State governments could reduce capital outlay for infra by up to 40% this fiscal: ICRA

New Delhi: State governments could reduce capital outlay on infrastructure by 10-40% this fiscal as Covid-19 has severely impacted their revenues and necessitated additional expenditure on healthcare and public welfare, ratings agency ICRA said on Tuesday.
Some states could, in fact, witness a steeper decline depending on the extent of additional borrowings availed of during this time, ICRA said in a statement.

“With Covid-19 and the related slowdown in the economic activities, states are staring at a significant decline in their revenues, which in turn could push them to cut down on discretionary expenditure, including deferment of capital outlay,” the agency said in a report.

State governments contribute 37-40% of the total infrastructure investment in the country, and of the Rs. 111 trillion worth infrastructure investments planned under the National Infrastructure Pipeline (NIP), about 40% is from the state governments.

The National Infrastructure Pipeline envisages the state’s budgetary outlay on capital investments to be around 1.7% of GDP and states are expected to fund 24-26% of the total expenditure under NIP.

Lower capital outlay by states could adversely impact the progress of ongoing projects dependent on the state's budgetary allocation, as well as investment in new projects in the near term, ICRA said.

“The cut down of the capex will have an adverse impact on construction companies, which depend on state government projects,” Shubham Jain, senior vice-president at ICRA, was quoted as saying in the statement.

While on the one hand the new project investments could decline in FY21, the bill realisation for ongoing projects could also get elongated, thereby impacting the execution of these projects, he said.

While in general states’ capex could come under pressure, some states that have stronger finances will be in a better position, ICRA said.

Further, infra projects undertaken by state corporations or SPVs (special purpose vehicles), where there is limited pending equity requirement and financial closure has been achieved, or state projects funded by multilateral agencies will not have much of an impact following this.