This financial year, the government has set a target of awarding 10,000 km of national highways to be executed over the next 2-3 years and has also announced development of 7 major ports and 5 no-frills airports over the next few years.
The government’s ambitious push for infrastructure development, now, has received a major boost with global commodity prices crashing to multi-year lows following the dip in Chinese manufacturing and a resultant decline in demand for commodities there.
While the dip in crude oil prices is helping the government save on subsidy expenditure and enhancing its ability to spend more on infrastructure projects, experts say that the fall in prices of other commodities will also reduce the cost of infrastructure development, as both operating and capital expenditure would decline substantially.
However, there is a rider. According to experts, softening of commodity prices will only benefit if the government embarks on its reform agenda early. “There is a big opportunity. You have to not only clear the stalled projects but also reform your subsidy regime and push infrastructure development,” said DK Joshi, chief economist at Crisil.
Decline in oil prices lifts Centre’s ability to spend more Oil prices have fallen to more than six-year lows and the Brent crude is now hovering at around $43 per barrel. Oil sector analysts say that as a general rule of thumb, a $1 per barrel of drop in import price of crude oil results into annual savings of around $1 billion for India. According to estimates, at an average expected crude price of $68-70 per barrel for 2015-16, the government would save around Rs 1,20,000 crore on account of reduced subsidy burden and increase in excise duty. However, since the prices are significantly lower than $70 per barrel, it would lift savings for the government and its ability to spend on building infrastructure.
While half of the benefits of the dip in crude prices have been going to the government (in the form of increased excise duty), several corporates have also witnessed a decline their petroleum-based raw material procurement costs. Most of them, however, have not passed on the price benefit to the consumers.
“With oil prices below $45 a barrel now, if the government decides to increase the excise duty (which we have learnt, it is considering) and retain some benefit for itself, it will result into building government’s ability to spend more,” said the investment strategist of a leading multinational bank.
As a result of the existing savings, the Centre has not only doubled its expenditure commitment for developing national highways over that in the previous year to close to Rs 1,00,000 crore, government sources also admit in private that, “there is no dearth of money for road development”.
In fact, while Prime Minister Narendra Modi recently announced a package of Rs1.25 lakh crore for Bihar’s development, almost Rs 60,000 crore are related to road development.
Devendra Pant, chief economist, India Ratings also said that fall in oil prices will provide a boost to government’s ability to spend on infrastructure development. “It will provide the fiscal space to the government to spend more on various road and other projects,” said Pant.
Impact of fall in other commodity prices
Over the last one year, there has been a significant drop in prices of various commodities including steel, coal, copper and aluminium among others that are involved in the development or operation of infrastructure projects.
A commodity expert said that aluminium and copper are used in power transmission and distribution, so a reduction in the price of these metals will bring down the cost for the sector. Also the fall in global coal prices brings down the cost of operating power projects.
“The fall in commodity prices will positively impact the infrastructure sector.
The operational expenditure of power plants will come down, imported coal will become cheaper, petroleum products, lubricants, bitumen and steel will become cheaper. Both capital and operational expenditure will be lower and will benefit the sector,” said Vinayak Chatterjee, chairman at infrastructure consultancy, Feedback Infrastructure. While a drop in oil prices will lead to a reduction in price of bitumen (a byproduct of crude oil), which, in turn, will lower the cost of manufacturing roads.
The decline in prices of steel — a major item in India’s import basket — is expected to be significantly beneficial to the country as the imports of iron and steel and related articles amounted to more than $16 billion in the financial year 2015-16. There will also be benefits on account of use of metal in the manufacturing of machinery that are used for developing road, bridges and executing other projects. “Since metal is used in manufacturing various machineries, cost of capital goods would come down bringing some saving for companies involved in project execution. Also, drop in fuel cost will reduce the cost of power generation,” said Joshi.
He, however, pointed that while there will be overall gains there will be companies within sectors like metal and other commodities in India that will take a hit. A commodity expert also pointed that the fall in steel prices will put stress on domestic steel companies and also on the banks that have lend money to them.
Interestingly, the crash in commodity prices globally is coinciding with decline in inflation in India and a cut in interest rates which may play an important role in improving the financial health of the players within power, engineering and construction and other infrastructure fields and improve their project execution ability.
While there is a big opportunity for India to benefit from a decline in global commodity prices by not only routing its savings into infrastructure development but also executing projects at a reduced cost, experts say that the country needs to show urgency and start clearing stalled projects and push for early take-off of projects in the pipeline.