Given how the Mumbai Trans-Harbour Link (MTHL) is such an iconic project for the Maharashtra government, the state will be relieved at the central government decision to allow it to borrow `15,109 crore directly from Japanese aid agency JICA to be able to fund the `17,854 crore project. At one level, the move is part of the Narendra Modi government’s commitment to cooperative federalism since, if there is a financially-sound state government entity, it is no longer ransom to the Union government getting, say, a JICA loan and then deciding to pass it on. And while the central government will counter-guarantee the loan, after the state furnishes a guarantee for it, the additional liability may not be that significant since, in any case, even when the JICA loan was routed through the Centre, the latter guaranteed repayment as well as the exchange rate risk.
But, there is a huge caveat. The model will work very well as long as the state body is financially sound and the project being planned is viable and does not suffer large delays. While MTHL may be a good project and the Mumbai Metropolitan Region Development Authority (MMRDA) might be financially viable, what happens if the project gets delayed by years or there are other complications? In the case of the Bandra-Worli Sea Link project in Mumbai, also an iconic project both when it was built eight years ago as well as now, the ridership is smaller than a third of what was originally estimated. While there is the danger of getting both estimates and timelines woefully wrong, what happens if, for instance, a very large irrigation project is planned? In terms of national and state priorities, it can’t get much higher. But, in the 2000s, while Maharashtra spent `81,206 crore to increase irrigation from 3.9 million hectares to just 4.1 million, Gujarat spent `39,369 crore and increased irrigation from 3.3 million hectares to 5.6 million. While fiscal federalism is all very well, the Centre will have to keep a tab on what state projects are being cleared for multilateral loans and also keep a tab on how the money is spent.
Keep in mind the fact that, unlike the situation some years ago, state government budgets have started to get out of hand, and in no small manner. Indeed, while the Central government has become more responsible, the states have become more profligate. From a very high 4.3% of GDP in 2003-04, state government deficits fell to 2.2% in 2013-14. After this, however, as expenditures kept rising, the deficits rose to 2.9% of GDP in FY15 and were at 2.8% in FY16 without including the Uday bonds—were this expenditure to be included, the deficit would rise to 3.5% of GDP. According to an analysis by JP Morgan, in FY17, the pre-Uday fiscal deficit could be as high as 3.4% of GDP—based on this, JP Morgan estimates states’ borrowing will be more than the Centre in FY19, presumably since states will be implementing the pay commission awards in a year or two. If, with their new-found freedom, states are allowed to run up more borrowing for their corporations, it may not take long for a crisis-like situation to develop, especially since, as in the case of MTHL, the borrowings will be made in convertible currencies that states have little expertise in hedging. The prime minister needs some kind of monitoring mechanism, presumably through NITI Aayog, to ensure the move does not backfire.