New Delhi, Nov 10 (IANS): State government funded infrastructure capital expenditure is expected to remain weak in the near term, ratings agency ICRA said on Tuesday.

According to the ratings agency, Covid-19 and the related slowdown have negatively impacted state government's revenues, which in turn will reduce their discretionary expenditure, including deferment of capital outlay.

Currently, state governments play a major role in the overall infrastructure development in India contributing between 37 per cent and 40 per cent of the total infrastructure investment in the country.

"Furthermore, of the Rs 111 trillion worth infrastructure investments planned under the National Infrastructure Pipeline (NIP), about 40 per cent is from the state governments," ICRA said.

"The National Infrastructure Pipeline envisages the state's budgetary outlay on capital investments to be around 1.7 per cent of GDP and states are expected to fund 24-26 per cent of the total expenditure under the NIP," it added.

As per ICRA estimates, major states together had a budgeted capital outlay of over Rs 5.7 trillion for FY2021 as against revised estimates (RE) of Rs 5.1 trillion in FY2020.

However, it said with Covid-19 severely impacting revenues of the state governments, and due to the additional expenditure towards healthcare and public welfare, the capital outlay on infrastructure by the states could decline by 10-40 per cent in FY2021, though some states could witness a steeper decline depending on the extent of additional borrowings, which is availed.

"While on one hand the states will generate lower revenues, they need to increase expenditure towards healthcare and social welfare," said Shubham Jain, Senior Vice-President and Group Head, Corporate Ratings, ICRA.

"Various policy measures in response to Covid-19 could cost over 0.3 per cent of GDP. Hence, to reduce the impact states are likely to curtail some revenue expenditure as well as capital expenditure. In the past, States had cut their capital expenditure by an average of 0.5 per cent of GDP to meet fiscal deficit targets," Jain added.

Given the current fiscal position, it is likely that the states would cut the capex by a higher proportion in FY2021. However, capex in health and education sectors could increase, he said.

Accordingly, to bridge the shortfall, the states' unconditional borrowing limit has been raised from 3 per cent of gross state domestic product (GSDP) to 4 per cent of GSDP for FY2021.

States also have the option of availing another 1 per cent 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.

To support capex, the Centre had also recently announced a special interest free 50-year loan to states for capital expenditure of Rs 12,000 crore to be spent till March-2021.

Overall, the states may still face a shortfall between Rs 0.5 to Rs 2.3 trillion in FY2021, depending on the extent of the borrowings availed of and the reforms completed, the ratings agency added.