Needed: Both Push And Pull

In 2015, Gammon Infrastructure loo­ked desperately to exit from some of its roads projects. For, debts piled upon the company, whose name was commonly visible at construction sites in several Indian cities. Today, this has become a sector-wide trend. The problem of bleeding infrastr­ucture firms and banks with bad loans to who they owe large sums is creeping towards a tipping point. All eyes are now riveted on the February 1 budget for support, though the real fixes may lie elsewhere.

Take, for instance, the Foxconn Techno­logy Group. Spurred by Prime Minister Narendra Modi’s ‘Make in India’, the firm that makes iPhone for Apple pledged to build an electronics ecosystem in Maha­rashtra. That’s yet to take off. By its very nature, infrastructure is tied to the imponderable risks of long gestation periods, high costs and budget constraints.

Last year, nearly a third of all big infrastructure projects were behind schedule. To be sure, that’s reassuringly less than the 45 per cent delayed projects in the previous year, which also means cost overruns have come down by about a percentage point. But the big cautionary tale is this: much of the push has come from public spending, which isn’t sufficient with private firms sitting on precarious balance sheets.

The Modi government needs to create employment for the 1.1 million new Indians who join the workforce each month. That scale of job creation means shifting people from farm to non-farm employment. This requires massive levels of infrastructure building that can support growth. Low-cost airports, paved highways, tunnels, cargo terminals, dry and seaports, warehouses, housing and manufacturing enclaves. Each is a cogwheel that makes the next one move.

When projects meet deadlines, it’s not just investors who gain. If a real estate project saves a 21-month delay, it also saves 20 per cent of the costs, which can then be passed on to consumers, going by CREDAI, India’s largest developer lobby.

According to a Credit Suisse report, debt levels at 10 top conglomerates have risen by 15 per cent, while profits continue to fall. Net debt in these companies has exceeded capital investment. Investment bankers label such firms over-leveraged—they are borrowing more than they are investing.

Cumulative problems of the past five years have increased mounting bad loans. To offset this, the government will have to continue pumping money. With the effects of demonetisation now clearer, the 2017-18 budget will have to carefully split funds between social spending and infrastructure. One of the pre-budget proposals is to up infrastructure allocation by at least 12 per cent, according to an official.

While the budget 2017 must keep up the spending, off-budget measures are critical. “Public expenditure must go up massively,” says Vinayak Chatterjee, the chairman of Feedback Infra Ltd. “But generally there is not much fiscal space for hugely hiking expenditure within the budgetary exercise.”

One of the things the government must do is to quickly release 75 per cent of the cash against arbitration awards on major projects so that firms have working capital. That’s like releasing upfront cash. Roads minister Nitin Gadkari recently said the government must find cheaper capital to sustain investments. Forget cheaper loans, Chatterjee says, finding liquidity itself is proving tough.

Budget proposals include the setting up of an overhauled National Infrastructure and Investment Fund besides asset recycling, which denotes the government’s divestment of operational utilities, like power plants, to private investors.

The ability to move goods quickly and cheaply around the country is necessary for growth. The world’s fastest-growing country will need to, at the minimum, double power generation, add a dozen more low-cost airports, upgrade all of its major ports with larger container terminals, develop inland water navigation and speed up high­way construction. This can raise GDP by 2 percentage points and add six million jobs. For the railways to regain falling freight market share, a Dedicated Freight Corridor must be commissioned in two years.

CRISIL recently pegged India’s infrastru­cture sector’s funding needs at Rs 43 lakh crore of investments over five years ending March 31, 2020. The government can at best match 6 per cent of this. Urban population will increase to 40 per cent by 2030. The government needs to crank up its plans further in the real-estate sector.

Take for instance, the PM’s housing-for-all initiative, which aims to create 20 million housing units for the poor by 2022 or 30 lakh houses every year. Only 14,511 houses could be constructed after a year of the scheme. Work is progressing on merely 144,321 units. That’s less than 15 per cent.

A major drag is the inability of the government to keep track of the progress, says Praveen Jain, president of the National Real Estate Development Council. “The government needs to keep track of developments within the scheme. We have recommended setting up a committee in this regard but action is yet to be taken,” he says.

Land acquisition remains a hurdle as much as funding and its current shortage in major peri-urban areas does not allow development of affordable housing. Of the Rs 6,000 crore sanctioned for the scheme, Rs 3,570 crore has been released so far.

Private equity investments within the sector have fallen from Rs 23,253 crore in 2015 to Rs 21,019 crore last year. “Investor faith in the real estate sector is down at the moment beca­use of demonetisation as well as a slump in the market,” says Praveen.

The last budget committed Rs 2.21 lakh-crore in creating new and upgrading old infrastructure. Of this, Rs 97,000 crore was for 10,000 km of roads planned during the financial year. The length of highways built went up from 18 km a day to about 21 km a day. “This is a sign of growth, but it presents a challenge also,” said finance minister Arun Jaitley. “Therefore, we have speeded up the process of road construction.”

The target of 40 km a day of roads, though, has not been met. “Lack of funds has compromised the procurement of reso­urces,” says S.P. Singh of IFTR. “And 40 per cent of our cargo is transported only on 2 per cent of the national highways.” Singh advocates a push to integrated transport systems that include railways and water transport.

Affordable housing is largely concentrated in peripheral areas where connectivity and infrastructure challenges abound. “The Housing For All project can only succeed with a rapid transport system as well as the opening up of periphery lands where such housing societies are being constructed,” says Ashutosh Lim­aye, head of research at JLL, a global real-estate services firm.

Analysts like Limaye expect a fresh reb­ates in income tax for home buyers in the new budget. “The current rebate of Rs 1,50,000 on interest and Rs 50,000 on capital payable is expected to go up.” He also suggests bringing back section 80 IB of the I-T Act which would help incentivise developers to construct more affordable housing by offering tax savings on capital gains.

Weather-exposed infrastructure such as roads tend to depreciate fast. Maintenance is critical. Lack of funds and capital investments have forced developers to buy substandard resources. This, according to K.K. Kapila, chairman of the consultancy Intercontinental Consultants and Tech­nocrats Pvt Ltd, has led to delay in projects, which are also substandard and compromises road safety.

Last year, Jaitley had met sovereign foreign wealth fund managers for investments in roads, energy and ports. Separately, steps announced by his ministry included revival of unserved and under­served airports in partnership with state governments, ince­ntives for gas production from deep-water, ultra deep-water and high-pressure-­high-temperature areas and a comprehensive plan looking at a 20-year horizon to augment investment in nuclear power generation.

It’s an uphill battle from now on. Economic data available after demonetisation point to a slowdown, including a 16 per cent dip in auto sales and a 41 per cent slump in home sales. Factory output showed a rise of 5 per cent in November but that’s only when compared to the same month last year. Sequentially, when compared to output growth in October, industrial output shows a clear fall. Only sufficiently high government spending can crank up the economy in 2017.

By Zia Haq and Arushi Bedi