States, which account for about 37-40 per cent of total infrastructure capital expenditure in the country, are likely to cut capital outlay by up to 40 per cent in FY2021 due to the impact of Covid-19, according to ICRA.

Such a cut is likely to impact the progress of some ongoing projects funded by states and possibly slow down and result in elongation in working capital cycle.

Furthermore, of the ₹1.11-lakh crore worth infrastructure investments planned under the National Infrastructure Pipeline (NIP), state governments account for about 40 per cent. The NIP envisages the States’ budgetary outlay on capital investments to be around 1.7 per cent of gross domestic product (GDP), and states are expected to fund 24-26 per cent of the total expenditure under the NIP.

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As per ICRA estimates, major states together had a budgeted capital outlay of over ₹5.7-lakh crore for FY2021, compared to the revised estimate (RE) of ₹5.1-lakh crore in FY2020. However, with Covid-19 severely impacting revenues of state governments, and additional expenditure towards healthcare and public welfare, the capital outlay on infrastructure by the states could decline by 10-40 per cent in FY2021, though some states could witness a steeper decline depending on the extent of additional borrowings, which is availed.

Shubham Jain, Senior Vice-President and Group Head, Corporate Ratings, ICRA, in a statement, said, “While on one hand states will generate lower revenues, they need to increase expenditure towards healthcare and social welfare. Various policy measures in response to Covid-19 could cost over 0.3 per cent of GDP. Hence, to reduce the impact states are likely to curtail some revenue expenditure as well as capital expenditure. In the past, States had cut their capital expenditure by an average of 0.5 per cent of GDP to meet fiscal deficit targets. Given the current fiscal position, it is likely that states would cut the capex by a higher proportion in FY2021. However, capex in health and education sectors could increase.”

To bridge the shortfall, the states’ unconditional borrowing limit for FY2021 has been raised to 4 per cent of gross state domestic product (GSDP) from to 3 per cent earlier.

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Overall, states may still face a shortfall of between ₹0.5-2.3-lakh crore in FY2021, depending on the extent of borrowings availed and reforms completed.

The lower capital outlay by states could adversely impact the progress of ongoing projects depending on the state’s budgetary allocation, as well as investment in new projects in the near term.

Jain said, “The cut in capex will have an adverse impact on construction companies, which depend on state government projects.”

Infra projects undertaken by the state corporations or special purpose vehicles (SPVs), where there is limited pending equity requirement and financial closure has been achieved, or state projects funded by multilateral agencies, will not be much impacted.

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