BackThe worrying lull in India’s infra push
With only a few bright spots, lofty infrastructure-creation goals may get stalled for a while. What can be done?The recent tussle between the Centre and the states over GST revenue sharing is only going to add to the air of uncertainty. When it comes to infra spending, states usually do the heavy lifting
PremiumMUMBAI : In August, Union finance minister Nirmala Sitharaman inaugurated the India Investment Grid website, an online dashboard that lays out information on large-scale government infrastructure projects as an aid to investors, lenders and companies bidding for work. The grid is designed to give real-time updates on the implementation of the National Infrastructure Pipeline (NIP), the Modi government’s ₹111 trillion infrastructure investment plan that runs from FY20-25.
Soon after the dashboard went live, Amar Kedia, an equity analyst with the brokerage firm Emkay Global, took a closer look at the projects listed under NIP. Kedia wanted to see which projects were likely to be tendered out soon, so that he could make stock recommendations accordingly. Kedia studied the top 1000 projects listed (accounting for over 80% of NIP’s total value) and found that less than a fifth were even remotely close to being tendered—that is, those that would come to the market soon seeking funds from lenders and become part of the order books of construction companies.
Besides, the NIP’s listing of projects itself is riddled with inaccuracies. Mint found that the same road projects have sometimes been listed more than once, adding to the total number on the list but not real projects on the ground. Some projects have been wrongly classified (e.g., Ganga Expressway road construction is listed as under implementation by Uttar Pradesh when tenders for this project are yet to be made public).
In other places, project costs have been inflated to meet investment targets. A road project stretching to less than 150km is listed at a project cost of ₹15,000 crore, which translates to ₹100 crore per km. In India, even after adding the cost of land acquisition, roads cost less than ₹35-40 crore a km.
In fact, contrary to the government’s signalling on increased infrastructure investments via the NIP and the corporate world’s insistence on a public spending spree to revive the economy, all signs indicate that the slowdown in government spending is going to be massive this year.
Last month, the Mint-Bain CEO survey polled over 100 chief executives about the business environment and two of every three executives said that the government needs to urgently triple its spending on infrastructure to jump-start economic growth.
But corporate India is placing its hopes on a pipedream. Data on project tenders show that on a trailing 12-month basis, government spending on infrastructure has fallen 40%, Kedia said. “Covid has simply accelerated this slowdown in FY21." Sectors that have reported a major decline in project tenders are roads (down 60% year-on-year), power distribution (down 52%), water supply and irrigation (down 45-50%) and even railways (down 31%).
There are a few patchy bright spots: road projects funded by the central government are slowly getting back on track; metro rail construction; renewable power. But these segments of nascent revival are too few to carry the weight of a battered economy.
Data from Projects Today, an independent data repository that tracks large physical infrastructure projects and factory construction across sectors, shows that in April-June this year, new project announcements halved to 1241 (compared to 2500 in April-June 2019). Arguably, these were also the months when India had imposed one of the strictest lockdowns in the world to contain the spread of covid-19. But data for July and August, when businesses had more or less fully resumed, shows the needle hasn’t shifted by much (see chart 1).
The recent tussle between the Centre and the states over GST revenue sharing is only going to add to the air of uncertainty. When it comes to infra spending, states usually do the heavy lifting, said Lekha Chakraborty, professor, National Institute of Public Finance and Policy (see chart 2). “This was the trend prior to the pandemic as well. There is ambiguity on what the borrowing programme will be like this year," Chakraborty said.
Ratings agency ICRA has estimated that the Centre not paying the full GST compensation may result in up to ₹3 trillion being cut in capital expenditure by the states in FY21.
The long-term trend
India’s capex-to-revenue ratio has been structurally declining over the decades (from about 45% in the 1980s; 35% in 90s; 25% over 2000-10; and 22% between 2010-20). “In fact, every crisis has structurally lowered the capex further as a share of government revenues," a research report from Emkay Global said, concluding that expectations of a counter-cyclical investment push will come to nought.
“India does not have the fiscal space for a stimulus as the current debt overhang is not transient and will last till FY25 (by estimates). India’s debt-to-revenue will exceed 5 times by FY23, a situation which was last witnessed in FY2003 when the sovereign rating was junk. As a result, we estimate the combined infra spending by the Centre and states will decline to a 5.5% CAGR (compounded annual growth rate) over FY19-25 from 21% over FY13-19," the report said.
If the government is badly hit, then the private sector has mostly bowed out of large capital expenditure programmes this year. Spending is projected to fall 20-26% in FY21 as companies don’t want to build idle capacity when the pandemic has ruined consumer demand.
This leaves large public sector enterprises, which have been ordered by the central government to spend ₹4.5 trillion in capital expenditure in FY21. Media reports so far indicate that these public enterprises are reluctant to lock in their capital too, spending less than 7% of their annual budget in the first quarter of the fiscal.
So, what’s a viable way out of this impasse? Anil Swarup, a retired 1981 batch IAS officer and a former coal secretary, believes that a shift in focus from funding to enabling faster processes and decision-making means the low-hanging fruit of public expenditure can be plucked easily.
“While money is a difficulty now, there are non-financial solutions that can rev up the economy. Even today, there are a number of projects where funds are allocated but there are delays in implementation. What no one realises is that there is a cost to every delay. So, get down to brass tacks, digitise these processes and see where the delays are happening. Make this information public. Fast-track decision-making, even if you don’t fast-track projects," he said.
Swarup was the bureaucrat who headed the project monitoring group (PMG) under the previous UPA government. The PMG’s mandate was to revive the economy, which was in similar doldrums back in 2013.
By early 2013, it had been estimated that projects with investments of ₹22 trillion were logjammed. In the 15 months following his appointment, Swarup cleared 153 projects with investments of ₹5.76 trillion. “You can’t take all your decisions from Delhi," Swarup said. “The government must speak to the industry and ask them what their concerns are. Improving processes won’t win you headlines, but it gets the work done." The PMG was absorbed into the Prime Minister’s Office under Narendra Modi. Swarup recommends putting the PMG in charge again and opening its files to public scrutiny.
The credit freeze
Adopting more transparent processes will also make lenders more confident about dealing with the infrastructure sector, partially solving the question of funding. Public sector banks burnt their fingers during the infrastructure boom that started in 2007-08, which came with new project structures, where the return profiles were difficult to chart.
Banks instead relied on overly optimistic GDP growth assumptions and used short-term money to lend to long-term projects. For instance, a lender to a road project expected to be fully repaid within 10 years. However, the developer had won a concession for 30 years, indicating that it took far longer than a decade to earn an adequate return on an infrastructure asset. As infra loans turned sour, banks turned the tap off.
For many years, ICICI Bank had been India’s largest private bank by dint of its rapidly growing corporate asset base and, till 2013, had been among India’s biggest lenders to the infrastructure sector. However, when the scale of its bad loan crisis came into full view in 2016, its biggest defaulters had been in infra, construction and metals.
In 2017, the banking regulator placed IDBI Bank, a former development finance institution and infra lender, under its prompt corrective action framework in order to restrict high-risk commercial and project lending. Axis Bank also decided in 2017 to gradually reduce its project lending exposure. And after three decades in the business, Hemant Kanoria, chairman of West Bengal-based shadow lender Srei Infrastructure Finance told Mint in February (even before the pandemic hit) that his firm had almost entirely stopped lending to infrastructure, switching to equipment finance instead. “Infrastructure finance is close to our hearts and we definitely want to come back to it, but we’re waiting to see if the environment improves," Kanoria said.
“Funding (for construction firms) has been a constraint for two reasons," said Shankar Raman, whole-time director and CFO, Larsen & Toubro. “One, the financials of construction companies aren’t encouraging lenders to step up their exposure. Unless lenders take a very benign look at some of the financial ratios of these companies, which are in deviation to standard norms, additional lending will be a challenge. On the supply side, banks are constrained because of capital adequacy norms. The capital market has gone cold too. Mutual funds did well at collecting surpluses over the last few years to finance infra and construction projects. But they’ve been seeing blow-up after blow-up, commencing with the ILFS fiasco."
Swarup’s suggestions regarding greater transparency and faster processes may ease some of this hesitation to lend. A senior banker at the State Bank of India, who did not wish to be named, said: “Corporate spending has come down, so any genesis, if at all, is from the government side. Wherever there is an opportunity and a credible sponsor with manageable risks, we are lending."
SBI has trimmed its infra exposure to a few key sectors, such as renewable energy, roads and highways and city gas distribution. “Our learning from the past is to only deal with sponsors with a track record of executing projects."
The way forward
Ultimately, for private lenders and private enterprises to rediscover their confidence swiftly, the government may have to make the first symbolic push. Swarup recommends redirecting funds from non-essential government spending, such as the Delhi Central Vista redevelopment project—estimated to cost ₹20,000 crore—to economically viable projects. “This will also send the right signal to the states."
On top of that, many economists, including so-called fiscal hawks, have come to the consensus view that fiscal deficit need not be India’s guiding logic for a few years. “We need not maintain a threshold ratio for the fiscal deficit if you can get the interest rates and growth correct," Chakraborty, the economist, said.
“If we focus too much on the deficit threshold ratios, we can’t do the necessary capital and human development spending needed to boost the economy. An economic package for fire-fighting a recession is still awaited. We should let go of the ‘fiscal rules’ for now."
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