Govt must not miss important link between automobile, infrastructure sectors

Updated: October 3, 2019 7:11:05 AM

India has achieved fair amount of growth in the infrastructure segment, typically, in ensuring connectivity via airways, waterways and roads.

In the early part of the decade we were talking about trillion-dollar infrastructure investment, the dream, now, is to achieve a trillion economy.

By Sharad Kumar & Sunil Sharma

Infrastructure, As IT creates capacities, generates employment and increases efficiencies, was the most talked about and searched term a couple of years ago. In the early part of the decade we were talking about $1 trillion-dollar infrastructure investment, the dream, now, is to achieve a $5 trillion economy. And, the government is investing heavily on infrastructure to support India’s long-term growth. India is far ahead than many emerging economies in terms of providing qualitative transportation related infrastructure.

India has achieved fair amount of growth in the infrastructure segment, typically, in ensuring connectivity via airways, waterways and roads. Although, regional connectivity scheme UDAN and Sagarmala initiative are yet to achieve potential, road network is getting tremendous impetus.

Under the ambitious Bharatmala Pariyojana the government plans to develop about 35,000 km in Phase-I at an estimated cost of Rs 5,35,000 crore to provide seamless connectivity to interior and backward areas and borders of the country.

In the Union Budget 2019-20, the government allocated Rs 1.12 trillion ($15.48 billion) expressing its intention to maintain the momentum in road expansion projects. Highway construction has increased to 10,800 km in FY19 from 4,260 km in FY14. As per the latest estimates there are 225 projects, with an aggregate length of about 9,613 km, which have been appraised and approved under Phase-I of the project. Moreover, various projects put together are expected to provide 14 crore man-days in employment. The substantial numbers speak about the linkages generated by the road sector. As per the toll information system, 512 toll plazas are operating in the country. Moreover, there are 2,363 road projects in the pipeline with a cost of Rs 8.62 lakh crore.

The highway construction in India has reported 20.45% CAGR from FY14-19 taking the NH length to 1,32,499 km as on March 2019. However, there are some legacy projects operating under old model, which are facing difficulties on account of debt servicing. Traffic estimates are an important part of the puzzle, and incorrect estimations may result in stressed assets. Some of the well-known Infrastructure companies, today, are under stress and are facing rating downgrades. In the one year period ending July 31, 2019, the upgrade to downgrade ratio for road constructions sector deteriorated by 22 bps to 0.58x from 0.80x .

At a time when the economy needs infrastructure push in greenfield projects, the stress in these segments may hamper growth prospects and dent profitability of lenders. It is, therefore, important to analyse the reasons for this decline and the impact of the changes on the economic skyline of the country.

While the road length is witnessing an increase, the traffic forecast of the highway projects may go haywire on account of multiple factors such as Increase in official maximum load carrying capacity of heavy vehicles, including trucks by 20-25% (increased in July’18). The gross vehicle weight of a two-axle truck (two wheels in the front axle and four wheels in the rear) has been increased to 18.5 tonne from the existing 16.2 tonnes, increasing the load carrying capacity by just over 20%. For a five-axle truck, the vehicle weight has been increased from 37 tonne to 43.5 tonne, increasing the load carrying capacity by more than 25%. Statistically, commercial vehicle traffic would also see a decline denting the toll revenue.

Though the decision to increase axle load was taken with a view to increase the carrying capacity of goods transport vehicles and bring down logistics cost, the immediate impact on vehicle sales and longer term affect on traffic assessment may not have been given consideration.

Road sector traffic assessment also has not quantified and factored the likely dent by the future projects such as Sagarmala, which aims to modernise India’s ports. The Dedicated Freight Corridor (DFC) network of railway lines would also cause shifting of transport preferences based on cost and convenience. It is pertinent to mention that, road sector exposure, from the banking system, reported a 14.6% growth in June-19, increasing to Rs 1,861 bn as on June-19 from Rs 1,624 bn a year ago. The overall bank credit during this period grew by 11.1%.

The growth of infrastructure needs a push, but on the other hand, one needs to remember that growth of one sector may stunt the growth of another critical sector. This changing logistics model may give rise to problem with the related entities. Economy should not miss the important link between the automobile and the infrastructure sector. There is a need to take a holistic view for the future of Indian transport sector factoring all the modes (rail, road, ports, and air) and not in isolation.

The author is senior management professionals, SBI. Views are personal

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