While the government’s policy initiatives in the infrastructure space and increased public investment led to an uptick in the development activity across the country in FY16, the hopes of an accelerated infrastructure development in FY17 is unlikely to come through. According to a report prepared by Standard Chartered Bank, while private sector investment is still few quarters away, the Central and state governments may reduce their combined capital expenditure as they look to implement the recommendations of 7th pay commission and the Union government aims to narrow the fiscal deficit.
The report pointed that the capital expenditure by Union and state governments may drop down to 4.5 per cent of the GDP in FY17 from 4.7 per cent last year as it looks to implement the pay hike and narrow the fiscal deficit to 3.5 per cent of the GDP in FY17 from 3.9 per cent in FY16. The report also indicated that while the government tried to fund infrastructure development through alternate financing source such as National Investment and Infrastructure Fund, it is not yet operational.
“With private-sector investment still facing strong cyclical headwinds and financing support from the banking sector likely to remain limited amid high non-performing assets, a pronounced improvement in overall investment looks unlikely in the near term,” said the report adding that as of March 2016, the stock of stalled investment projects rose to an all-time high of Rs 11.3 trillion (8 per cent of GDP).
“The increase in stalled projects reflect a lack of investor interest, particularly in the private sector, amid slower economic activity and high leverage. “A sustained rise in investment is a precondition for a higher growth trajectory, and has been cited by the government as a top policy priority. While government investment was the primary driver of overall investment in FY16, we expect it to slow in FY17 due to fiscal constraints,” it said.
If roads sector witnessed major initiatives from the government in terms of fast-tracking of road development over the last one year, the report states that progress has not been at desired pace due to sluggish economic recovery and high leverage.
While high debt levels of private-sector developers resulted into slowdown in the pace of road building until FY14, the last year saw accelerated regulatory approvals from the government side along with an increase in budgetary allocation to roads by 55 per cent. The government took various steps to ease development such as upfront land acquisition, prior clearance from the Ministry of Environment and Forests, and development though engineering procurement and construction (EPC) contract.
They did yield some results and the report points that while there was a 69 per cent YoY jump in project awards by National Highways Authority of India to 2,649 km in the 11-month period ended February 2016, even the pace of execution increased to 4.96 km per day during the April-November 2015 period, a 45 per cent YoY increase.
The report, however, points that a sluggish economic recovery puts developers under stress as there is larger-than-expected declines in road traffic and a negative WPI inflation hurts their revenue by virtue of toll tariff hike linked to WPI.
On the power sector, the government made progress both in terms of sorting the issue of coal availability and improving the financial health of state-owned power distribution companies that had accumulated debt of Rs 4.3 trillion as of September 2015. The report, however, points that since the revival of state electricity boards is linked to raising the tariff for consumers (a politically sensitive decision for state-governments) it may not be an easy one to execute and therefore it will be critical to see how the revival materialises. “Unless consumers are charged the right prices, SEBs are unlikely to undergo the required structural changes. However, regular revisions of electricity tariffs would be politically sensitive,” said the report.
Even for Railways that has traditionally suffered from inadequate investments, while the Ministry of Railways in February 2015, unveiled an ambitious plan to increase investments to Rs 8.5 trillion in the period between FY16 and FY20, the report says that the execution will hold the key and proposed various additional steps by government to improve the pace of rail infrastructure development. “A number of planned railway investments rely on partnerships with states, the private sector and long-term institutional investors. Reducing bureaucratic bottlenecks will be important to expediting decision-making. Increased flexibility in setting tariffs and an independent rail regulator (RDA) are necessary to attract non-government investment. Political will is also needed to tackle sensitive issues such as encroachment on Indian Railways land, which prevents the monetisation of land assets,” the report said.