Budget cuts by states to adversely affect contractors in FY2021
WATER & WASTE

Budget cuts by states to adversely affect contractors in FY2021

The gross tax collections for states are likely to witness significant contraction in FY2021 consequent to the disruption caused by COVID-19. The overall capex budgeted by states for FY2021 is around Rs.5,708 billion, which is now likely to witness a steep cut. Recently, the Maharashtra Government announced that only 33 per cent of outlay will be released in FY2021. Budget cuts by some states will curtail the allocations to infrastructure spend and thereby slow down execution as well as new project award activity, and elongate the receivable cycle for construction contractors, says an ICRA note. 

Elaborating further, Shubham Jain, Senior Vice-President, Corporate Ratings, ICRA, says, “Major and medium irrigation, roads, metros and drinking water supply projects have been the major focus areas for various state governments.

The gross tax collections for states are likely to witness significant contraction in FY2021 consequent to the disruption caused by COVID-19. The overall capex budgeted by states for FY2021 is around Rs.5,708 billion, which is now likely to witness a steep cut. Recently, the Maharashtra Government announced that only 33 per cent of outlay will be released in FY2021. Budget cuts by some states will curtail the allocations to infrastructure spend and thereby slow down execution as well as new project award activity, and elongate the receivable cycle for construction contractors, says an ICRA note. Elaborating further, Shubham Jain, Senior Vice-President, Corporate Ratings, ICRA, says, “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 the states’ share of Central Government-funded projects or grant for projects awarded by various state corporations to allow them to draw down debt from financial institutions. Hence, projects funded by the Government of India, multilateral agencies and financial institutions through corporations are expected to fare relatively better. Projects dependent solely on state budgetary allocations are likely to suffer most. Not only is the awarding activity for these projects likely to reduce sharply, 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 pace of execution.”State-led capex accounts for around half of total government-driven capex in the country. Over the past three years, it grew by 16 per cent to Rs.5,110 billion in FY2020 (RE) from Rs.3,735 billion in FY2018. Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu and Gujarat are the top five states accounting for 43 per cent of total state capex. “The cashflow position for entities with better client diversification – a good mix of state, central (including multilateral agencies) and funded corporations – will be superior compared to those exposed to projects solely funded by state governments,” says Jain. “In the case of the latter, order-book accretion and execution (gross billing) are likely to witness moderation and the cash-conversion cycle will get elongated, resulting in increase in working capital borrowings. Lenders may look at increasing the cover period for drawing power calculations to ensure that such entities are adequately funded to tide over temporary cashflow issues.”The Finance Ministry, in consultation with the Reserve Bank of India (RBI), revised the Government of India’s borrowing programme for FY2021, which is likely to support the Central Government’s capital expenditure to an extent. 

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