Tag Archives: GDP

All eyes north!

Finance Minister Arun Jaitley aggregated infrastructure under a single umbrella and drew attention to its importance during his Budget address stating, ‘Our country needs massive investments estimated to be in excess of Rs 50 lakh crore in infrastructure to increase growth of GDP, connect and integrate the nation with a network of roads, airports, railways, ports and inland waterways, and provide good quality services to our people.’

The budgetary expenditure on infrastructure for 2018-19 is being enhanced by Rs 1 lakh crore to Rs 5.97 lakh crore against an estimated expenditure of Rs 4.94 lakh crore in 2017-18.

The Prime Minister’s PRAGATI initiative has been established to fast-track projects worth Rs 9.46 lakh crore. The Budget has provided for plans to complete over 9,000 km of National Highways in 2017-18 – this will mean 25 km per day of construction which is more conservative than what Nitin Gadkari told us in an interview last month.

The Railways’ capex has been pegged at Rs 148,528 crore; 4,000 km of the rail network has been targetted for electrification, 600 stations are being developed, and elevators are being provided to all stations with over 25,000 footfalls.

As for smart cities, 99 cities have been selected with an outlay of Rs 2.04 lakh crore, of which projects worth Rs 2,350 crore have been completed and projects worth Rs 20,852 crore are under progress. State-level plans of Rs 77,640 crore for 500 cities have been approved. Water supply contracts for 494 projects worth Rs 19,428 crore and sewerage work contracts for 272 projects costing Rs 12,429 crore have been awarded.

Expectedly, rural India, too, drew funds in gigantic proportions with a collective amount of Rs 14.34 lakh crore. The Namami Gange programme is on track with 187 projects sanctioned for river surface cleaning, rural sanitation and other interventions at Rs 16,713 crore; of this, 47 projects have been completed and the rest are at various stages of execution. Significantly, all 4,465 villages on the banks of the river have been declared open defecation-free.

The seriousness of envisioning an inclusive society seems apparent in the Budget, which attempts to put ‘its money where its mouth is’. The government has identified 115 aspirational districts for improvement in social services like health, education, nutrition, skill upgrade, financial inclusion and infrastructure, like irrigation, rural electrification, potable drinking water and access to toilets, at an accelerated pace and in a time-bound manner. Thus, infrastructure continues to remain the driver of the growth that India needs to sustain its demographic dividend.

However, some concerns remained unaddressed.
1. Private capital has remained elusive as the government has made efforts to revive the mojo in the economy. Besides reducing the tax rate for companies with turnover less than Rs 250 crore from 30 per cent to 25 per cent, there is no impetus provided. Section 32 AC and (1A) provided a deduction of 15 per cent of cost of new machinery investment made by a company from its profits subject to tax, where the the investment was more than Rs 25 crore. This facility has not been extended beyond assessment year commencing April 1, 2018. Even though this may not have elicited response in the past since 2015 when section 32AC was introduced, the time is ripe for more companies to use this benefit as the economy has begun responding positively now.

2. Also, costs are rising: Raw material like sand, which was earlier available at Rs 3,500 per truckload in 2014 cost Rs 35,000 per truckload in 2017; while a cement bag, which cost Rs 270, is being sold at Rs 330 per bag upwards. Labour costs in road construction have increased almost 50 per cent in the past three years.

A 20-22 per cent hike in iron ore prices announced by state-run miner NMDC in early January has pressed the cost accelerator further. Steel prices have also gone up from the earlier Rs 34,000 per tonne to Rs 47,000 per tonne. In cost index data issued last June, the index for labour cost was at 185, compared to 110.2 in April 2014! (Labour accounts for around 8-10 per cent of road construction cost.)

Further, the Budget has eased tax rates for companies with a turnover under Rs 250 crore to 25 per cent (from 30 per cent earlier). But given the cost pressure in a scenario of slow uptake on demand, there should be more emphasis on quick disbursement of funds under public projects. Public-sector units must step up their expansion plans. The disinvestment target of Rs 80,000 crore set for this year will ensure that more public-sector units come in for dilution, improving efficiency in the process.

In light of the above, the Finance Minister has kept up the momentum from last year-s narrative and continued the push for infrastructure. The results are bound to begin to emerge as projects begin to be executed. Standards of accountability have been stepped up – assurance, indeed, that the green shoots we see emerging will propel us northward.

Stage Set for Revival?

As the GDP figures of 5.7 per cent appeared in the press, the murmurs began. GST was already making lives difficult for the traders and businessmen, and the ghosts of demonetisation had not completely vanished yet. The evidence of the economy sputtering emboldened the critics and turned the loyalists into skeptics. The government too moved at an amazing speed having realised that the wolves were beginning to bay for their blood. Establishment of the PM Economic Council was announced, and then, within a fortnight, a massive infusion of reforms was launched.

The Rs 6.92 trillion road network of 83,677 km, on the back of the GST reform, can be a potent economic multiplier in times to come. The road construction push includes the Bharatmala Pariyojana with an investment of Rs 5.35 trillion to construct 34,800 km. In addition, Rs 1.57 trillion will be spent on the construction of 48,877 km by NHAI and MoRTH. That said, NHAI has been made the nodal body to ensure timely execution. Financing is innovatively being raised by monetising road assets worth Rs 34,000 crore from 82 operating highways under the TOT model.

Further, the bank recapitalisation plan of Rs 2.11 trillion over the next two years, in a bid to clean banks’ books and revive investment, is a timely move. With this, the projects that will be put to bid can be funded by banks giving a boost to credit disbursal, which has fallen abysmally low.

Besides roads, the next biggest business opportunity has become the Metro-Rail project execution. Over Rs 2 trillion of business is up for grabs over the next few years with Mumbai Metropolitan Region (MMR) itself contributing Rs 1.5 trillion. Metro projects with a total length of 370 km are operational in eight cities. Further, metro projects with a total length of 537 km are in progress in 13 cities. New cities acquiring metro services include Hyderabad (71 km), Nagpur (38 km), Ahmedabad (36 km), Pune (31.25 km) and Lucknow (23 km). Last month, the government introduced a New Metro Policy that focuses on giving clarity on the development of projects, collaborations, participation, standardising norms, financing, and creating a procurement mechanism to implement projects effectively.

Although the timing of the announcements may be scheduled to ensure that the economic agenda reaches a crescendo just before the elections, the forthcoming calendar year 2018 can be extremely rewarding with most contracts getting to fruition during this period.

After a long hiatus, the stage seems set for a revival and if the land acquisition hurdle can be overcome, we are headed for a frenetic pace ahead.

Is the economic miracle a mirage

In the December quarter, the construction sector took a hit. The average net revenue of 156 firms in the mid and large-sized category, excluding L&T, fell by 9 per cent YoY. Road developers took a hit on account of toll collections, which were suspended for three weeks. Orders across infrastructure sector slid several notches. The road sector itself, as reported earlier in this column, has not been able to achieve its targets.

NHAI and the Ministry of Road Transport and Highways had awarded projects of about 3,200 km and 3,100 km, respectively, till mid-February. NHAI had watered down its forecast for FY17 from 10,000 km to 6,700 km. In nine months of FY17, the NHAI awards have dwindled by 8 per cent YoY. While the new hybrid annuity model (HAM) had many takers owing to PPP, lenders are reluctant given the overhang of past record liabilities. As per reports, only 15 of the 35 projects awarded under HAM have achieved financial closure and some have even been cancelled. Even if we factor in an achievement confidence index of 40 per cent on projected estimates, the aspirational scale is so huge that anything over 40 per cent would add a welcome spur to economic growth. As per Nitin Gadkari, Minister of MoRTH & Shipping, a national perspective plan under the Sagarmala project has been prepared and projects worth Rs 8 lakh crore have been identified. This can accelerate momentum in trade as with a 7,500-km coastline, our country transports only 6 per cent of its cargo through waterways compared to around 55 per cent on roadways and 35 per cent by the railways. As a result, logistic costs as a percentage of GDP is as high as 19 per cent compared to 12.5 per cent in China.

On the brighter side, the process to expedite government spending is in the works. With four more states falling with the ruling party, the agenda of development will step up activity locally. Uttar Pradesh, Uttarakhand, Manipur and Goa will toe the Centre’s diktat of development. The state budgets and their policies reflect the urgency to transform. This is evident from policies being introduced in creating a better business environment in Gujarat, Haryana, Maharashtra, Andhra Pradesh and Telangana. The most notable among the reforms are related to land and its use. Unlocking land for commercial and industrial use will lead to increase in economic activity.

If bad bank loans can now find a solution, we may return to an easy money era that would accelerate return on capital and bring back private investors. Only then will we be set for an economic miracle.

Revival Mantra: Go Rural

The ´leap´ of the year turned out to be more of a ´hop, skip and jump´. Cautiousness prevailed as FM Arun Jaitley reined in the fiscal deficit to 3.5 per cent of GDP and stood his ground. The month began with the ´Make in India´ extravaganza which helped the state administration revisit the MOUs signed by industrialists with various BJP-ruled states. This was followed by the Rail Budget, the Economic Survey and the Union Budget. The mood of the nation is showing the strain. The corporate sector is in severe pain. Profitability of business has shrunk by Rs 20,000 crore in the public sector while it has shrunk by over Rs 30,000 crore in the private sector (as per a survey of 3,000 companies that excluded banks, finance and broking houses). The proportion of corporate debt owed by stressed companies, defined as those whose earnings are insufficient to cover their interest obligations, has increased to 41 per cent in December 2015, compared to 35 per cent in December 2014.

Yet, the GDP is estimated to grow by 7-7.75 per cent on the back of the three demand drivers: the infusion of the 7th Pay Commission payout (estimated Rs 1.02 lakh crore), the OROP payout (Rs 10,000 crore) and the public spending envisaged under the Union Budget. This is further backed by a higher probability of a normal monsoon although the benefit of the oil price is not likely to be as much as was available last year.

Public spending is clearly the engine of revival. In the current scenario with the private sector badly bruised, capital is shy and only government-funded, large-scale infra projects can revive the economic cycle. The FM has proposed an outlay of Rs 2,21,728 crore for infrastructure. Of this, the Rail Budget proposes to spend Rs 1,21,000 crore. The budget to electrify 2,000 km next year has witnessed an increase by 50 per cent. It has also targeted commissioning 2,500 km of broad gauge lines at 7 km/ day, almost 30 per cent higher than last year. LIC has agreed to invest Rs. 1.5 lakh crore to fund railway projects. In the roads sector, which has green-lit the infra revival, the Budget has accorded a higher allocation of Rs 97,000 crore and including an accelerated Pradhan Mantri Gram SadakYojana (PMGSY) with an outlay of Rs 27,000 crore. As per the roads minister (see cover story on page 51), Maharashtra itself will see a spending of Rs 68,000 crore in the coming nine months. Rural development is the mantra of this year´s budget as Rs 87,765 crore has been provided for irrigation, electrification and welfare. Coal production has been the highest ever at 550 mt while imports by India are sliding. Last fiscal, India spent Rs 1 lakh crore in importing coal. We have already saved Rs 22,000 crore this fiscal on this account. Coal India has been directed to double production from the present level to 1,000 mt by 2019-20. Most of this increase would happen via the surface mining segment and, to achieve this, the volume of overburden to be removed would shoot up from 1,000 million cu m to 2,500 million cu m. This will result in greater utilisation of existing deployed equipment while placing huge demands on the need to invest in additional mining equipment. Smart cities, too, would see RFPs of Rs 4,000 crore by the end of this calendar year.

The change in the complexion of state budgets like those of Bihar, Uttar Pradesh, Madhya Pradesh and Gujarat, among others, are great proof that federal empowerment is working and will be the true opportunity in the years ahead. All states are laying great emphasis on infrastructure investment, education, power and youth employment. The 14th Finance Commission´s largesse to states will see an amount of Rs 2,87,000 crore, which going by the composition of the spending will see a greater thrust on infrastructure and social welfare. All considered, the Budget supports the creation of an ecosystem for the revival of rural demand for overall economic revival.

Build infra, ban construction

As the smog settles, we will be able to see beyond the smokescreen. And the picture does not look too different yet, despite major efforts in keeping our spirits soaring by our PM who is on overdrive in screening favourable optics, one after another. Once the winter chill wanes, financial thrills may take over because the political (as well as the polluting particulate) dust will not settle easily. The Budget will be more about taxation as exemptions will end and the government will step up its easy money source: Service tax. The statistical jugglery that has confounded economists as to how the scales of our GDP changed (the base year was changed to 2011-12 from 2004-05 in January by the Central Statistics Office) has killed the pulse of the GDP number. The other numbers do not indicate an uptick as yet.

In a way, the courts have come to the rescue of the automobile industry after punishing it for its contribution to pollution. A notification to come into effect in January would seek to retire roughly 3.4 million commercial vehicles (CVs) older than 15 years from the Indian roads. Vehicular pollution contributes to 20-25 per cent of the pollution in the city. CVs contribute to nearly 74 per cent of the air pollution caused by all vehicles in the city. This will be a win-win for both the residents of the cities and the CV sector. The other silver lining emerging is the advent of commercial mining. The coal ministry has identified about six coal blocks for allotment to public sector units (PSUs) for commercial mining. Mining activity coupled with the phase-out of old CVs will be a big bonanza for the CV industry. FDI in construction-development projects fell by over 38 per cent during the year ending March 2015 to $758 million compared to $1,226 million in FY14.

FDI flow has remained weak this year with just $34 million of investments in the April-June quarter of this fiscal. The poor pick-up in the inflow is owing to the slow approval process. Despite the ´ease of doing business´ initiative, even the CM of Maharashtra is struggling to break the mafia impasse that stonewalls the approval process and runs an extortion racket under his nose. Even the Environment Ministry approvals have not improved and remain contentious. In a way, this is good, as cities barely have any capacity to carry the weight of high-rise towers. Ideally, construction in cities with a population over 5 million should be banned until and unless the municipal corporation can provide proof of the capacity per capita in terms of ability of the city to handle traffic, sewerage, and provide water and power.

These cut-off capacities should be published on their websites permanently and should be sacrosanct in implementation, or else all – Pune, Ahmedabad, Hyderabad, Chennai, Bengaluru, Kolkata and Mumbai – will follow Delhi in becoming dangerous cities. (Already, 13 of the world´s 20 most polluted cities are in India.) Delhi is bathing in dust as construction debris and dust are contributing to 45 per cent of the pollution in the city. So while the CM of Delhi is at his wits´ end over the odd-even car scheme, the real culprit goes unchecked. A city administration must develop city infra projects to raise the capacities of services before giving a nod to growth. As metro projects progress in a dozen Indian cities, as roads projects accelerate to reach 30 km per day, and as real estate construction gathers momentum to build even higher towers dotting the skyline, we need to set a framework so that the growth of a city is not at the cost of the life of its citizens.

After setting new benchmarks in infrastructure and construction publishing and then inorganically assuming leadership in engineering too, ASAPP is on the move again. In 2016, it aims to fortify its leadership in all three ICE sectors, namely infrastructure, construction & engineering. Its latest digital product DezignGenie.com will be relaunched early 2016. Its digital abilities are being scaled up and its brands will soar new heights. Its events too will accelerate into a new stratosphere. ASAPP has donned a new name in keeping with its mission to be an ´information brands´ company.

Toasting the fighters

We are not out of the woods yet. Eight core sectors – coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity – slowed to 1.1 per cent in July after a growth of 3 per cent in June, mainly on account of low expansion in coal output and contraction in steel, crude oil and natural gas production, all hinting at weakness in industrial recovery. AM Naik, chairman of engineering and construction conglomerate L&T, expressed his anguish publicly, and maintained that any recovery was at least a year away.

While Naik may be right, the roads sector has definitely rebounded, to about 13 km a day from just 3 km when the NDA took over, as per the ministry´s website. The government plans to sanction 20,000 km of projects in the coming three years and the target for the year to March 2016 has been set at 8,000 km. Seven top road builders have raised Rs 10,700 crore by way of bonds, paving the way for finance to the debt-stressed sector. Bonds come at a cost of 11 per cent and can be serviced, provided tolls commence within the timeline. Recent easing of policies, including allowing companies to exit projects and getting environmental clearances in time, have helped improve the climate.

Raising finance overseas has been the route many companies like ITNL have followed. The global scenario, though, is not too smooth with Caterpillar planning to cut up to 10,000 jobs by 2018 and JCB cutting 400 jobs in the UK. The Chinese residential property market, which contributes tremendously to the GDP, continues to remain under pressure. In the Middle East, too, the pressure on oil prices has rubbed off on public-sector spending, with the award of new construction projects having slowed down.

In the light of this global upheaval, India remains an attractive option. During Prime Minister Modi´s visit to the US, American CEOs implored him to step up the pace of reforms. Once he´s back, he will jump into the Bihar elections, but will have to sharpen his ability on seeing through bills of reform. For instance, the plan to build 50 non-frill regional airports has been revived. The logic to accelerate connection of the hinterland is unquestionable. However, roads take their own time and larger investment; a quicker way would be to deploy air taxis on economically run airports. Creation of these ´air corridors´ can accelerate economic growth.

Similarly Union Minister for Roads, Highways and Shipping Nitin Gadkari has been a strong proponent of the use of inland waterways and a bill is in the works. There is a proposal to offer 850 ports along major rivers to transport coal to the private sector. This will create new opportunities in logistics and is likely to bring in Rs 4,000 crore of private investments apart from saving sizeable freight costs. The smart cities mission, in which nearly two dozen countries are showing interest, also has great potential to revive the urban construction scenario. However, all this will require good footwork on the floor of Parliament.

Meanwhile, a flock of nimble-footed construction companies are emerging, who are moving stealthily and strengthening their order-books. Many of them are small and new. These and others who have retained their conservative approach are in the reckoning to grab the business as it is likely to unfold. Our 13th Construction World Annual Awards will celebrate these winners on October 16, in Mumbai. So while the third quarter gets underway along with the hopes of a better festive season, we will raise a toast to the fighters who managed to score on a rough turf.

Proof of performance

The problem with solutions is that solutions need to be measured for effectiveness of resolution. When solutions are taken as gospel answers, problems do not disappear. They remain and lurk in the shadows. Green ratings are similar solutions that seem like gospel answers to the energy guzzle by high rises.´What can´t be measured can´t be managed´-´this favourite boardroom credo needs an extension:´…and once measured needs to be reviewed´. While a lot of time is spent thinking up solutions and phrasing them into laws and acts, the least time is spent on their implementation. Execution requires the administration of reviews, penalties, awards and incentives. Transparency in execution can help us solve the problem completely but this is where most resolutions falter and fail. On green ratings, a periodical review with a transparent process could invigorate the mission of energy efficiency in buildings.

There is an informal assessment of the performance of the Modi Government already in motion. Many from the anti-Modi camp have already begun raising their voices about the lack of´feel-good´ translating into better bottom lines. Although Modi supporters are holding up with the´it-requires-time-to-resuscitate-a-sick-economy´ line, they too are beginning to look for answers. Despite the bonanza on the oil front (where the oil import bill has shrunk as the price per barrel has fallen from $ 110 to around $ 60 and as India imports over 70 per cent of its oil consumption, India´s annual CAD could improve by up to $ 50 billion from a $ 50 fall), our Government is staring at a potential revenue shortfall of over Rs 1 lakh crore this fiscal year and some expenditure reduction may be undertaken to stick to the fiscal deficit target of 4.1 per cent of GDP.

In the roads sector that sets the construction sector on an accelerated drive, the contracts awarded are struggling to reach the 5,500-km target. The UPA government had awarded just 3,169 km in 2013-14 against 2,300-km-odd in 2012-13. In fact, the average time overrun had increased from about 20 months in 2008-09 to about 50 months in 2013-14. Yet, construction per year ranged in the region of 14 km per day from 2009 to 2013. However, the lag in awards in the past two to three years has cast a long shadow on a pickup in activity. Hence the importance of expediting awards to reflect construction of at least 20 km per day as against Road Minister Nitin Gadkari´s target of 30 km per day. Despite low awards, projects are seeing better clearance timelines. Of the 16 projects awarded in 2013-14, work has already begun on 12, or 75 per cent, so far, an improvement from the previous two years. This, and the savings on land and environment clearances that account for up to Rs 200 crore per project, can help better ROI.

Although the Union Budget 2015-16 is scheduled to be a historic one given the macroeconomic fundamentals, I believe it will involve more financial jugglery than report an economic recovery. It may be high on vision and aspiration but low on results of any radical transformation. There is no denying the clarity & honesty of intention as the government has launched all its promises under ordinances. But business needs visible and tangible proof of an economic recovery apart from the efforts being made to improve efficiency of administrative processes. Further, given the precarious finances, the Government needs to demonstrate a credible plan to fund the various schemes announced. Any demonstrative proof could enliven the order pipelines. Here´s wishing all of you a constructive new year!

Year Target km per yr Actual km
constructed per yr
Actual km
constructed per day
2009-10 5,830 5,145 14.10
2010-11 5,534 4,439 12.16
2011-12 5,824 5,013 13.73
2012-13 6,092 5,726 15.69
Five Year Plans No. of kms built during the
plan period
Total kms of national
highways
Eighth Plan (1992-1997) 609 34298
Eighth Plan (1992-1997) 23814 58112
Tenth Plan (2002-2007) 908 66590
Eleventh Plan (2007-2012) 10228 76818