COVID Could Hit State Funded Infrastructure CAPEX in India
infrastructure investments planned under the National Infrastructure Pipeline, about 40% of projects are from the state governments. As per ICRA estimates, major states together had a budgeted capital outlay of over INR 5.7 trillion for FY2021. 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% in FY2021, though some states could witness a steeper decline depending on the extent of additional borrowings which is availed. ICRA had conducted a poll on the outlook of the state government CAPEX during its recent webinar on the construction sector. Most participants were of the view that the state government's CAPEX would decline by 20-40% in FY2021. In ICRA's opinion, this could adversely impact the progress of on going projects dependent on the state's budgetary allocation, as well as new project investments in the near term.
State governments play a very important role in the overall infrastructure development in India and have been a key driver for growth of the construction sector over the years. If we look at the National Infrastructure Pipeline (NIP), the dependence on state governments is the highest, even higher than the Central Government. States in the past have contributed between 37-45% of the overall infrastructure investment in the country. The last two years' average has been close to 37%, which is projected to increase to over 40% in the NIP. As the NIP plans to almost double the pace of infrastructure investment over the next five years, the role of the states becomes crucial in achieving it. The infrastructure investment by States is planned to increase from INR 3.7 lakh crore in FY2019E to an average of INR 7.4 lakh crore per annum between FY2020-FY2025. ICRA had analysed the capital outlay trend of 12 large states till FY2020. These states in total account for close to two-thirds of the total CAPEX by all the states hence are crucial in determining the overall infrastructure investment trend in the country. Overall, for these 12 states, the investment has increased at a CAGR of about 8% over the last four years.
Some large states have put a greater impetus on infrastructure development with the focus being transportation, irrigation, water supply, energy, etc. Transportation segment (primarily roads) accounts for over 24% of the capital outlay of States followed by Irrigation (19%), and water supply, sanitation, housing and urban (15%). The share of Transport infrastructure has increased over the last three years as some states have taken up larger highway development projects. 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 the NIP.
With Covid-19 and the related slowdown in the economic activities, states are staring at a significant decline in their revenues. Own tax revenues of states in FY2021 are likely to be sharply lower than budgeted one due to curtailed consumption. A large part of the shortfall in 5GST is to be financed through borrowings - both open market and back-to-back from the government of India instead of the GST compensation grants from the government of India. Furthermore, there is an additional risk of shortfall in the Central tax devolution in FY2021.To bridge the shortfall, the states' unconditional borrowing limit has been raised from 5% of GSDP to 4% of GSDP for FY2021. States also have the option of availing another 1% of the GSDP, but 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 etc. Overall, the states may still face a shortfall between INR 0.5 to 2.3 trillion in FY2021, depending on the extent of the borrowings availed of and the reforms completed. To support CAPEX, centre had also recently announced a special interest free 50-year loan to states for capital expenditure of INR 12,000 crore to be spent till March-2021, though this is only a small fraction of state's budgeted CAPEX of INR 6.5 lakh crores.
The states are likely to increase expenditure towards healthcare & social welfare. As per an RBI assessment, various policy measures in response to Covid-19 could cost over 0.3% of GDP. To reduce the impact states are likely to curtail some revenue expenditure through freezing DA, deferment of part or full salaries etc. 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 FY2021. However, CAPEX in health and education sectors could increase.
ICRA had recently conducted a poll on this aspect. The participants of the poll comprised banks, mutual funds, consultants, construction companies, and other stakeholders. Nearly 46% participants were of the view that the state government's CAPEX would decline by 20-40% in FY2021, while 28% voted that there could be a major decline between 40-60%.The cut down of the CAPEX will have an adverse impact on construction companies, which depend on state government projects. While on the one hand the new project investments could decline in FY2021, the bill realisation for the on going projects could also get elongated, thereby impacting the execution of these projects. While in general the states' CAPEX could come under pressure, some states which have stronger finances will be in a better position. Further, infra projects undertaken by the state corporations or SPVs, 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.