Is the Indian economy on the cusp of a revival? There is a sense of momentum if we look at the number of projects revived over the past three financial years. According to data from the Centre for Monitoring Indian Economy (CMIE), a total of 360 projects were revived between 2014/15 and 2016/17 compared to the 248 projects that came back on track during the previous three financial years - from 2011/12 to 2013/14. Also, in the fourth quarter of 2016/17, 26 investment projects were resuscitated, taking the total count to 109 compared to 135 and 116 projects in 2015/16 and 2014/15, respectively.
Overall, the numbers look good, especially if one keeps in mind that the UPA government managed to revive only 417 projects during its full-blown second term between 2009/10 and 2013/14.
While projects that were earlier stalled or shelved often get revived, stalling may happen at any stage - soon after the project announcement but before any actual work is done or even after some considerable progress has been made. Worse still, some of the projects are abandoned altogether.
A look at the key reasons for stalling reveals another disturbing trend. According to the CMIE report, 80 per cent of the investments were stalled during the December 2016 quarter due to lack of government clearances - both environmental and non-environmental. In contrast, unfavourable market conditions and lack of promoter interest accounted for only about 11 per cent of the projects stalled during the quarter.
In spite of these constraints, the stock of projects that got stalled, shelved or abandoned came down by more than 50 per cent within a span of two years - from 637 in 2014/15 to 273 in 2016/17. "The reason for fewer projects getting stalled is primarily due to lower capex and fewer projects being planned," explains Mahesh Vyas, Managing Director and Chief Executive of CMIE.
"In the past year or so, there have been small spikes in projects getting shelved. By and large, during the Modi government's tenure, the value of the shelved projects has remained under `10,000 crore in a quarter. However, there were two exceptions in the 10 quarters since July-September 2014," he adds. The value of the projects shelved in the March 2017 quarter was `13,177.1 crore.
As stalled projects need to get going to revive investment and growth, several factors have proved critical to the debottlenecking efforts. Says Vyas, "There was serious concern among entrepreneurs of the UPA-II being an indecisive government. But after the Narendra Modi-led National Democratic Alliance (NDA) came to power, the perception shifted strongly to this government being decisive, which led the projects back in play."
What has worked primarily is a steady supply of basic raw materials as most of the projects were struggling earlier due to acute crisis. Tracking things historically will explain it further. For instance, coal prices (nominal) shot up significantly in 2011 and Australian coal traded at around $121.5 per metric tonne during the period. Also, there was scarcity of gas and iron-ore shortage as the Supreme Court banned/restricted mining operations in some of the biggest production zones.
"Over time, raw material prices stabilised," notes Vyas. Australian coal prices (nominal) cooled off to $65.8 per metric tonne in 2016 - it was still higher than the 2015 price of $57.5 per metric tonne - while the apex court lifted the ban on iron-ore mining in 2014.
A deep dive into the projects revived continues to reveal interesting facts. For instance, out of the 360 projects revived over the past three years, the majority are government-backed; the private sector has been muted. In the current financial year, this ratio stands at 60:40.
That is not all. A look at the sectoral breakdown will tell you that the services sector (other than financial services), including hospitality, transport, communication and retail trading, has a big chunk of the revived projects pie, followed by manufacturing. However, nearly half the projects under 'services' revived in 2016/17 belong to the transport sector.
"Most of the revived projects belong to the road sector," says Sunil Kumar Sinha, Principal Economist at India Ratings.
Interestingly, majority of the road projects are pending due to land acquisition issues and green clearances. As per a Lok Sabha reply by Pon Radhakrishnan, Minister of State for Road Transport & Highways and Shipping, the National Highways Authority of India (NHAI) has 105 pending projects worth `89,404.4 crore.
"The NHAI analysed the delayed projects, tried to diagnose the problems and came up with possible solutions in some cases," notes Sinha.
Developers, who had more than one project stuck with the NHAI, were so leveraged that they did not have the money to pay their dues. "In some cases, the NHAI allowed them to exit their projects much before the sceduled period to monetise the same and use those funds to pump money into their projects that were languishing," adds Sinha. The government has also adopted an engineering, procurement and construction (EPC) model where it bears the entire financial burden and takes care of issues such as clearances and land acquisition.
The bigger picture seems fraught with red flags although green shoots are firming up. "Currently, the economic environment is not conducive enough as domestic demand is not picking up in a big way. Moreover, the government's fiscal pace regarding infrastructure investments is also limited," says Vyas.
At an aggregate level, capacity utilisation is also not picking up. "Capacity utilisation has remained in the range of 70-75 per cent since 2012," says Sinha of India Ratings.
Meanwhile, in sync with the low rate of stalling, especially in the private sector, new investments announced plunged around 16 per cent in 2016/17 compared to 3,307 projects in the previous year. As per CMIE, 2,550 projects, with a total investment of `8,02,237 crore, were announced during the year - the third lowest in a single year since 2005/06.
Given the current trend of revival, the economy is certainly sending some positive signals. But it is too early to hope for a total turnaround. We will have to wait for domestic demand to pick up first. ~