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.

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.

Let´s Get Parliamentary

When, a couple of years ago, CW raised the question of whether India could be considered a construction equipment hub, many scoffed at the idea as our delivery on manufacturing was not considered competitive. Over the years, the logic morphed from addressing the needs of neighbouring countries to developing models specific to the needs of Indian terrain and then exporting such models to other countries requiring them. At this year´s EXCON, which just concluded in Bengaluru, the fact that India has established itself as a sourcing hub was very clear. This is an essential pillar of the ´Make in India´ campaign within the construction segment. With a current size of $2.8 billion, the Indian construction equipment industry is expected to grow to $5 billion by 2019-20. Even the after-sales spares market is about $800 million.

The roads sector has clearly been prime among the islands of solace, closely followed by contract mining, irrigation and power. Minister for Roads Nitin Gadkari has proven to be a dependable ally for the construction sector owing to his dogged determination in resolving issues afflicting progress.

He, along with his team, has initiated several measures to counter reticence, paving the way for resurgence in orders for the sector. However, as Robert Frost said, ¨The woods are lovely, dark and deep. But I have promises to keep, and miles to go before I sleep.¨ The finances are showing no indication of improvement.

Aggregate sales, operating profit and net profit of over 300 companies from core sectors fell in the September 2015 quarter, making it the third consecutive quarter of a dismal performance. Half the operating profit was spent on servicing debt indicating pressured balance sheets. The performance of core sectors (including capital goods, cement, construction, metals, mining, and power) is indicating that the decline has not been arrested conclusively and a turnaround in the economy may take longer than expected. The performance of core sector companies in the September quarter has seen net sales fall year-on-year by 5.5 per cent while net profit has dropped by 7.1 per cent. Operating profit skidded 12.6 per cent, which was steeper than the drop in sales, reflecting pressure on margins. If a comprehensive view of the entire sample of over 1,800 companies across sectors excluding banking, finance, oil and gas is taken, we find a modest improvement in net sales by 1.5 per cent and net profit by 1.6 per cent while operating profit slipped by 2.3 per cent. Companies are weighed down under a $640-billion debt burden, which is more than 30 per cent of India´s GDP. The strain lies in the stressed debt of over $50 billion in the banks and a rise in bond defaults. Gammon India is the sixth company where bankers have decided to take majority control by converting debt into equity. Previously, lenders to Electrosteel Steels Ltd, Lanco Teesta Hydro Power Pvt Ltd, VISA Steel Ltd, Jyoti Structures Ltd and Monnet Ispat and Energy Ltd have invoked conversion of debt into equity giving them majority control. Gammon´s T&D and EPC businesses have already been scheduled to change hands by incorporating them into separate SPVs.

Government spending will need to continue to accelerate the momentum in the economy. The passing of GST would also greatly help. Politically, an atmosphere of cooperation is needed; this appears to be emerging as the ruling party seems to have decided to work with the opposition than have a standoff. Enough un-parliamentary communication across the country – Parliament at work will augur well for closing the year on a positive note.


One of the highlights of Barrack Obama’s visit to the recently concluded Indian visit was the stress that Obama laid upon recognising the focus that PM Modi laid on enhancing the ‘ease of doing business’ quotient in India. PM Modi has not only made this his mission but has also made an international commitment in improving a benchmark in bureaucracy by a huge margin. India currently ranks 142nd out of 189 countries in ‘ease of doing business’. India further ranks 184th in ‘dealing with construction permits’. Only five countries are worse than India in the red tape associated with getting construction permits. This also means that Indian construction companies are dealing with the world’s toughest market in obtaining construction permits. India further ranks 186th in ‘enforcing construction contracts’. With such a poor business environment, it is no wonder that our developers have experienced a harrowing time and are now laden with crushing debt while they struggle with permissions or are awaiting arbitration awards. The Jaiprakash Gaur Group has been on an asset fire sale with a view to paring the debt. Its debt it to the tune of Rs 72,599 crore and its debt to equity ratio stands at 5.16. GMR Infra, meanwhile, has loans worth Rs 45,041 crore with a debt-to-equity ratio of 5.87. Gammon India and Hindustan Construction Company have higher ratios of 19.26 and 15.06, respectively. It is not infrastructure developers alone that need to ease their financial pressure, banks too are saddled with a massive Rs 8.5 lakh crore in stressed assets, which forms about 14 percent of their total loan book, making it difficult for them to take any initiative in providing any relief.
There are only two ways out: Either FDI comes pouring in or the economy takes off. Both will take time. The PM has put the greatest efforts in first visiting all countries from which we can hope for a high FDI inflow and then holding a huge Vibrant Gujarat show and getting the biggest leaders including the US President to India. Having brought the spotlight onto India and pushing India’s readiness for business he has set the stage for FDI to flow into India. However kickstarting the economy would need public spending or a great incentive for entrepreneurs to pull out all stops for investing into their enterprises despite the current challenging business environment. For e.g. the PM’s ‘Make in India’ policy is likely to offer a huge bag of goodies to encourage manufacture of electronics. India imports 65% of the current demand for electronic products, most of it from China. So dire is the situation that, the country’s electronics import bill may well surpass its oil import expenses by 2020.While the demand for electronics hardware in India is projected to increase to $400 billion by 2020, the estimated domestic production could rise to $104 billion only, creating a gap of $296 billion, which has to be met through imports. India imported $31 billion worth of electronic items in 2013-14 of which $10.9 billion was accounted for by cell phones alone.
The economy is showing signs of a consistent improvement as evidenced from the HSBC PM indices. The rail freight by volume has improved by 5% over previous year. On January 15, the RBI cut the policy rate by 25 bps to 7.75%, the first cut since May 2013, before the monetary policy meeting scheduled on February 3. As per a report, the medium and heavy commercial vehicle segment, which signals improvement in the economy, is scheduled to see a volume growth of 13-17 per cent next fiscal and accelerate the CV sector, while LCVs will see only a marginal growth of up to 3 per cent.
The forthcoming budget is likely to be PM Modi’s big opportunity in propelling the economy forward on the back of concrete evidence of a revival. The vision of India is changing and every Indian needs to reaffirm his or her commitment to supporting the rebuilding a #NewAgeIndia.

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