With two-thirds of projects awaiting central clearances in the power and steel sector, both of which have massive amounts of over-capacity, it is unlikely the slew of projects cleared by the Cabinet Committee on Investments will automatically translate into fresh investments in the coming year, after the new government is in place. Thermal plants have capacity utilisation of under 60%—a 20-year low—a reflection of poor demand as well as the impact of Coal India Limited’s (CIL) monopoly.
A recent report by rating agency Crisil brings out the impact that a slowing economy has on the finances of the highways sector where NHAI is trying to help out by giving fresh loans at a 10.75% interest rate. While NHAI’s view is that these projects are viable, Crisil points out the annual road traffic across a sample of 15 highways is expected to grow just 3-5% in FY15 on the back of a mere 1-2% increase in FY14. As a result, for six projects that Crisil has studied in detail, the returns are now expected to be in the range of 8-14%, way below the 22-26% pencilled in earlier. And, as Crisil points out, it is not simply the growth in traffic that is posing the problem, even base traffic is below the estimated levels—for a clutch of six national highway stretches, base traffic has been lower by a significant 20-40% compared with NHAI estimates. In other words, the investment cycle isn’t going to revive just because a new government—even if an NDA one—is coming to power. In the case of the electricity sector, for instance, apart from ending CIL’s monopoly, new capacity will depend on how tariffs get raised and SEBs become solvent.