If large swathes of private investment in infra have turned NPA, govt must provide a solution; critical for raising investment level.
Even as most are hoping there will be a revival in both investment sentiment and GDP growth now that the Narendra Modi government has won such a decisive mandate, how serious the task ahead is will be made clear on Friday when the GDP numbers for FY19 will be put out. Most expect Q4 GVA to be less than 6%; it was last seen at this level in the June 2017 quarter and, if GVA is at this level, this will make it the fourth successive quarter of a fall in growth since the 7.9% growth in March 2018. Nor does an early revival look imminent though it is true that activity levels do pick up after an election – according to HSBC Securities Chief Economist for India, about 70% of the 40-odd indicators of growth it tracks – like automobile sales and cement/steel production – have weakened over the last three months.
Indeed, while there seems to be small pickup in investment levels – gross fixed capital formation, as a proportion of GDP, rose from 28.9% in Q3FY18 to 29.5% in Q3F19, and data for Q4 will come on Friday, FDI levels have fallen for the first time since FY13; equity flows of FDI in FY19 were $44.4bn as compared to $44.9bn in FY18. Reviving GDP growth, it is obvious, depends on how quickly investment levels come back.
Given the twin balance sheet crisis, and the fact that several bargain-basement deals are available at the NCLT for businesses that have money, any serious investment revival will take a few years, but that too will require some concerted effort. The latest results for Power Finance Corporation (PFC) provide a good indication of where the problem lies. While only 9% of PFC’s Rs 314,667 crore loan book is stressed, over 55% of its Rs 53,612 crore loans to the private sector are stressed.
So even if the new government is to spell out a new investment plan – for the entire infrastructure sector, not just power – and say, for instance, that it plans to invest X trillion dollars, and half of this is to come from the private sector, do you think the private sector will rush to invest if a large part of its current investments are stressed? Indeed, while the RBI’s latest financial stability report is yet to be released, last year’s report points to the fact that slightly over a fifth of all infrastructure loans are stressed; going by the PFC report, chances are the bulk of this relates to private sector investment.
So, one of the first tasks of the government has to be to find a solution to this problem of stressed investments of the private sector; and to then ensure the solution is actually implemented. This is the area where there is the biggest gap in the government’s promise and the reality.
In the roads sector, for instance, it was at an FE Best Banks event in Mumbai some years ago that then finance minister Arun Jaitley announced that the government had a new plan to ensure private sector firms got their money that was stuck with various government departments. Since most of these firms were engaged in arbitration with the government, Jaitley said that if the awards went in their favour, 75% of the money would be released immediately. While several construction firms heaved a sigh of relief since this would ease their cash flows – and even allow them to repay debt on other projects they were working on – it turned out the celebrations were premature. For one, firms had to give a bank guarantee to get even this money due to them despite the fact that the arbitral award had gone in their favour. In some other cases, the money was released to banks to square the debt on the existing projects while the companies needed the money to be able to carry on their operations.
In the case of the power sector, for instance, while 52,000MW of assets are deeply stressed, government-owned state electricity boards (SEBs) owe power generators Rs 38,000 crore; that is a 60% increase since a year ago. Apart from this, the SEBs are supposed to pay another Rs 17,000 crore that are classified as what is called ‘regulatory dues’. So if, say, the government raises the royalty on coal, this should normally be paid for by the SEBs, but since it wasn’t, the matter went to the regulator which has ruled the SEBs need to pay this. If the government cannot even ensure its own arms pay their dues of over Rs 55,000 crore already, investors are right to feel aggrieved when PSU banks try to take over their assets for non-payment of interest and other dues.
It gets worse. With the Uday scheme not really resulting in the massive SEB turnaround that the first Modi government had envisaged – after the huge initial financial savings that resulted from banks being asked to slash their interest rates – a large part of the investment made has been laid to waste. There are a large number of plants that don’t have gas, for instance, and around 20,000 MW have no power purchase agreements (PPAs) since the SEBs are too cash-strapped to want to sign long-term agreements. Then power minister RK Singh had talked of making 24×7 supply of power mandatory – so, SEBs would have to sign PPAs – but this didn’t take off; without PPAs, these investments are pretty much dead in the water. And while, during the UPA period, an automatic mechanism was put in place to ensure PSUs got their dues from SEBs – if they didn’t pay, RBI deducted the money from the state’s account – no such mechanism was put in place for private investors.
It is such issues that plague private sector investments that Modi 2.0 needs to resolve if it wishes to win back the trust of investors; not only does this require the right policy, it needs to be ensured that the intent doesn’t get lost in the fine print or due to the fact that the policy is never implemented. Investors care about the safety of their investment, not whether India has moved up five or 10 points on some Doing Business ranking.