While stalled projects have added to the woes of infrastructure sector, the decline in the financial health of corporate houses executing these projects has further weakened their ability to borrow more from banks.
Even though the government stepped up the process of clearing stalled projects and is pushing for more investments in infrastructure development across the country, funding by banks and financial institutions continues to languish.
While there is an overall decline in value and volume of institutionally assisted projects across sectors, investment into such projects hit a decade low in the year ended March 2015. The infrastructure sector, which accounts for a majority of such projects, has led the decline from the front.
While the country needs an investment of about $1 trillion for infrastructure development over the next few years, data on institutionally assisted projects in the country sourced from the Reserve Bank of India shows that the number of new infrastructure projects has witnessed a constant decline. In 2014-15, only 75 projects were taken up and the value of those projects stood at just Rs 42,749 crore. This is a sharp decline from the value of 120 projects taken up in 2010-11 which amounted to over Rs 2,00,000 crore and is also lower than the value of bank/financial institution (FI)-funded infrastructure projects in 2005-06 amounting to Rs 44,511 crore.
The decline is also visible across other sectors reflecting the overall decline in business sentiment. According to the RBI data, during 2014-15, 39 banks/FIs, which are actively involved in project finance, reported 328 projects with an envisaged project cost of Rs 87,600 crore, each with a project cost of Rs 100 million and above. This is significantly down from 729 projects amounting to Rs 4,09,500 crore in 2009-10. While capital expenditure is the barometer of the economic development of a country, the decline in capex numbers to decade-back levels display the continued decline in such activity. The RBI report states that if weak domestic economic activity in 2014-15 was marked by subdued corporate performance, low manufacturing growth and a sluggish credit expansion, there are some positive signs such as lower inflation, lower fiscal and current account deficit, and surging foreign investment inflows.
“Positive measures for unclogging of stalled projects, addressing the financial stress of certain sectors like power, arising out of under utilisation of capacities, on a priority basis, and timely implementation of supportive policies and reforms could pave the way for a momentum in private investment to expect a turnaround of the economy in the coming months,” said the RBI report.
Not surprisingly, the decline in the number of new projects has resulted in a sharp fall in the credit growth of banks. While the non-food credit growth hit a two-decade low of 8.4 per cent in June and July 2015, the credit growth for the infrastructure sector witnessed a sharp decline in credit demand for development of road, power and other infrastructure projects over the past two years.
Even though infrastructure has been the government’s key focus area and is expected to lead the revival of economy and corporate investment, the RBI data is not very encouraging. The year-on-year monthly credit growth for the infrastructure sector declined to an over two-year low of 8.3 per cent. The decline has been consistent over the past two years and while the credit growth numbers hovered around 20 per cent in June 2013, it sharply declined to around 11 per cent in June 2014. Even under the new government, the numbers continue to fall. While the credit growth for infrastructure sector stood at 8.6 per cent in May 2015, it dipped to 8.3 per cent in July.
A look at the details of Central sector infrastructure projects costing Rs 150 crore or above, which have been stalled for various reasons, shows that there are over 235 projects with an anticipated cost of around Rs 5,90,000 crore that have been stalled for up to 10 years.
The biggest contributor to this has been the power sector which alone accounts for 61 stalled projects worth around Rs 1,81,000 crore. The petroleum sector comes next with about 41 such projects with an anticipated cost of around Rs 89,000 crore.
“Legacy of stalled projects is very high and the infrastructure sector account for almost 50 per cent of the total NPAs in the banking system. Just by reviving the stalled projects, the borrowing ability of companies within the system will improve and the banks will get encouraged to lend more,” said a former senior RBI official, who did not wish to be named. If stalled projects need to be revived to improve the ability of both banks and the executioner, the government’s announcement of road projects across the country seems to be the silver lining. Not only will it bring in government expenditure, it is also likely to rope in private investment going forward.