Reeling under the impact of lockdown and dwindling gross tax collections, state governments are less likely to loosen the purse strings, whose brunt will have to be borne by the construction industry, according the credit rating agency ICRA. As per the rating agency, the overall capex budgeted by states for FY2021 was around Rs 5.7 lakh crore. But it is likely to be reduced as they cannot afford to take the leap of faith in terms of capital expenditure as of now. The impact of nationwide lockdown is evident as economic activities have been shunted, and the state revenues have gone down, ICRA said to Economic Times.
State-led capex contributes to around half of the total government driven capex in the country.
"Budget cuts by some states will curtail the allocations to infrastructure spend and thereby slowdown the execution as well as new project awarding activity and elongate the receivable cycle for construction contractors," said ICRA. According to the agency, major and medium irrigation, roads, metros and drinking water supply projects have been the major focus areas for various state governments. "Whatever reduced capex allocation happens in FY2021, would be primarily allocated towards states' share of central government funded projects or grants for projects awarded by various state corporations to allow them to draw down debt from financial institutions," ICRA SVP, Corporate Ratings, Shubham Jain said. He also added that projects funded by the central government, multilateral agencies and financial institutions through corporations are expected to fare relatively better.
"Projects dependent completely on state budgetary allocations are likely to suffer the 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. Elongation in the receivable cycle triggers a vicious cycle by exerting pressure on cash flows of contractors which in turn affects the execution pace," Jain added.
Foremost states that have contributed the most to the total state capex are Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu and Gujarat. The centre has recently increased the net borrowing cap of state governments to 5 percent to 3 percent of GSDP to make up for the drop in their revenues as a result of the pandemic.
