Lack of promoter interest and unfavourable market conditions are the two reasons that account for nearly 50% of the projects stalled last year, according to data released by the Centre for Monitoring Indian Economy (CMIE). This was in single digits in 2014-15 and just over 19% in 2013-14.
The silver lining, though, is that problems linked to land acquisition or raw materials and environmental and other clearances are no longer the key impediments to progress of projects. In other words, CMIE data shows, that the task of ironing out procedural bottlenecks is beginning to show tangible results and the stage may be set for an uptick in investments, as and when investor sentiment turns.
According to the CMIE database on the stalling of projects, the cumulative impact of projects stalling on account of three systemic constraints — lack of environment clearance, lack of non-environment clearances and raw material supply problems — accounted for just 9 per cent of stalled projects in 2015-16, sharply down from over 57 per cent in 2012-13, 36 per cent in 2013-14 and 33 per cent in 2014-15.
Land acquisition problems, as a reason for stalling of project implementation, have come down to under seven per cent over the last two years, down from 16 per cent in 2013-14 and 13 per cent in 2012-13.
The problem, though, is that promoters are still not optimistic.
Two reasons, the lack of promoter interest and unfavourable market conditions, accounted for nearly 50 per cent of the projects that were stalled last fiscal. This was in single digits in 2014-15 and just over 10 per cent in 2013-14.
Some of this is backed by the RBI obicus (order books, inventories & capacity utilization survey), which shows capacity utilization among manufacturing firms. Capacity utilization in the December 2015 quarter, though higher than in December 2014 quarter, continued to be lower than that for the December 2013 quarter.
The problem for a lot of private developers, though, is that they are weighed down by surging interest costs amid delayed revenue streams.
Even though the repo rate has dipped from 8 per cent in January 2014 to 6.75 per cent in September 2015, the interest-expense ratio steadily climbed for Indian firms across sectors. Analysts point to the likelihood of the interest rates surging due to rising volumes of interest during construction on stalled and delayed projects.
In such cases, without any revenues streams during the construction period, delays result in pushing up the share of interests in total project cost.
Over recent months, steel prices have strengthened both globally and domestically, especially after introduction of the Minimum Import Price. Plus, cement and auto sectors have also shown signs of growth pick-up while demand for oil has also increased by about 11 per cent in terms of quantity, conveying some signs of buoyancy in economic activity.
“In 2012-13 there was considerable optimism on the economy and people were looking to invest even though there were hurdles on ease of doing business. While there is no doubt that the environment for setting up a company has improved, the fact that there is lot of excess capacity and the global and domestic growth outlook is weak, it is unlikely that the ease of doing business will lead to investments,” says Abheek Barua, chief economist at HDFC Bank. Accepting that there are green shoots in the economy, Barua says that a real improvement in investment climate is not likely before the end of December 2017.
DK Joshi, chief economist at Crisil, says that a positive movement on ease of doing business will lead to investments at a faster pace when the global growth outlook improves. “There is lot of debt on the books of heavy investors in steel and power sector and the manufacturing sector is impacted by high unutilised capacity. However, as the outlook improves, investments will happen faster because a lot of bottlenecks have been removed,” says Joshi.