2018: A Watershed Year?

‘Disruption’ was an oft-used word in 2017. Sometimes it was used when describing a phenomenon that turned an existing business model on its head, as Uber and Airbnb did. But more often than not, it was used when wishful thinking was allowed over logic, or when no clear solution was visible.

In essence, disruption represents a desire to change the status quo. Jio has challenged the status quo, but then it has deep pockets. Meanwhile, HAM tried to be a game-changer but did not get the desired results. The smart cities mission took on urban rejuvenation through inspiration – but it has achieved limited success.

That said, land pooling by Andhra Pradesh proved to be an intelligent solution. And, the Insolvency and Bankruptcy Code has been a game-changer. It is addressing the need to revive assets that have potential for productivity but need some respite. Assets changing hands will ensure that they do not lie idle and rot. Putting them to use enhances the GDP.

In the construction sector, too, consolidation is the name of the game. Stressed owners are selling prime assets and seeking a new lease of life. New buyers are seeking revenue earning assets at good value. This allows a more liquid market in trading revenue-yielding assets such that the investor has an exit route and can free up capital in engaging with new opportunities.

Our cover story sets the tone for the year 2018 as Union Minister Nitin Gadkari spells out his plans for Bharatmala and Sagarmala with timelines and investments. Gadkari’s commitment to work and penchant for numbers and details are legendary. After meeting our editorial team at 7 am, he continued the discussion through his personal grooming process and then set out for the airport! He has a challenge ahead of him as he revs up to accelerate the road construction per day rate.

Indeed, the year ahead is likely to be a watershed one for the construction industry. Here’s why:

  • The GST effect has stabilised and demand is limping back.
  • The demonetisation wounds have healed.
  • Ease of doing business has helped ease regulatory hurdles.
  • The Insolvency & Bankruptcy Code has helped revived several projects.
  • Credit disbursement has picked up and private-sector investment is likely to revive.
  • Uttar Pradesh, Haryana and Gujarat are likely to expedite their projects.
  • There will be ample provision for big-ticket infrastructure projects as next year’s Budget is likely to be completely populist.
  • Maximum contracts will be awarded in FY2018-19 so that they are secured before the election code kicks in by the time of the next Budget.
  • In other news, SM@RT URBANATION opens on March 22-23, 2018, in Hyderabad. Over 25 city officials will descend to seek knowledge on the latest technological smart solutions for cities at the two-day summit and expo, including an evening of awards.

To know more, check out www.SmartUrbanation.com.
And don’t forget to keep your eyes on CONSTRUCTION WORLD on the web and print – we’ll keep you up-to-date on every opportunity so you can stay ahead!

Don’t stymie equipment & technology

The recent inauguration of the 9.15-km Dhola-Sadiya Bridge, India’s longest bridge above water, by Prime Minister Modi coincided with the completion of three years of his government in office. Apart from underscoring the government’s emphasis on infrastructure, it also reaffirmed its resolve in improving connectivity to the Northeastern region. Built at Rs 1,000 crore under PPP with Navayuga Engineering over rivers Bramhaputra and Lohit, the bridge cuts travel time by four hours.

In fact, the Nitin Gadkari ministry has awarded 16,800 km of highway contracts and constructed around 8,500 km for the year ended March, taking the count up to 23 km per day. The 135-km Eastern Peripheral Expressway, being constructed to decongest Delhi, is scheduled for completion in the next few months. Similarly, other expressways to take off include Delhi-Meerut, Mumbai-Vadodara, Dwarka Expressway, Bengaluru-Chennai and Delhi-Jaipur. With HAM not being popular yet, EPC is the easier way to accelerate road development. The 43-km, 12-lane Dedicated Freight Corridor costing Rs 3,000 crore from JNPT (Navi Mumbai) to Panvel, being built to ease container traffic is also under construction. Further, the UDAN scheme envisages 45 new airports and 70 regional routes, and caps ticket fares at Rs 2,500 for one-hour flights. Six new ports are being developed, and automobile and leather clusters have been planned alongside. Indeed, infrastructure bottlenecks are being addressed like never before and the pace is surely picking up.

However, the recent rate slabs announced under GST are likely to undermine infrastructure plans as construction equipment has been put under the same category as luxury cars! The rate applicable is 28 per cent; given the fact that 70 per cent of buyers of construction equipment are small entrepreneurs, small rental companies and hiring small setups, their capacity to buy will be affected and may deter the pace of execution. A pace of 40 km per day from the current 23 km would require extensive mechanisation and the government must consider a slab that encourages adoption. Categorising it with luxury cars is unfair – if the government thinks this equipment is purchased by companies that will pass on the tax impact, it is ill-advised. The Budget has allocated a spend of Rs 3.96 lakh crore on infrastructure in 2017-18 and this GST rate will result in inflating the cost, apart from affecting rightful demand. Even the ‘Make in India’ initiative that is helping the industry gain its status as an export hub will take a beating with the GST dampener. Given the importance of building infrastructure at a reasonable cost and easing the pressure of high financial costs hurting the infrastructure industry, a rate of 12 per cent for GST is being proposed.

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.

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.

Step up contracts!

The industrial policy statement of July 24, 1991, set the notes on which the elephant learnt to dance. Manmohan Singh´s reform Budget scrapped industrial licensing and the requirement to get clearance from the Monopolies and Restrictive Trade Practices Commission for large companies to expand or start something new. This paved the way for foreign investment and foreign technology licensing. Opportunities opened for the private sector in many areas hitherto reserved for the public sector. India had to pledge 67 tonne of gold to Europe to get $600 million to tide over a dire import payments crisis.

Now, 25 years later, in 2016, India has become the world´s fastest-growing major economy. So while we have lost several years to ´policy paralysis´, global headwinds have once again, put the country in pole position. This is yet another opportunity to regain its pace by breaking shackles and leveraging the demographic dividend to move into superpower status.

As stated in this column earlier, projects commissioned reached a record high of Rs 4.6 lakh crore in FY2016 according to CMIE. This is the highest-ever commissioning of projects in a year and represents a 12 per cent increase over Rs 4 lakh crore in FY2015.The stock of projects on hand is also huge – total outstanding projects are worth Rs 159 lakh crore. Of these, Rs 92 lakh crore worth of projects are estimated to be under implementation. However, as per CMIE, a low addition to the stock of investment projects has contributed to a fall in the total outstanding projects from Rs 171 trillion at the beginning of the quarter to Rs 170 trillion at the end of the quarter of June 2016. This is the largest fall in outstanding investments during a quarter since June 2002. It is also the first fall since June 2014. The government needs to accelerate the conversion of project announcements to project tenders. The numbers of ´tenders issued´ and ´contracts awarded´ need to grow rapidly to create the momentum in the economy.

Union Minister of Roads Nitin Gadkari, who has already built up some momentum with acceleration in the roads sector, is also seeking FDI from the US and other Asian countries to explore business opportunities in India, including Bharatmala projects, projects under the TOT model, tunnel projects and intelligent transport systems (ITS). The National Investment and Infrastructure Fund (NIIF), with a mandate of Rs 40,000 crore, has identified the first eight projects it plans to invest in. These include the Konkan Railways project, a power transmission project in the north region, and a few road projects.

Still, India´s infrastructure spending is sub-par for the economic growth we aspire to. This is evident from the state of our airports, which have exhausted their capacities. The worst-hit airports are those in Mumbai, Delhi, Bengaluru, Hyderabad, Goa, Lucknow and Calicut. The Indian civil aviation market is growing at a rapid pace and now ranks ninth in the world. It is estimated that by 2020, India will be the third largest civil aviation market. To cater to this sector, which is growing at a pace of over 20 per cent, a much larger supporting aviation infrastructure is required than the proposed plan to invest $5 billion can address.

Although the monsoon has done its part to provide adequate rainfall this season, the roads in Mumbai have caved under yet again. It is shameful that six contractors – KR Construction, J Kumar, RPS Infraprojects, RK Madhani, Mahavir Infraprojects and Relcon Infraprojects – have been named in an FIR filed by the state government as perpetrators of a scam. This brings shame to the contracting community as the public paints all contractors with the same brush. Contracting associations must have stringent rules that uphold the dignity of the profession and should debar those that bring disgrace.

If India has to build infrastructure worth $1 trillion, it will spend $200 billion on construction.

Let us earn our keep with some dignity.

Will February be transformational?

While the global outlook is disconcerting, it has brought in good tidings in the form of nearly $60 billion of savings owing to sub $30 oil prices. However, our stock markets indicate that the near-term outlook for India is yet to see a revival. The Sensex is at the same level as when our current PM assumed office. The manufacturing indices have slipped below levels that would have indicated a positive trend. The economy is on the mend but recovery is delayed.

According to reports on real estate trends, sales volumes dropped and new launches have plunged. Amid large-scale delivery defaults, slow sales and huge unsold inventory, residential real estate remained in the slow lane, like last year. Luxury real estate was badly hit, though the affordable housing segment did gain some ground with sales of residential units from Rs 50 lakh to Rs 1 crore, seeing maximum traction. However, the infusion of private equity into e-commerce led the boost of office space absorption to 3.5 million sq ft, the second highest after 2011, with rise in rents across cities, especially in certain segments in Tier-I cities. The year 2016 is expected to see a continuation of the increase in demand driven by IT and ITES.

Change is in the offing. The consumer movement has seen success in beating the dogmatic attitude of the super-rich-and-powerful club. Around a third of over 25 lakh apartments launched between 2008 and 2014 were delayed by at least a year, according to property research firm Liases Foras. Of the total space of 3.2 billion sq ft under construction across 25 cities, about 34 per cent of the space valued at Rs 165,064 crore (1.32 per cent of GDP) was delayed by over a year. But consumers are being empowered. Their ire recently saw the courts order the promoters of the Unitech Group to be held behind bars. The Competition Commission of India (CCI) has even filed first information reports with the police where fraud was involved. Although it has been provided a foreign equity bonanza, waiver of entry and exit barriers, raising of approval limit for the Foreign Investment Promotion Board limit from Rs 3,000 crore to Rs 5,000 crore, doing away with area restrictions of 20,000 sq m and capitalisation of $5 million, besides allowing investment repatriation before project completion with three-year lock-in, governance is what this sector clearly lacks. The real estate bill will provide some correction.

On the infrastructure front, Nitin Gadkari, Minister of Roads & Highways, said the pace of road building, which is at 18 km a day at present, will reach 30 km a day by March and projects worth Rs 1.5 lakh crore would start by March. While he did make tall claims early on, one has seen there is some semblance of truth in his claims. He has taken on the 19 stuck highway projects and is finding solutions. The projects have been grounded owing to various problems, including cost escalation, non-viability and rows between bankers and concessionaires. The cost of these stalled projects, which are threatening to pile up the non-performing assets of banks, is at least Rs 30,000 crore, with some of them having cost escalation of up to 30 per cent.

The Budget throws open yet another opportunity for the government to undertake transformational reforms. This does require a switch in policy, which can trigger a landslide win. The black money policy has been a dud and even the gold bond does not seem to have the muscle to restrain imports that are unnecessarily draining our forex reserves.

Activity will pick up pace in February, beginning with the smart cities kickoff. The US Smart Cities Infrastructure Mission will be at the 3rd SM@RT CITIES SUMMIT on February 10-11, followed by several delegations converging for the ´Make in India Week´ in Mumbai. It is likely that we get some large commitments from international companies to source manufacturing from India. Finally, it will be over to the FM who will reveal what the Budget holds for the year ahead – I only hope I get to hear the word ´transformational´ more than ´deficit´ during the Budget sessions on TV.

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.

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.

Bure din gaye

On the completion of his first year in office, Prime Minister Narendra Modi reached out to all citizens and presented his case. The media extensively assessed the Government´s performance too. Generally, the verdict was that ´not enough has been done´ – yet everyone recognised that the fruits for such labour take a while to ripen. One of my favourites: ´Would you have preferred the UPA government to continue for one more year instead of the Modi Government?´

This one is a no-brainer. Yet, we seem to have forgotten how bad the situation had turned with an inactive government saddling its finances with burdens of ill-planned social schemes with an eye on the elections while keeping the economy at a standstill. As CW reported in its cover stories in March with Union Minister Nitin Gadkari, April with Maharashtra Chief Minister Devendra Fadnavis, and ´Report Card´ last month, the Government´s momentum is strong but the lag in process is holding back impact on the ground. Corporate results for the year ended March 2015 conclusively prove that the corporate sector is reeling under an almost negative demand and virtually nil margins with a debt overhang. The consumer sector, which was buoyant, is now not likely to throw up good numbers too, going ahead. The fall in inflation will see improvement in demand, albeit gradually, over the next six months.

The roads sector would be the first to get into higher gear with loads of EPC projects being awarded in the second quarter this fiscal. Fortunately, this sector has been the quickest to fall in line and the most visible statement on infrastructure. Its track record too shows that the pace of construction has been over 12 km per day for the past seven years as given below:

I have seen many speakers at conferences compare regimes and quote incorrect figures on road construction per day, trying to ridicule the previous regime´s quest to build 20 km per day. As we can see in the table, in 2012-13 we were doing close to 16 km per day. If the NDA Government awards 10,000 km this year as intended and follows this up with a similar figure for 2016-17, we could move very close to 30 km per day as stated by Union Minister Nitin Gadkari.

Railways, too, is likely to see activity with 94,000 km of doubling and third line on choked routes receiving sanctions to decongest the rail network. To overcome the cycle of chronic underinvestment, the Railways is approaching the markets to finance revenue generating projects. Further, among urban infrastructure, metro projects are on course while projects under smart cities will take some more time to benefit from the allocation and provision of Rs 200,000 crore.

Energy is upbeat, which is good news for a country in growth mode. There is a sharp increase of 8.4 per cent in electricity generation, the highest in the past 20 years. The country has added 22,566 mw of generation capacity in the past year with some contribution from enhanced coal production, which is up by 12 per cent. The Supreme Court has breathed new life into the renewable sector with a landmark judgement enforcing renewable energy purchase obligations. This will help boost renewable power generation manifold.

Given all the developments, it is likely that an interest rate cut could come sooner than later, unless there are global pressures. The year 2015-16 will be the prep year for the boom year that is to come.

Radical solution to land acquisition bill impasse


India has a total land area of 32,87,590 sq km, which is 2.4 per cent of the world’s surface area, making it the seventh largest country in the world. Forty-six per cent of the land is under agriculture and 50 per cent is inhospitable; 2 per cent of the land is urban and 1 per cent under industry. The Government has the largest land bank under its supervision and ownership. At present, Coal India has a land bank of around 7 lakh acre whereas the Railways has around 47,336 hectare, making them the owners of the largest land bank available at this point of time, followed by major ports at 2.64 lakh acre and PSUs at 2.5 lakh acre.

Putting land to work

Land needs to be made productive to add to national wealth. Historically, too, land has been offered for development of industry. The Bombay Spinning and Weaving Company was the first cotton mill to be set up in Tardeo, Mumbai, in 1856. A boom in the textile industry followed, with 10 cotton mills set up in Mumbai by 1865, and then a total of 136 mills being set up by 1900. The textile industry was offered added government incentives in the form of long-term leases (some of 999 years), as mills stimulated economic growth and employment. These mills were owned by former traders like the Tatas, Petits, Wadias, Currimbhoys, Thakerseys, Sassoons, Khataus, Goculdas and Greaves. Most of the mill workers came from areas around Mumbai; the Kolis were particularly represented. The mill owners housed their workers in chawls built in the areas of Tardeo, Byculla, Mazgaon, Reay Road, Lalbaug, Parel, Naigaum, Sewri, Worli and Prabhadevi. These areas gradually came to be known collectively as Girangaon (literally ‘the village of mills’).

Land was put to use once it was handed over on lease. The investors sought to make gains though the productive use of land. It did not matter that the land was not in their ownership as long as they had the right to develop revenues on it for a fixed period of time for rent. Although the rent was a paltry sum, it was reflective of the demands of the times. Even now countries like Ethiopia and Sudan offer land on very low rent to Indian entrepreneurs to help develop their economies. The cost of missed opportunity owing to loss of productivity of land can be mindboggling, especially in a country like India that is starved of infrastructure on all fronts.

Delays and derailment

To illustrate the sheer cost of delay in putting a project to work, let alone the cost of leaving land idle, here are some details: In December 2014, 127 out of 251 projects were delayed with respect to original schedule. The delay is in the range of one to 96 months with respect of projects relating to the railway, power, steel, road and petroleum sectors. Out of the 127 delayed projects, 32 projects have an overall delay in the range of one to 12 months, 25 projects in the range of 13 to 24 months, 37 projects n the range of 25 to 60 months, and 33 projects of 61 months and above.

The total original estimated cost of these 251 projects was Rs 788,629.01 crore and anticipated completion cost is likely to be Rs 970,972.78 crore, which reflects an overall cost overrun of Rs 1,82,343.77 crore (23.10 per cent of original cost). The expenditure incurred on these projects till December 2014 is Rs 411,545.86 crore, which is 42.40 per cent of the anticipated cost of the projects. Out of the 251 projects, three projects are ahead of schedule as per the original timeline, while 52 projects are on schedule and 127 projects are delayed. Brief reasons for time overruns as reported by various project implementing agencies are delay in land acquisition, forest clearance, delay in supply of equipment, fund constraints, geological surprises, equipment erection, geo-mining condition, shortage of labour, inadequate mobilisation by the contractor, contractual issue, ROU/ROW problems and law-and-order situation.

The railway sector has witnessed maximum project delays owing to land acquisition. Out of the 83 projects that have been reported, 21 projects are delayed. In the road sector, 23 out of 37 projects are delayed. Last year, delays in land acquisition and statutory approvals cost road projects heavily. Against the target of 6,300 km of road construction works under various schemes of the Ministry of Road Transport and Highways during the current year, only 3,038 km was constructed till January 31, 2015.

Non-issue for private sector

Private players like Nikhil Gandhi, GMR, GVK, Hiranandani, Lodha, Raheja etc have all successfully amassed land banks for their projects without raising a hue and cry. Even industrialists like Sajjan Jindal, Anil Agarwal, Anand Mahindra have all successfully bought large land parcels for their projects with no cause for delay. So land acquisition is only hurting big-ticket public projects where vested interests are either interested in derailing the success of the government or those who want to leverage this opportunity for their own selfish agenda.

Act now

The Land Acquisition Act has been constantly running into rough political weather every now and then. And if the Government caves into the demands of the opposition, many infrastructure projects (including smart cities, rural electrification programmes and industrial corridors, to list a few) will be stuck in limbo. However, the solution lies in turning the idea on its head. Land for such projects need not be bought but taken on a 99-year lease. Apart from the rent that would accrue to the landowner, some token compensation should be made such that the landowner can buy a piece of land elsewhere for agriculture activity and would also be given a share in the super-profits on the project. This solution can ensure that the capex for such projects is contained and that the landowner continues to get rent for subsistence, does not end up destroying his wealth and capital and can continue to be an agriculturist with another piece of land. ( Recently CIDCO, a state-run undertaking in Maharashtra, acquired 671 hectares of land owned by 1,200 villagers in ten villages of Navi Mumbai for the airport project. In lieu of the surrendered land, the Maharashtra government, in a unique compensation model, offered the owners developed land measuring 22.5 per cent of the acquired land, including 15.75 per cent of buildable plots, and 6.75 per cent development amenities, in Pushpak Nagar township which CIDCO is developing near the proposed airport ).

Renting land for infra projects is a viable and practical solution. It will help save capital by not requiring a large amount of capital to be locked up and saving time in purchase and the entire process of land acquisition, thereby fast-tracking projects ( As per recent estimates the capex for land alone for road projects is Rs 1,85,000 crore). Some industries already follow the model of leasing land instead of acquiring it. Oil and gas extraction usually follows the land-lease model. And renewable energy projects such as wind power, solar farms and bio-fuel projects often lease the land from owners instead of trying to acquire it, which could make the projects prohibitively expensive.

Leasing land can ease the pressure on demands for capital expenditure that does not add any wealth to the nation. True wealth to the nation is generated only when the land is put to productive use. Land on rent will result in accelerating the cycle of investment in projects by at least three to five years for each project and consequently accelerate the return on investment. This will also defuse the social upheaval caused by these injections of wealth in the lower economic strata of society while enhancing lives owing to a consistent flow of rental income. This debate on land acquisition is as unproductive as the land sitting idle with no investments to enable its productivity.