Mumbai: Investments of around Rs34.25 trillion ($800 billion) may be affected in the short term by inflation that is at a 13-year high, rising cost of funds and high commodity prices, according to a report by ProjectsToday, a Mumbai-based corporate research company that runs an online database on project investments.
The report, however, adds that “prospects still look bright” in the long term and says that to keep the projects investment tempo going, government agencies should continue their infrastructure-building activities.
The projects listed by the company include those being implemented by the private sector, state-owned firms and by the government. The numbers listed by it are significant because India’s economy is primarily driven by investments. One economist says this trend will be even more evident now because consumption is falling.
“GDP (gross domestic product) growth would still remain above trend due to the demand from the investment side,” says Shuchita Mehta, senior economist at Standard Chartered Bank Plc.
ATTRACTING FUNDS (Graphic)
PROJECT INVESTMENTS BY OWNERSHIP (Graphic)
While bankers insist that there is no real threat of projects being affected, at least three executives say that some companies could defer their investment plans.
According to data till June, Indian companies had 25,399 projects at various stages. Of this, 10,955 projects worth Rs14.59 trillion were under “active” execution, according to ProjectsToday. The firm’s study shows that the impact of the rising cost of funds is already evident in the project implementation ratio. From 44.5% in June 2006 and 44.9% in June 2007, this slipped to 42.6% in June 2008.
The project implementation ratio is a measure of the proportion of projects that are being executed.
“The ongoing projects which have achieved financial closure will not be affected, but the ones which are yet to achieve financial closure—there the companies will have to look at various options to raise funds,” says Sheshagiri Rao, director (finance) at JSW Steel Ltd, an integrated steel making company.
“Many of the companies are going to be on a wait-and-watch mode, given the circumstances, especially those who are yet to achieve financial closure,” adds V. Ashok, chief financial officer at Essar Shipping, Ports and Logistics Ltd.
“Real estate sector will surely be a dampener now. Liquidity is a huge concern for the sector and raising further funds will not be easy. We can expect some stalling in the projects,” Ashok says.
Vikram Limaye, executive director at Infrastructure Development Finance Co. Ltd, says companies will be cautious, and investors and lenders will now focus on execution capabilities. According to him, companies that are highly leveraged will be impacted. “... There has been a shift in negotiating power that vested with corporates, to investors and lenders. This shift in the market paradigm and fundamentals has resulted in not all players getting access to capital and the overall cost of capital having increased. This could lead to corporates delaying or deferring their investment plans,” he adds.
Economists say everything depends on the specific projects and industries. “If it is a manufacturing project at a blueprint stage, it can be halted for a while. But if it is a power project, there is no question why it should stop,” says Indranil Pan, chief economist for private sector Kotak Mahindra Bank Ltd.
Bankers, on their part, maintain that there will not be any shortage of funds for key projects.
“We haven’t seen any slowdown in projects under implementation, especially in infrastructure and power. The disbursements under these projects are as usual,” says M.D. Mallya, chairman and managing director of Bank of Baroda.
“There could be a slowdown in fresh manufacturing projects, but, so far, we have not seen anything alarming,” Mallya adds.
“High interest rates do not disturb investments, what disturbs (them) is volatility (in interest rates),” says K.C. Chakrabarty, chairman of Punjab National Bank.
“It is true that in a low interest rate scenario, investment demand goes up because people know that interest rates cannot go lower, but projects don’t stop due to high interest rates. It’s all how people work out their cash flow. So far, I have not seen any slowdown in investment demand,” he says.
ICICI Bank Ltd’s executive director Sonjoy Chatterjee also points out that the free cash flows of Indian companies is still substantial. “Our estimate of corporate cash flows is in excess of $150 billion for financial year 2008. These cash accruals, together with a stable and liquid banking sector, should sustain the investment pipeline of about $700 billion in the next five years,” he says. According to him, high interest costs will ensure conservative debt-equity ratios, which is good for the system.
There are several projects in the planning stage.
Large projects that are in this stage include an integrated steel project by JSW Bengal Steel Ltd, worth about Rs40,000 crore, in West Bengal, and a multi-product special economic zone (SEZ) project in Haryana that is being developed by Reliance Haryana SEZ Ltd, worth around Rs40,000 crore.
So far in 2008, the Reserve Bank of India has raised banks’ cash reserve ratio, or the amount banks are required to keep with the central bank, by 125 basis points to 8.75%, and its policy rate by 75 basis points to 8.50%. One basis point is one-hundredth of a percentage point.
Banks started raising their lending rates in the second half of June and economists expect interest rates to harden further as inflation continues to rise, which will definitely affect fresh projects.
The industrial production growth data, released on Friday, points to a slowdown, especially with the growth in capital goods production slowing to 2.5% in May from 11.4% in the same month last year.
Experts are watching for the government’s response to this in terms of how it approaches its own projects or those it is funding.
Global rating agencies say that the government plays a key role in such a scenario. According to Sherman Chan, an economist with Moody’s Economy.com, the expected increase in government spending on infrastructure will provide the much-needed support to the industrial sector. Hence, production growth will remain positive, despite steadily slowing.
One of the largest projects that is in the execution stage is the Jamnagar petroleum refinery (SEZ) being built by Reliance Petroleum Ltd at a cost of Rs25,000 crore.
In the year ended June, the manufacturing sector saw a growth of 52% in total investment and, as of June, there were 3,245 projects entailing a total investment of Rs8.5 trillion in the sector, according to the survey.
In the mining sector, total investments rose by 21.8%, while the power sector posted a growth of 42.6%. In total, there has been a 53.8% increase in investment intentions by private companies in the year ended June.