wider fiscal deficit in 2016-17. We estimate that every 10 bps of expansion in the fiscal deficit to GDP ratio would allow for extra spending of a relatively limited Rs 150 billion. In our view, it may be more appropriate to make additional funding available for capital expenditure through extra-budgetary sources such as the NIIF.
The fiscal outlook for State Governments is also challenging, with several states likely to participate in the UDAY scheme and revise pay and pension scales over the next 1-2 years. Moreover, with petroleum products accounting for around a quarter of the total sales tax/VAT revenues (as budgeted by the state governments in 2014-15), and most States levying VAT on an ad valorem basis on fuels, lower average fuel prices in FY17 as against FY16 would impact the aggregate growth of States’ sales tax revenues.
The cloudy outlook for the general government fiscal deficit may push up bond yields. Moreover, if the NIIF raises significant resources from the market, a tightening of liquidity conditions may cause yields to harden, and emerge as a source of macroeconomic concern over the near term.
Structural issues continue to plague a significant portion of the existing project pipeline of Rs 31.9 trillion submitted to the Cabinet Committee on Investment (CCI), particularly in sectors such as steel, petroleum & natural gas and, to a lesser extent, power. Although the fresh project pipeline appears robust, with investment commitments of Rs 15.2 trillion during the Make In India Week, commencement of work will lag such announcements, given moderate capacity utilisation, uneven demand and competitive imports in some sectors. Past experience suggests that several of these projects may be slow to get off the ground whereas some may remain at the announcement stage. Moreover, the significant stress on the public sector banks’ (PSBs’) balance sheets and the large Tier I capital requirement for FY17 are likely to constrain their ability to fund a sharp revival of economic growth.
(The writer is Senior Economist, ICRA Ratings)