BackNarendra Modi’s vow to unclog nation faces grimmer reality
Modi’s vision of bullet trains and jam-free roads connecting cities lit by reliable power faces an obstacle: difficulty of achieving infrastructure spending goals
Premium(Bloomberg)
New Delhi: Prime Minister Narendra Modi’s vision of bullet trains and jam-free roads connecting gleaming Indian cities lit by reliable power faces an obstacle: the difficulty of achieving infrastructure spending goals.
Modi in July said he would boost outlays on projects such as highways and ports 21% to ₹ 5.75 in the year through March 2015. In the nine months ending December, he had spent ₹ 3.5 trillion—little changed on the same period in the prior fiscal year.
UBS Group AG sees Modi increasing capital spending 35% in India’s budget on Saturday, but the question is how much of the plan gets implemented by a byzantine bureaucracy. The answer will determine whether Modi can make good on his vow to energize growth and help shape the outlook for construction companies such as Larsen and Toubro Ltd (L&T) and Lanco Infratech Ltd that face falling profits or losses.
“They might be doing quite a few good things on a long-term perspective basis, in terms of changing the overall atmosphere, but still at the grassroot level, hardly anything has been delivered," Kishor Kumar Mohanty, managing director of Gammon Infrastructure Projects Ltd, said in an interview. While Modi has curbed graft, bureaucrats may be more sluggish to drive public works as they aren’t gaining financially, he said.
Hesitation
Such views suggest the government’s push to speed up environmental and other approvals for stalled major projects has yet to fully filter into the economy. At the same time, rising bad debts are curbing private companies’ scope for investment.
Capital expenditure plans by state-run and private businesses will drop 4% in the year starting 1 April, a survey by Standard and Poor’s domestic unit Crisil Ltd shows. Private companies alone plan to cut such outlays 11%.
“The message coming through is crystal clear: as things stand, there’s only one way to kick-start the all-important investment cycle, and that’s through public investment," Crisil president for ratings Raman Uberoi said in a statement. “The onus is on the government to do the initial heavy lifting."
Profit at L&T, India’s largest engineering company, fell 15% to ₹ 1,060 crore in the three months ended December. Lanco Infratech lost ₹ 640 crore. Gammon Infrastructure posted a profit of ₹ 5.98 crore.
Modi’s drive
India’s investment as percentage of gross domestic product (GDP) dropped to 32% in 2014 from 38% in 2007, falling below Indonesia at 33% and widening the gap with China at 48%, according to International Monetary Fund (IMF) data.
Investors remain bullish that Modi’s nine-month-old government can deliver a turnaround by reducing red tape and spurring manufacturing. The S&P BSE capital goods index, which includes infrastructure companies, is up 71% in the past year, more than the 39% climb in the S&P BSE Sensex.
The premier has also pledged to fight graft.
In a sting operation last week, police arrested five people and recovered stacks of stolen documents from the coal, power and oil ministries. The probe widened over the weekend, with seven people detained. Among those held are officials from Reliance Industries Ltd, Essar Oil Ltd, Cairn India Ltd, Jubilant Energy NV and Reliance Group, according to police in New Delhi.
Keeping faith
Legislation to make it easier to acquire land for some projects and bring more transparency to mining is pending. The administration aims to introduce a goods and service tax (GST) to simplify commerce and spur growth. It’s also prodding state- controlled companies to expand capital spending.
Barclays Plc sees India’s sovereign foreign currency ratings rising by 2017 against a backdrop of higher growth, fairly stable inflation and fiscal consolidation.
“If you have to ask me, or any foreign investor, ‘do you continue to believe he will deliver?’ the answer is ‘yes,’" Sam Mahtani, a London-based director of emerging markets at F&C Asset Management Plc, which oversees about $150 billion, said in a phone interview on Wednesday.
At the same time, the focus is shifting to implementation as Indian cities continue to struggle with periodic blackouts, jammed highways and overflowing trains.
In roads, India contracted 1,572km of projects in the eight months ended 30 November, leaving four months to achieve the fiscal year target of 5,500km, Icra Ltd said. The execution rate was 3.41km a day in April-November, down 17% from the same period a year earlier, Icra said.
In railways, Modi in July last year opened the doors to foreign investment in railroad infrastructure, except for the operation of existing trains. Such inflows have yet to begin. A proposal to start bullet trains hasn’t moved beyond discussions with Japan, China and France on possible collaboration.
“Nine months is a fairly long time and we should have seen much more action by now," said Pradeep Singh, the deputy dean at the Indian School of Business in Punjab state. “I’m still not losing hope. The intent and the vision of the government is encouraging." Bloomberg
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