Spending by the government and the country’s public sector corporations on infrastructure projects have seen a sharp rise in November with contracts worth Rs 31,250 crore awarded. The value of tenders floated has also risen by a sharp 60% over the corresponding period. The pick-up is encouraging given the October numbers were muted with project awards rising just 8% year-on-year, and with a drop in tenders floated of nearly 30% y-o-y.
Government investments assume importance since most private sector companies remain over-leveraged and, hence, unable to add new capacity. Moreover, surplus capacity across sectors and the lack of visibility on demand have made the sector cautious.
Given tenders floated have seen a jump of over 37% y-o-y in the eight months to November, we could see more projects being given out. Project awards have surged 27% in this period.
The data must be viewed in the context of the fall in the value of projects by some 13% last year to Rs 3.53 lakh crore, as estimated by Emkay Research. The reduced spends resulted from the government’s need to trim expenses so as to rein in the fiscal deficit.
Nonetheless, the fact that there is some traction, even if it is coming off a low base and even if the pace dropped in the last two months, is encouraging. Much of the action is taking place in the railways, power equipment and roadways sectors.
In November, for instance, the railways and power equipment sectors saw a threefold increase each in projects awarded. The largest order of the month in value terms was worth Rs 14,660 crore, given by Indian Railways to GE Global Sourcing India for setting up a diesel locomotive factory in Bihar. The second largest order was bagged by Bharat Heavy Electricals (BHEL), which was worth Rs 4,614 crore, for setting up two supercritical thermal power projects of 800 MW each, in Andhra Pradesh.
Meanwhile, the roads sector saw the finalisation of 40 new contracts worth Rs 2650 crore. The largest contract was awarded by National Highways Authority of India (NHAI) for Rs 644 crore to PNC Infratech for improvement/augmentation of Aligarh-Moradabad section of NH-93, in Uttar Pradesh, on an engineering, procurement and construction basis.
Despite this, some projects have been cancelled, which is worrying since it means the capex cycle could take longer to turn at a time the private sector is unable and unwilling to add capacity. Already, gross fixed capital formation, a measure of investment in the economy, has fallen over the last few years from 33.64 % of GDP in FY12 to 28.72% of GDP in FY15. While the capital goods segment within the IIP jumped 10% y-o-y in July and 21% y-o-y in August, the numbers come off very small bases since the segment had negative growth both in July and August 2014.
As Nitin Arora, who tracks the construction space at Emkay, points out, the government departments have extended the timelines for submitting bids in 504 project tenders to ensure enough participation, and around four tenders were cancelled.