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Executive summary

For decades, infrastructure development hinged on policy facilitation and public spending by the central government, with the role of private-sector investments restricted to covering gaps in spending.

That 'centre' of gravity is now shifting to states, especially facilitated by two seminal developments: a big leap - of a full 1,000 basis points (bps) – in vertical tax devolution afforded by the Fourteenth Finance Commission; and, the onus of the factor markets – labour, land and taxation – increasingly falling on states as competitive and cooperative federalism take root.

That's reflected in the trends in capital expenditure (capex) and infrastructure investments.

Capex of states nearly quadrupled from Rs 1.7 lakh crore in fiscal 2011 to an estimated Rs 6 lakh crore this fiscal, as their share of total spending surged 1,300 bps to 65%.

This growth in spending has also been driven by rising economic heft and per capita incomes of the larger states, and greater determination to address infrastructure gaps.This growth in spending has also been driven by rising economic heft and per capita incomes of the larger states, and greater determination to address infrastructure gaps.

A few smart moves by states over the past decade or so have helped address certain qualitative aspects. The growth of private ports in Gujarat, private airports in Hyderabad and Bengaluru, debt financing of urban water projects in Tamil Nadu, and state-level financing entities set up by Kerala and Tamil Nadu to raise resources – are cases in point.

Despite these strides, three factors constrain sustained improvement in infrastructure investment: (i) fiscal squeeze, as seen in 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 PPPs.

States need to address these constraints urgently if India is to have world-class infrastructure. Without cardinal contribution from states, it will be tough for India’s GDP growth to rebound and sustain above 7.5%, and infrastructure spending to increase to 6.0-6.2% of GDP in the coming decade.

Such a level of spending translates into ~Rs 235 lakh crore investments, or ~Rs 23 lakh crore per year. That would be thrice the average levels of this decade.

To boot, states will have to contribute close to half of this or Rs 110-125 lakh crore.

That means both Centre and states will have to pull out all stops, with states needing to redouble their efforts.

In this yearbook, CRISIL identifies actions relating to three quintessential aspects that states need to address.