Mounting govt arrears trigger cash crunch for contractors

MUMBAI: Welfare sops and pre-poll freebies have squeezed the state’s finances, stalling payments to private contractors executing government schemes. Their pending dues are now ₹77,770 crore.

Sameer Shaikh from Ahilyanagar was awarded a ₹20-lakh contract to build a gram panchayat office but, for six months, he’s been struggling to get the project off the ground as he’s unable to raise fresh capital. Shaikh is still owed ₹86.50 lakh for earlier projects under various government departments.

Shaikh is one of thousands of small and medium contractors whose outstanding payments with the government are holding them back from working on future contracts. While the bill in outstanding dues was a colossal ₹89,000 crore until March, it has fallen marginally, to ₹77,770 crore, as the government released ₹11,400 crore with local body elections around the corner.

For most contractors, it’s made no difference. For most of them, 80% of their bills are yet to be cleared but the government simply cannot afford to pay them right now.

The problem was highlighted recently by hostage-taker Rohit Aarrya, who claimed the state education department owed him ₹2 crore. Although the state pointed out that Aarrya had failed to submit a formal proposal for the scheme in question, his hostage-taking bid has spotlighted the predicament of contractors.

The truth is, contractors are paying for populist schemes announced by the Mahayuti government in June 2024, ahead of the assembly elections. These schemes, such as the direct benefit Ladki Bahin scheme, free power for farmers, and free LPG cylinders to economically disadvantaged families, are costing the state exchequer a colossal ₹96,000 crore a year. Around half of this is set aside for the Ladki Bahin Yojana alone.

Liquidity crunch

Now, contractors are growing worried. Many are facing a liquidity crunch as the government owes them large sums; suppliers and vendors won’t extend them credit; and some have turned to private lenders to make good on pending payments as banks have refused to loan them money unless they repay loans.

Sameer Shaikh’s pending dues relate to work under the Jal Jeevan Mission and road contracts. Against a bill of ₹1.03 crore, he has been paid only ₹16.5 lakh. Shaikh says materials and machinery suppliers are pressuring him to pay their outstanding bills and he’s finally approached private lenders. “Pending dues of ₹86.5 lakh has affected my creditworthiness and banks are reluctant to lend me more money,” he said.

Rajesh Deshmukh, a contractor from Thane, is owed ₹21 lakh for projects under the public works department. The only reason he can continue to take on projects is due to timely payments that come in from projects under central government schemes. “Small and medium contractors are hard hit as local government officials give preference to pay big contractors,” said Deshmukh.

Subodh Sarode, a contractor from Nagpur, said holding back payments is having a cascading effect on contractors. Unable to repay bank loans on time, their interest burden has increased, while suppliers have stopped offering discounts on even large consignments of materials purchased by those whose payments are pending.

“Earlier, suppliers used to give contractors 5-15% discounts on the purchase of different types of construction material. Now contractors have become defaulters and they have stopped these discounts,” said Sarode.

“My outstanding sum with the government was ₹3 crore but I have been paid only ₹1 crore so far. This has impacted how I manage my business finances and has pushed up costs. Besides, my credit limit with banks has been slashed by half, from ₹1 crore. Now, it is a challenge for me to raise capital,” he said.

Milind Bhosale, president of the Maharashtra State Contractors’ Association, said, “Pending payments are hitting small and medium contractors hard as they have limited access to funds. The government is yet to clear bills amounting to ₹2,200 crore for building work like repairs, renovations etc in the last nine months, and a large number of small contractors are involved in such works.”

He added, “One of the main reasons the government is finding it difficult to pay these dues is the freebies it offered with an eye on the assembly elections last year. These welfare schemes include the Ladki Bahin Yojana and free power for farmers etc, amounting to around ₹96,000 crore,” said Bhosale.

HT reached out to Ashish Jaiswal, minister of state for finance, and OP Gupta, additional chief secretary, finance department, but phone calls and text messages went unanswered.