With GST implementation well on its course, the next big thrust of the Modi government is expected to be on the infrastructure sector that has shown signs of de-stressing but is still way off from a full recovery.
Despite efforts over the past three years to push infrastructure growth, the global slowdown coupled with slackening demand conditions in the country has prevented large-scale investment in the sector.
The statistics reveal that despite efforts, investment is failing to pick up. In the three years of the Modi government, the investment-GDP ratio has steadily dropped – from 30.8 per cent in 2014-15 to 26.6 per cent in 2016-17.
Moreover, according to a Reserve bank of India (RBI) survey, capacity utilisation has declined steadily from 74.6 per cent in the fourth quarter (Q4, January-March) of 2015-16 to 72.7 per cent in Q3 (October-December) of 2016-17. And credit growth is also not in the pink of its health registering a growth of mere 5.08 per cent in FY17, almost half of the levels registered in previous year.
This explains why, despite the government putting its own money to prop up sector, growth has remained mute and adversely affected the employment scenario. It has moved from no new jobs being created in the last three years to a situation now where jobs are actually being lost. So, is it all gloom on the infrastructure front? Certainly not.
The Centre is not leaving any stone unturned to initiate policies that would ensure time-bound creation of world-class infrastructure in the country. Road and highways minister Nitin Gadkari has announced the government’s target of Rs 2.5 lakh crore investment in infrastructure over a period of three years, which will include Rs 8 lakh crore for developing 27 industrial clusters and an additional Rs 5 lakh crore for road, railway and port connectivity projects.
Roads
The Modi government has given a major thrust to road projects stuck in limbo for years and stepped up public spending in the absence of private sector investment in the sector. The aim is to take up construction of national highways to over 40 km a day.
But in practice, the Modi government’s grand plans of rapidly expanding the highway network could be running out of steam. Not only has the pace slowed, the sector continues to be bogged by old issues of land acquisition, tepid investor response, environment and legal hassles. The same set of problems had constrained road development during the previous UPA-II government. The NDA’s record, it looks, is no different either.
In the last three years of the government, only about 18,500 km of national highways has been added at an average of about 17 km per day. For FY 17, a total of 8,231 km of national highway was added against a target of over 15,000 km. Experts note that infrastructure projects have a relatively long gestation period and therefore the initiative taken so far would start yielding results in the next two-to-three years.
“The government has been very liberal to the developers. Most of their demands have been met and support has been extended. Even the issues related to arbitrations have been resolved and fast tracked. In the initial days, a lot of EPC (engineering, procurement and construction) projects were awarded. But some of the initiatives like TOT (toll-operate and transfer) have not really taken off,” said Vishwas Udgirkar, senior director, Deloitte India.
“I think the reform is one part. The other thing on which the government has been emphasising is doing a lot of capital expenditure on the government balance sheet. If highway projects have really picked up, it is because of the fact that a lot of hybrid annuity, EPC and annuity projects have been coming up,” said Sandeep Upadhyay MD & CEO (investment banking) at Centrum Infrastructure Advisory.
In order to revive the investment cycle, the government has been awarding hundreds of projects on EPC and hybrid annuity model funding the projects with public money. While government provides entire funds in case of the EPC projects, it provides 40 per cent of the project cost to developer upfront in case of hybrid annuity thus reducing the risk for private sector. Only the remaining 60 per cent funds have to be arranged in the form of debt and equity by the private firm.
Power
Besides highways, there has been a lot of emphasis on the power sector, especially renewables. The government has set an ambitious target of 175 GW renewable power installed capacity by the end of 2022. This includes 60 GW from wind power, 100 GW from solar power, 10 GW from biomass power and 5 GW from small hydropower.
The government has been aggressive in projections and setting targets. But, it would be an uphill task for the government to reach 175 GW by 2020 from about 46.33 GW now. Against a target of 100,000 MW of solar capacity by 2022, so far generation has reached just about 12,000 MW. Though the rate of increase has accelerated, GST poses fresh challenges for the sector to maintain low tariff as a tax of 18 per cent has been imposed on solar panels.
India’s total power capacity has increased by nearly one third (31 per cent or an addition of 76,577 MW) from 243GW in March 2014 to 320 GW in March 2017 and the conventional or coal-based power capacity (which is the mainstay of the country’s overall power capacity) has increased by 26 per cent (one fourth) from 214 GW in March 2014 to 270 GW in March 2017.
Regarding measures to de-stress the banking sector so that funds could seamlessly flow to the infrastructure projects, a change in strategic debt restructuring (SDR) and the recent ordinance on non-performing assets (NPAs) giving more teeth to RBI to deal with mounting bad debts are aimed at de-stressing the banking sector whose good health is imperative for a robust infrastructure sector.
The government has realised that the backbone of growth financing is to come from banks. In this direction, the launch of Ujwal Discom Assurance Yojana (UDAY) is a path breaking initiative that aims to restore financial health of debt-ridden discoms (with outstanding debt of over Rs 4.2 lakh crore) making them profitable again in three years time. Though the success of the scheme is still awaited, green shoots could be seen with state electricity boards becoming more disciplined in their operations and filing tariff petitions regularly to come out from the mountain of losses.
Also initiative to provide assured quantity of coal to power plants under a transparent auction mechanism aims to break the tainted systems of the past and ensure round-the-clock power supply to both households and industry.
As these initiative have shown some positive results with fuel no longer an issue for growth of power generation. Moreover, from being a deficit country, India is power surplus now.
Railway and airports
The railways and airport sectors have also been key focus areas with huge investments lined up for building new infrastructure. While railways have set a capex target of Rs 8.56 lakh crore over the next few years, more than a dozen airports projects are in the pipeline to expand air transport network. The railways have already tied up with LIC for a Rs 150,000 crore long-term fund at a cheaper rate and is learnt to be in talks with multilateral institutions like World Bank for financing some of its remunerative projects.
Port
In ports, though the current government has continued with the policy of attracting private investment in building ports, the biggest achievement would be successful implementation of the Sagarmala project. The prime objective of this ambitious project is to promote port-led direct and indirect development and to provide infrastructure to transport goods to and from ports quickly, efficiently and cost-effectively.
Sagarmala is billed as a garland of hope (read ports), which is expected to propel Indian economy to register double-digit growth. The grandiose integrated port development programme, first conceptualised by the previous NDA government under Atal Bihari Vajpayee, has been revived by Prime Minister Narendra Modi who has taken up the daunting task of bringing it on ground from drawing board.
With the port-led development programme being one of the national priorities of the government a total of Rs 10 lakh crore investment plan has been unveiled to build highways, ports and other supporting infrastructure. The government expects the private sector to drive this massive investment by 2019. the Sagarmala Project aims to develop access to new development regions with intermodal solutions and promotion of the optimum modal split, enhanced connectivity with main economic centres and beyond through expansion of rail, inland water, coastal and road services.
"Power, railway and roads are the three key infra sectors that have been focus of the government. All three have been bestowed with pro reform and pragmatic ministers with fairly high degree of empowerment. Whilst there has been positive outcome from their efforts, these have not been to the extent of expectation. Much more bold ideas and reforms were hoped. Hopefully having dealt with legacy constraining issues, reforms will now change gears," said Gokul Chaudhry, partner, BMR Advisors.
nirbhaykumar@mydigitalfc.com
