Madan Sabnavis, Chief Economist, CARE Ratings
Does the government have funds to keep infrastructure spending on track?
Infrastructure is the responsibility of both - the government and the private sector. Presently, the government is heavily investing in the infrastructure sector compared to the private sector. That said, the spending is from both the levels of governments -central and state - who are focussed on maintaining the fiscal deficit currently. The government has planned Rs 3.3 trillion towards capital expenditure and focussed mainly in areas like roads, railways, and urban development. However, it is duty-bound to spend on sectors such as power and telecom, because they are also part of infrastructure.
Apart from the government capex plan, each public sector unit (PSU) has its own expenditure plan for which it directly borrows from the market, in addition to what it has set aside. But this is not the case with the private sector, considering that many private stakeholders are grappled with NCLT and IBC. So, in this kind of a situation, expecting the private players to invest more in infrastructure space, especially power infrastructure, may not be appropriate.
If we look at the State government, they spend more on roads, irrigation, etc. The total expenditure on infrastructure of all states put together is around Rs 4 trillion. So is the government doing enough? The answer lies within the purview of the fiscal deficit and financial constraint the state and central governments have to deal with; both are doing their best. But, should they be doing more? Obviously, the answer is yes! But they cannot go beyond what they are doing because of financing constraints.
You said financial constraints. Are you talking purely in terms of bank lending to the infrastructure sector?
It is more about the government's challenge in keeping the fiscal deficit in check. At this point, the government cannot go beyond 3.2-3.4 per cent and hence is not in a position to lend. It is in a catch-22 situation where it cannot borrow more because of limited funds resources but has committed expenditures. Populist measures such as NYAY are good, but the kind of burden they would place on the government's treasury is beyond imagination. So, if the government announces such schemes, it automatically means that it has less money to spend on capital expenditure. This is as far as the government is concerned.
If I am looking at the private sector -specifically, the power sector - the country has a surplus capacity already. And now, most of the stranded power capacity has already gone to NCLT. So why would private players invest knowing their inability to run a power plant? If I look at telecom, the industry itself is not viable. The sector is already witnessing mergers and acquisitions. To top it all, today, if a private player needs funding - an additional investment to a project - can they go to the market and borrow? The answer is no, because most infra companies have low credit ratings. If a company does not get AA or AAA rating, nobody will give funds, investors will not be investing. Here, we need to develop a bond market, as it can combat such situations.
If we take a stock of the exposure of banks to the infrastructure sector, we would realise that they have the most non-performing assets (NPAs). Hence, they are reluctant to lend to this sector. Banks be willing to lend more to the infrastructure sector only when the capitalised NPA ratios come down and become financially healthy. At present, banks prefer lending to the retail segment than the infrastructure sector.
Does the government, in its tenure, manage to attain the capex cycle?
I think they have done better than the earlier governments. I am not making a political statement here. The earlier government was marred with fuel subsidies, which the current government has somehow managed to evade, although not completely. Considering the fall in crude oil prices, the current government does not deal with the subsidy issue. So as long as the subsidy was high and fiscal deficit ratios were maintained, capital expenditures were cut down. But this government, I think, has met its targets in three out of five years.