States’ infra spend to remain weak in near term: Icra

By: |
November 11, 2020 3:45 AM

“In the past, states had cut their capital expenditure by an average of 0.5% 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 FY21,” Jain said.

To bridge the shortfall, the states’ unconditional borrowing limit has been raised from 3% of gross state domestic product (GSDP) to 4% of GSDP for FY21.To bridge the shortfall, the states’ unconditional borrowing limit has been raised from 3% of gross state domestic product (GSDP) to 4% of GSDP for FY21.

Even as the states together have budgeted a capital outlay of Rs 5.7 lakh crore for infrastructure spending in FY21 against Rs 5.1 lakh crore in FY20, actual spending could decline by up to 40% with Covid seriously impacting states’ revenue, according to Icra.

State governments play a major role in infrastructure development, contributing 37-40% of the total country’s infrastructure investment. Of the Rs 111 lakh crore worth infrastructure investments planned under the National Infrastructure Pipeline (NIP), about 40% is from the state governments. The NIP envisages the state’s budgetary outlay on capital investments to be around 1.7% of GDP. States are expected to fund 24-26% of the total expenditure under the NIP.

Shubham Jain, senior V-P and Group head, Corporate Ratings, Icra, said the states will generate lower revenues since they need to increase expenditure towards healthcare and social welfare in response to Covid-19, costing 0.3% of GDP. States are likely to curtail both revenue and capital expenditures to meet deficit targets. “In the past, states had cut their capital expenditure by an average of 0.5% 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 FY21,” Jain said.

To bridge the shortfall, the states’ unconditional borrowing limit has been raised from 3% of gross state domestic product (GSDP) to 4% of GSDP for FY21. States also have the option of availing another 1% of the GSDP on completing specified reforms. Still, there is likely to be a shortfall, part of which can be bridged by additional loans from the Centre in lieu of the GST compensation. To support capex, the Centre had also announced a special interest free 50-year loan to states for capital expenditure of `12,000 crore to be spent till March-2021. Overall, the states may still face a shortfall between `0.5-2.3 lakh crore in FY21, depending on the extent of the borrowings availed and the reforms completed.

In Icra’s opinion, lower capital outlay by states could adversely impact the progress of ongoing projects dependent on the state’s budgetary allocation and investment in new projects as well in the near term. This will also impact construction companies depending on state government projects. Bill realisation for ongoing projects could also get elongated, Jain said.

But infra projects undertaken by the state corporations or SPVs, where there is limited pending equity requirement and financial closure achieved or state projects funded by multilateral agencies, will not have much of an impact, Icra said.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Back on track? At minus 7.5%, economy looks better than expected
2States to get loan from agriculture infrastructure fund for Kusum scheme
3FY21 GDP: Q2 data signal ‘upside potential’ to forecasts, says CEA KV Subramanian