Covid-19 fallout: Lower capex by states to weigh on EPC sector

Our Bureau Mumbai | Updated on May 27, 2020

As a result of the disruption caused by Covid-19, States staring at huge revenue deficits could reduce capital expenditure, thereby impacting the engineering, procurement and construction (EPC) sector.

The gross tax collections for states are likely to witness significant contraction in FY21and the headroom available to them with regard to capital expenditure has reduced substantially, according to ratings agency ICRA.

The overall capex budgeted by states for FY2021 was around ₹5,70,800 crore which is now likely to witness a steep cut.

ICRA’s views come in the wake of Maharashtra government’s recent announcement that only 33 per cent of outlay will be released in FY2021.

“Budget cuts by some states will curtail the allocations to infrastructure spend and thereby slow down the execution as well as new project awarding activity, and elongate the receivable cycle for construction contractors, said ICRA. State-led capex accounts for around half of total government-driven capex in the country. In the last three years, state capex grew by 16 per cent to ₹5.11-lakh crore.

The funding for EPC projects falls in three categories. Projects funded by central government or multi-lateral agencies like ADB, World Bank, projects funded through state budgets, and projects awarded by state-level corporations where funding has been tied up with various financial institutions and projects which are jointly funded by Central and State Governments like in the case of affordable housing projects.

“Projects funded by the government of India, multi-lateral agencies and financial institutions through corporations are expected to fare relatively better. Projects dependent solely on state budgetary allocations are likely to suffer most. Not only is the awarding activity for these projects likely to reduce sharply but the receivable cycle is also likely to get elongated by 60-90 days,” noted Shubham Jain, Senior Vice President, Corporate Ratings, ICRA.

Elongation in payments receivable triggers a vicious cycle by exerting pressure on cash flows of contractors which in turn affects the pace of execution.

Further, UP, Maharashtra, Karnataka, Tamil Nadu and Gujarat are the top five states accounting for 43 per cent of total state capex. The Indian government recently enhanced the permitted net borrowing of state governments in FY2021 to 5 per cent of gross state domestic product (GSDP) from 3 per cent earlier, to address the expected shortfall in their revenues related to the Covid-19 pandemic. Of this, additional borrowing of 1.5 per cent of GSDP is conditional on the states executing reforms in FY2021 in four areas outlined by the GoI. Also, the permitted unconditional borrowing of 0.5 per cent of GSDP for state governments (for FY2021) is estimated by ICRA at ₹1-lakh crore, which pales in comparison with the gap between the estimated GST compensation requirement and the funding for the same through cess collections.

With strain on state finances, the funding for National Infrastructure Pipeline will also be lower, thereby slowing the award and execution pace, noted ICRA.

Published on May 27, 2020

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