This ‘A’ grade from RBI for infrastructure boost will cheer Modi government

By: | Updated: August 31, 2017 6:19 PM

The Narendra Modi government is giving the Indian economy a big infrastructure boost - a step that has been lauded by the RBI in its latest annual report.

RBI report, nitin gadkari, modi governmentAwarding and construction of highway projects in the road sector reached an all-time high last year, says RBI.

Even as economists debate the “failure” of Modi government’s massive demonetisation drive, RBI’s praise for one sector seems to have been eclipsed amidst all the din. The Narendra Modi government is giving the Indian economy a big infrastructure boost – a step that has been lauded by the RBI in its latest annual report. In particular, the Nitin Gadkari-led Ministry of Road Transport and Highways has every reason to cheer. According to RBI, the “awarding and construction of highway projects in the road sector reached an all-time high even as daily additions to the roads constructed touched a peak of 22.6 km during 2016-17 from 16.6 km last year.” RBI is of the view that “resolution of stalled projects, development of roads under Bharat Mala project, steps taken to streamline land acquisition, inter alia, helped to speed up road construction.”

Giving a big thumbs up to the resilience shown by the infrastructure sectors, the central bank has stated that top priority has been given by the government with regards to clearances for various projects. “As the infrastructure sector is widely perceived to hold the key to revival of growth, top priority was accorded to addressing environmental clearances, land acquisition issues and other structural bottlenecks associated with project implementation, which led to a reduction in the number of stalled projects and cost overruns in central sector infrastructure projects during 2016-17,” RBI states.

Forecasting a brighter outlook for the infrastructure sector, RBI makes four noteworthy points:

  1. There was a decline in cost and time overruns in central sector infrastructure projects (Rs 1.5 billion and above).
  2. Awarding and construction of highway projects in the road sector reached an all-time high even as daily additions to the roads constructed touched a peak of 22.6 km during 2016-17 from 16.6 km last year.
  3. Stalled projects declined by 40% in terms of value and 37% in terms of number.
  4. Capacity addition in major ports was the highest ever in a single year and 12 major ports recorded higher growth in cargo traffic as well as efficiency gains measured in turnaround time (3.43 days in 2016- 17 as against 3.64 days in the previous year), and average output per ship berth day (14,576 tonnes in 2016-17 as against 13,748 tonnes in the previous year).

RBI highlights the several initiatives taken to ease bottlenecks in the infrastructure sector and believes that the sector will continue to play a critical rile in shaping growth prospects of the Indian economy. “Several initiatives – increased public infrastructure investment; innovative ways of infrastructure financing; the fast-track awarding and construction of national highway projects; effective streamlining of land acquisition issues; Regional Connectivity Scheme (RCS) to connect the unserved and underserved airports; the proposal to achieve 100% rural electrification by May 2018; providing infrastructure status to affordable housing; and a new Metro Rail Policy and Metro Rail Act – are in the pipeline which would provide an enabling environment for growth path in the years to come,” RBI says.

RBI report, nitin gadkari, modi governmentGraph source: RBI Annual Report 2016-2017

Parvesh Minocha, Chairman, Board of Growth & Development at Feedback Infra is of the view that the government has shown knack for “out-of-the-box” thinking. “Stalled projects have indeed reduced, thanks to out of box thinking & detailed solutions being offered by the respective ministries. The bold initiatives taken during the last 30 months are unprecedented. Each stalled project was analyzed and a solution was found. NHAI put some of its own money, lenders were persuaded to lend, subcontracts were arranged for financially unviable concessionaires, unviable projects were allowed to be surrendered etc,” Minocha tells FE Online. “Efficiency increase in ports, however small, is again a welcome reiteration of accountability being demanded by the top leadership,” he adds.

Agrees Abhaya Agarwal, Partner Infrastructure & PPP Leader at EY India, who adds that PM Modi’s intervention in key projects has helped. “There is little doubt that the government has streamlined things a lot in the past few years. A lot of steps have been taken to clear stalled projects, with the PM Narendra Modi himself reviewing progress of key ones. That’s what is making the difference. RBI’s data is proof that the steps and measures are working. The government should continue in that direction.,” Agarwal tells FE Online.

But, even as RBI notes that the number of stalled projects has reduced, it also points to the fact that new investment intentions contracted in 2016-2017. This is with respect to both government and private sectors. RBI adds that the cost of private projects remains elevated. So, what’s the way forward?

RBI report, nitin gadkari, modi governmentGraph source: RBI Annual Report 2016-2017

EY’s Abhaya Agarwal, Partner Infrastructure & PPP Leader at EY India says that many of the projects that showed progress fall under the EPC category (Engineering, procurement and construction). “They don’t suffer from much risk. A lot less movement has happened on the PPP front. The government should now shift focus to creating better structures for PPP projects. More capacity needs to be built on private and public side for PPPs. Recommendations of the Kelkar committee need to be implemented and there is urgent need for a dispute resolution mechanism to be put in place. Doing this would unlock major GDP growth potential through the infrastructure sector,” he advises.

Minocha of Feedback Infra concludes, “While the number of public-funded highway projects have gone up, private sector appetite remains rather limited. With M&A activity picking up, fresh investments by the private sector can revive in couple of years, provided lenders are also able to resolve their NPA related issues, at least partially.”

Infrastructure is one of the fundamental sectors that drives the GDP growth of the economy. With a huge multiplier effect, the infrastructure sector also holds enormous potential to create jobs. As experts point out, unlocking private investment would play an important role in unleashing the growth multiplier of the sector.

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