Can Bharatmala revive India’s capex cycle and boost growth?

Mumbai: Last week, the government relaunched the Bharatmala Pariyojana (BMP)—an initiative to add 35,000km of new highways (subsuming existing plans to add 10,000km of national highways) with an outlay of Rs5.35 trillion over the next five years—to raise investments in infrastructure, and boost economic growth. An additional Rs1.57 trillion is set to be used in existing projects. Thus, overall the Union government is set to spend around Rs6.92 trillion on roads over the next five years.

The road-building initiative was sorely needed but it does not represent acceleration in road-building, and is unlikely to provide a big boost to the capital expenditure cycle, Mint analysis shows.

According to data from the Centre for Monitoring Indian Economy (CMIE), newly started road projects in the last five years (i.e., between 2012-13 and 2016-17) amounted to Rs6.55 trillion. Of this, Rs4.35 trillion was spent by the centre, which tends to focus mainly on national highways, with other roads being under the jurisdiction of states. Hence, the outlay on highways envisaged over the next five years, i.e. Rs6.92 trillion, does not appear to be a big jump, especially after accounting for inflation.

Even when viewed in terms of road length, the proposals do not amount to a significant increase. The central government aims to build around 35,000km of new highways over the next five years; 24,800km under Bharatmala, and the rest under the existing NHDP program. This is not too ambitious a target given that around 27,000km of national highways were added in the last five years.

On top of that, the risk that even this not-so-ambitious target will be missed remains, given that actual road construction has typically been behind target.

As a note by UBS Securities India Pvt. Ltd pointed out, highway award activity stagnated in the last fiscal year, and the Bharatmala initiative does not change that.

“The government’s new Bharatmala programme doesn’t change that picture (of stagnation) – it was needed because existing program awards were ending,” a team of UBS analysts wrote in the recently published note.

While the initiative will lead to new awards of road contracts, it will still be a small fraction of the investments the Indian economy needs over the next five years even if the government happens to beat its past record, and meet all targets. To illustrate, the entire proposed spending on highways over the next five years—Rs6.92 trillion—only amounts to 17% of overall investment spending (gross fixed capital formation or GFCF) in the single year 2016-17. Even after adding the proposed Rs88,185 crore spending on rural roads in the next three years, the total capex plans of the road sector in coming years amounts to Rs7.8 trillion or only 19% of GFCF in 2016-17.

While it is true that investments in roads now constitute a big part of infrastructure-related capital expenditure, the trend actually reflects subdued capex activity by private firms.

A previous Mint analysis of CMIE data showed that while public spending on infra projects has indeed risen over the past couple of years, overall growth in infra spending still remains muted largely because of lack of infra investments by the private sector owing to legacy problems. The boom years of high private participation in the 2000s were followed by a spike in stressed assets, leading to a pile-up of bad debt and lowered lending to the sector.

The government’s other big plan announced last week—recapitalization of state-owned banks—may partly ease such constraints in the years ahead, if it is implemented well. However, it is worth keeping in mind that funding constraints are not the only hurdles infra projects face.

Many such projects are stuck because of lack of clearances even as the extent of projects stuck because of land acquisition problems seems to have declined.