Tag Archives: Demonetisation

We are getting there

NITI Aayog has put forth a plan to turn India’s economy to reach a size of $7.5 trillion, (though targeting $10 trillion) or more than three times of what it is today, at $2 trillion. Implementation of GST, tax reform and ease of doing business (read the Cover Story) are all parts of the building blocks of this plan. And, they all seem to be moving on course so far. India is on the throes of a massive change. The change is not only limited to economy and industry but is also being instituted in social behaviour, and most importantly, in changing mindsets. Just look at what all is happening: Swachh Bharat, Digital India, Smart Cities, AMRUT, Affordable Housing, E-governance, E-Procurement, Make in India, Direct Benefit Transfer, Demonetisation, black money campaign, renewable energy thrust, UDAN, etc, and other social campaigns such as the Ujwala Yojna, Beti Bachao Beti Padhao and so on. This is a lot of work in so short a time and work is in progress.

The recently announced affordable housing scheme and Pradhan Mantri Awas Yojana or PMAY have seen the launch of over 350 projects to build about 2 lakh houses with a private sector commitment of investing Rs 38,000 crore. The cost of constructing these units will be in the range of Rs 15 lakh to Rs 30 lakh with an average construction cost of Rs 18 lakh per house.

Under PMAY-U, central assistance is provided to each beneficiary in the range of Rs 1 lakh to Rs 2.35 lakh. Of the 2 lakh houses, over 1 lakh will be constructed in Maharashtra, followed by 41,921 houses in the NCR; 28,465 in Gujarat; 7,037 in Karnataka; and 6,055 in Uttar Pradesh; among others. Cement prices have already reached pre-demonetisation levels on the back of demand coming from infrastructure and will firm further due to these housing projects.

GST is on track and is likely to cause another disruption for a quarter, but will soon bring great prosperity. Distressed assets of around $6.8 trillion sitting on books of the banks would also heave a sigh of relief as firms and funds like KKR, Lone Star, Kotak and Edelweiss are planning to mobilise their resurrection. It is estimated by experts that the capital required for the next four to five years to resolve distressed situations is about Rs 30,000 crore to Rs 40,000 crore, and it is already being provided for by NBFCs, PEs and international funds.

The PM completes three years on May 26 this month and a lot is on his plate. Fortunately, for us, his plans have accorded priority to infrastructure and while public spending is leading the way, the private sector is preparing to jump in the fray too. Recently, at a private charity function, I bumped into Sajjan Jindal, Chairman of JSW Group, and when I posed him a casual question on whether the private sector was ready to invest into the India story: “We are getting there,” he quipped.

Set for an infra-run

Data suggests that demonetisation has hit the pace of announcement of new investment proposals during the quarter-ended December 2016

The Union Budget has set the tone for 2017 by accelerating the growth agenda. The allocation for infrastructure at Rs 3.96 lakh crore, over Rs 3.49 lakh crore last year, will fuel the sector. Of the increase of Rs 47,000 crore, transport itself will consume Rs 24,000 crore.

The Railway Budget has been the largest-ever at Rs 1.31 lakh crore – an 8.26 per cent increase over the Rs 1.21 lakh crore allocated in 2016-17. Railway lines of 3,500 km will be commissioned in 2017-18 while at least 25 stations are expected to be awarded during 2017-18 for station redevelopment. Allocation for highways has been increased from Rs 57,976 crore in 2016-17 to Rs 64,900 crore in 2017-18. Around 2,000 km of coastal connectivity roads have been identified for construction and development.

The dark horse in the transport sector, the Pradhan Mantri Gram Sadak Yojana (PMGSY) has gathered pace. Last year, when I asked Minister Nitin Gadkari at a CII meet, why the PMGSY programme, which had tremendous potential, was not going anywhere – he responded that it did not fall under his ministry but that the government was working on an impetus for it.

The pace of construction of PMGSY roads has accelerated to reach 133 km per day in 2016-17, as against an average of 73 km during the period 2011-2014. And, the Budget has continued to provide Rs 19,000 crore in 2017-18 for this scheme. Together with the contribution of States, an amount of Rs 27,000 crore will be spent on PMGSY in 2017-18.

The other big bang boost has been for the housing sector. National Housing Bank will refinance individual housing loans of about Rs 20,000 crore in 2017-18. Affordable housing has been given the ´infrastructure´ status, which will enable these projects to avail benefits including interest subvention. Further, a target to complete 1 crore houses by 2019 has been set for the homeless and those living in kutcha houses.

Allocation for Pradhan Mantri Awas Yojana (PMAY) has been raised from Rs 20,000 crore in 2016-17 to Rs 29,000 crore in 2017-18. Owing to these reforms, there is a likelihood of an ample availability of affordable housing in the next three years.

Among other infrastructure projects, the Metro projects will see the introduction of a Metro Policy and higher allocation of Rs 18,000 crore, against Rs 10,000 crore in the previous year. AMRUT and the Smart Cities mission will continue to move forward with an allocation of Rs 9,000 crore, against Rs 7,296 crore, as 60 selected cities gear up to issue tenders for city development.

The Namami Gange project has been allocated an increase of Rs 100 crore from Rs 2,150 crore to Rs 2,250 crore. And, Sagarmala has received an enhanced allocation of Rs 150 crore from Rs 450 to 600 crore. The Swachh Bharat campaign is being vigorously run and the allocation has risen to Rs 16,000 crore. Armed with the demonetisation swell in the banks, the finance minister had some head room to hold back the temptation of hiking the service tax in view of the forthcoming Goods and Service Tax (GST), which was a big relief. Further, though the large corporate sector did not get the tax reduction, the FM reduced taxes by 5 per cent for the MSMEs, which have an annual turnover of Rs 50 crore or less, thereby benefitting nearly 64 lakh companies.

Issues that need further attention by the ministry include implementation of the projects. Even the irrigation projects, which found mention in his last year´s Budget speech where 23 of the 99 projects would require to be completed by March 2017, are likely to miss the deadline. As per CMIE, new investment proposals worth Rs 1.25 lakh crore were observed during the quarter ended December 2016. This is low compared to the average Rs 2.36 lakh crore worth of new investments seen per quarter in the preceding nine quarters of the Modi Government. Data suggests that demonetisation has hit the pace of announcement of new investment proposals during the quarter-ended December 2016. Two hundred and twenty seven new investment proposals worth Rs 81,800 crore were announced during this quarter till November 8, 2016. In comparison, only 177 investment proposals worth Rs 43,700 crore were made between November 9 and December 31, 2016.

As for stalled projects, though the current government was to invigorate the economy by debottlenecking and accelerating these, the data points to the contrary. CMIE capex figures show that year-end stalled project figures for 2016 are at their highest levels since December 1995. The total value of stalled projects has reached Rs 11.70 lakh crore in the December quarter, accounting for 12.11 per cent of the total projects under implementation. Among the prime reasons for which the projects are stalled, ´obstacles in environment clearances´ contribute to 20 per cent while ´lack of promoter interest´ seems to be a growing trend over ´land acquisition issues´.

However, the absolute value of new project announcements shows that 2016 ranks second best among the last five years. This means that but for demonetisation, the economy was set for a run. Even if we examine the performance for the road sector, the contracts awarded and the length of roads constructed in the highway sector has been way behind claims of the road ministry.

The status of construction awarded and completed during September 2016 vis-a-vis targets set forth for 2016-17 are as follows:
However, the stage is set for a revival of the tempo. The Dispute Resolution Bill, release of funds for cases stuck in arbitration, reduction in interest rates, resolution of some severely stuck road projects, consolidation of some road assets and the infusion of some foreign capital, which has come to the rescue for some developers – all has signaled the dawn of the good times by Diwali 2016. And now, with the demonetisation impact easing up, the delayed dawn of good times is on the horizon again.

Can the Budget bring the mojo back?

Demonetisation has dealt a body blow to the economy whether we like it or not. It has delayed the uptick in the economy by a minimum of several quarters. The informal economy is in tatters and the business outlook is glum.

But it is done and nothing can be done about it. Building a cashless economy is a long-term goal but given the fillip provided owing to the diktat, digital payments and the infrastructure required for their enablement are set to leapfrog.

The argument that the informal economy can become part of the formal economy by such legal leverage is flawed. On the contrary, when the fruits of development ripen under the formal economy, they beckon with sweet dividends. But this, too, is more likely to happen provided the formal economy offers infrastructure to enable ´ease of doing business´. Currently, the formal economy is low down in the rankings globally and has barely moved up a notch despite fervent campaigns trying to create a favourable pitch for the same.

The reason it is not being reflected is because the constituents, like the legal system for enforcing contracts, resolving insolvency, obtaining construction permits, are not tuned in to this level of efficiency. They need overhauling. The Insolvency and Bankruptcy Code 2016 has just got notified and has been activated in the last quarter. But why are we ranked 172nd in paying taxes? If we want more and more tax payers, the process should be made payer-friendly and easy to comprehend and observe. Disillusionment with the formal economy will always encourage new entrants to find easier, unlawful ways of avoiding taxes. Starting a business, too, is a difficult proposition. Then, how can we create and harness young talent, which is the true demographic dividend? Thus, only when the states make it easy to do business will the informal economy take lessons in joining the formal economy.

For instance, dealing with construction permits is a nightmare. State governments need to bring down the number of permits and arrive at a one-window solution. The Model Building Bylaws introduced earlier this year provide a framework for online approvals for building and construction projects in urban areas, including simplified environmental and other clearances within 30 days, and encourage self-declaration. Similarly, various states need to adopt the Real-Estate Regulation Act to make the shift. Here, the act has stiffened penalties for the developers, but has kept no onus of delay in permissions on the authorities, leaving the developer exposed to the mercy of the authorities.

Meanwhile, roads need to step up the acceleration. Up to November, the total length of road contracts awarded has been 5,688 km and the length of roads constructed 4,021 km, which is 12 km per day.

A huge development in the Northeast under NHIDCL is underway, covering a length of 8,007 km to be executed at about Rs 100,000 crore. And, in urban infrastructure, from January to December 2016, a total investment of Rs 272,380 crore has been approved for the smart city plans of 60 cities, AMRUT, PMAY (Urban), new metro projects, Swachh Bharat Mission (Urban), and redevelopment of seven Central Government residential colonies in New Delhi.

Public spending will need to further be stepped up to create employment opportunities for the informal sector. The Budget is expected to reduce taxes, offer incentives for using digital payments and announce major initiatives in public spending. The growth momentum had just about begun to accelerate when November 8 struck. Now, that mojo seems elusive. Can the Budget bring it back?

PS: The Union Budget is scheduled on 1st February, a big change in practice followed ever since we became independent. Construction World too is making a big change. Watch out for the February issue!