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!

White knight wanted after black money battle

There are very few events etched in the memories of an entire generation. For the Americans, it was the 9/11 attack and the Lehman brothers collapse. For Indians, it was the Kargil skirmish, the 26/11 terror attack and, now, demonetisation.
This bold and moral move by the PM has had its share of execution challenges, the consequences of which are grave. At just about the time when the green shoots, as reported in this column, began to stabilise, the land beneath them was scorched. Real estate, consumer goods, jewellery and the informal business segment of the country have been victims of a frontal attack. Businesses have reported a loss of 30-40 per cent in revenues. The momentum of money has ground to a halt. Banks have run out of money to dispense. Fortunately, the government is course-correcting rapidly. It is ready to launch an extension of the ´Voluntary Disclosure Income Scheme´, where a tax of 50 per cent would give unaccounted money a holy dip with another 25 per cent of the money being subject to a zero interest bearing bond for four years, thus allowing the offender to circulate 25 per cent of his declaration in an official form. This would effectively cost the declarer 57 per cent. The challenge is that there are several ´start-up gangs´ that have reinvented the art of conversion at a lower cost of 25 per cent. So although the money remains tainted, legal tender is received in place of the obsolete notes. This would dampen the response to such conversion.

Unless we are able to increase the number of tax-paying individuals from the current 30 million to at least 45 million, the effectiveness of the demonetisation exercise may remain in question. The country, however, has improved its image by portraying a robust financial system that has been able to withstand such staggering logistics.

That said, real estate has suffered a big blow. According to a report by PropEquity, housing prices in 42 major cities across India could drop by up to 30 per cent over six to twelve months, wiping out over Rs 8 lakh crore worth of market value of residential properties sold and unsold by developers since 2008. The bigger casualty is employment, which is likely to suffer a setback.

This may be one of the stiffest challenges that the Modi Government will face. Our CW issue with Minister for Skill Development and Entrepreneurship Rajiv Pratap Rudy has already highlighted the fact that improvement in skills for 35 million workers was a prerequisite for desired growth. However, demonetisation has severely hit the informal sector, which will need to undertake some costs to come into the formal economy. Targeting benefits to reach the right segments would require precision and agility on the part of the government.

On the brighter side, interest rates are set to come down. Income tax rates, too, will ease up
The cycle of low rents and high interest is likely to turn with interest rates softening up and rents hardening. Public spending will continue to drive economic sentiment. Private-sector spending will defer all plans but overseas investments with a stronger dollar may rise if the Fed rates remain easy. But there is a fear that the Federal Reserve may increase the rates and just as $3.18 billion fled the country in November alone (the steepest selling in equity and bonds by foreign institutions in the past three years), such a trigger may depress our outlook.
As the government brings in more money to be accounted for in a formalised manner by curbing black money, it needs to set benchmarks for the use of this money, especially the money managed and run by it. Only 15 of the 74 loss-making PSUs have been asked to shut shop so far. With more and more digital mechanisms in place in the government, it needs to relook at its hiring policies and shed some weight by moving experienced bureaucrats into management positions of SPVs, which are JVs under the PPP mode.

The fight against black money will also need to provide a balm for those wounded as part of collateral damage, to keep up the spirit of the population that is supporting this moral battle.
We need a ´white´ knight!

Win some, lose some

The balance between social good and infrastructural development is a delicate one. A citizen has a constitutional right to be provided basic amenities but the nation has limited resources, further constrained by a poor administrative system of collection of revenues, making it necessary to depend upon private investment. Private investment has to serve the profit motive, which in turn conflicts with the ´right to be served´ of the citizen.

The recent judgement by Allahabad High Court has split this wound wide open. It denied Noida Toll Bridge Company, which has been awarded the contract of collecting toll from passengers for 30 years, the right to continue collecting toll as it claimed that the concessionaire has earned reasonable profits. Even the Supreme Court has not entertained the plea of the defendant. It has noted that ´the Concessionaire, according to their own financial statements, has recovered Rs 810.18 crore from toll income from the date of commencement of the project till March 31, 2014, and after deduction of operation and maintenance expenses and corporate income tax, the surplus was Rs 578.80 crore (computed before interest, depreciation, and lease rental received by the Concessionaire)´.

Many issues need to be addressed here. Are contracts that provide service to citizens but allow the company providing the service to make profits, void? If power companies, airport operators and port operators can make 16 per cent return or more, why not toll concessionaires? Will this not have a retrograde effect as was the case with retrospective tax, which drove foreign investors away? How will the government, then, fund such projects?

Only funds with a long payout date that are ultra conservative will invest in these projects, provided the government provides sovereign guarantees. Noida Toll Bridge Company is a public-listed entity and its business plan comprised the returns from this project alone. By withdrawing the company´s right to earn tolls, the courts have made the government renege on its commitment and kill shareholder value, apart from scaring away potential investors in such projects. The risk quotient has spiked and shareholder value in such projects has eroded. Moreover, this will set a trend as local leaders with political ambitions will join protests to derail user charges and win the favour of voters.

Meanwhile, GMR has won an arbitration order of $270 million against the Maldives government, which had arbitrarily cancelled GMR´s contract to run its airport. The compensation covers the debt and equity invested in the project along with a return of 17 per cent, as well as termination payments and legal costs.

It´s true what they say – you win some and you lose some! On October 21, 2016, though, we had a room full of winners. This issue brings to life the magical evening that recognised India´s Fastest Growing Construction Companies and Top Challengers. The jury is playing a more responsible role than ever before as it serves as a moral guardian for the integrity of the awards process through its acumen and judgement. Raghav Chandra, Chairman, National Highway Authority of India, hit the nail on the head when he said, ´Construction is an intimate affair.´ His sentiment was echoed by Dilip Suryavanshi, along with Devendra Jain of Dilip Buildcon – while accepting the award for the fastest growing construction company in the large category, he said, ´When my competitor sleeps, I am at work, and the top management needs to be intricately involved in the management of men, materials and machines to deliver a sterling performance.´

We are happy to have been able to bring this evening to your homes by webcasting it live; in case you missed it, you can watch it at Meanwhile, enjoy some of the highlights in this issue. Here´s wishing all our readers a happy and prosperous new samvat year!

Modi 2.0

Never before have the rains mattered so much for the corporate sector as this year -despite all the efforts of a hard working government that has just completed two years. There is no doubt that in these two years, wastage has been targeted and reduced (Rs 36,000 crore saved in leakages). Natural resources like coal and gas have been protected and leveraged in a transparent and efficient manner (the savings through reduction in imports in coal last year saved the country Rs 24,000 crore in foreign exchange). The rightful recipients have been provided the subsidies meant for them. Corruption has been checked. Faith in the administration has begun to be restored.

Considering that we have budgeted Rs 205,000 crore for food and fertiliser schemes for FY17, plus pending bills of over Rs 100,000 crore, the Direct Benefit Transfer schemes will save crores of resources. Just knowing that our revenues are being administered restores a sense of assurance.

While there are plenty of welfare schemes that are being monitored both by the PM´s PRAGATI mechanism (the ICT-based, multi-modal platform for Pro-Active Governance and Timely Implementation) and the opposition, the infrastructure projects initiated by the Centre and states too are under observation. Road projects have taken the lead with 90 per cent of 380 delayed projects worth Rs 3.50 lakh crore taking off. Port projects worth Rs 70,000 crore have been planned and inland water projects are likely to see some traction with the Rs 4,000-crore Haldia waterway project getting the green signal. Railways have stepped up the budget by 100 per cent to Rs 93,975 crore and decision making has been accelerated while political exploitation of this ministry has ended. The Power Ministry has put the sale of LED on fire (sale of LED has increased from 6 lakh annually to 6 lakh per day). The UDAY scheme is aimed at restoring financial viability to the sector (the discom sector is sitting on a loss of Rs 3.20 crore) and several states have joined the scheme. The Urban Development Ministry has brought in the Real-Estate Regulation Act, the model building bylaws, the Smart Cities mission and the AMRUT mission initiating urban renewal reform. The missions are on track and are likely to see tenders being issued by the third quarter of the current financial year.

The Bankruptcy Code has been passed and ´Ease of Doing Business´ has gained momentum with states going on overdrive in terms of reducing the number of formalities hindering quicker registration processes.

The PM´s overseas travel has helped the renewed India brand get recognised at a time when we are the bright spot in economic growth among all countries and a record foreign direct investment (FDI) of $55.4 billion was received during financial year ended 2015-16. The entire effort to reduce leakages and corruption and get the government administration to work efficiently to deliver results has yet to yield clearly visible results. The economy continues to be under strain and the banking sector is heavily stressed despite the godsend opportunity of savings in our oil import bill. Public spending will be required to continue to lead the economy out of the morass. With its recent victory in Assam, the Modi Government needs to step up its game and, with a good monsoon, Modi 2.0 will be off to a good start.

City Lights

According to a World Bank report titled Dealing with Construction Permits, India is languishing at the 183rd position in this parameter, rubbing shoulders with the likes of Afghanistan (185). But, finally, the government has attacked this in right earnest. March has been a watershed month of sorts in the history of construction in India. The Budget announcement on allowing 100-per-cent deduction for profits to projects building homes up to 30 sq m in the four metros and 60 sq m in other cities is likely to spur supply of affordable homes. This was followed by the passing of the Real-Estate Regulatory Act (RERA), which has created a robust structure for protecting homebuyers. And recently, the Model Building Bye Laws 2016 were proposed – these provide a structural framework for a single-window, integrated, building plan approval process and set the maximum time limit for all kind of building approvals at 30 days, after which the approval can be considered ´deemed´. All these measures have come at a time when the sector is reeling under debt stress and low demand but they form firm pillars for the sector to stand upon during better times. The next wave of the economic boom can be well sustained for a longer duration with systems in place that provide checks and balances.

Our cities are in definite need for resuscitation. As per a 21-city survey conducted by Janaagraha, our cities continue to score poorly in comparison with the likes of London and New York.

The lowest-ranked city among all is surprisingly Chandigarh, having the dubious distinction of coming last among 21 for the second time in a row. Further, our cities are grossly underprepared to deliver a high quality of life that is sustainable in the long term.

This is particularly worrisome given the rapid pace of urbanisation in India and the huge backlog in public service delivery. Cities face governance challenges on multiple levels. Most fail to disclose audited accounts. They have no evaluation mechanism for the plans implemented by the municipal corporations. They have extremely weak finances and no city among the 21 reviewed has an effective system in place to monitor and prevent violations or mechanisms to undertake punitive or corrective action. City leaders don´t really have the power to formulate a long-term vision or the length of tenure to execute the same. How is it possible for Bengaluru and Jaipur to become smart cities unless they provide some stability to their commissioners? Both cities have had six commissioners in five years while Raipur has had eight! The Swachh Bharat mission has also ranked the ´cleanest cities´ in India where Mysore, Chandigarh and Tiruchirapalli have secured the top three honours. Now, the smart cities challenge launched by the Ministry of Urban Development has set a race among cities and their leaders, including chief ministers, in urban renewal. Although there is a long way to go, this is now being taken up on a war footing.

So far all deadlines for the smart cities mission have been maintained and the programme appears to be moving forward to prepare India to rebuild its growth engines: Its cities. Read this issue´s cover story for a ringside view of the plans for the cities of tomorrow…..

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.

Shoot beyond the roots

The global gloom turned into panic as the Chinese stock markets tumbled 8.5 per cent on August 24, paving way for speculation that China has lost its stem and is heading for a major slowdown. Its manufacturing index is at a 77-month low and its auto, cement and steel industry growth has turned negative. The Indian stock markets too, caught the cold, as the Chinese markets sneezed. Luckily, it turned out to be a minor ailment and the markets began recovering their losses. The progress of the monsoon, movement of the rupee against the dollar, crude oil prices and auto sales numbers will be key factors determining the trend on the bourses.

Realising that private capital is shy considering a gloomy economic picture, the government has taken upon itself to provide the triggers. It has already spent nearly a quarter of plan funds in the first three months of the fiscal year, the highest pace of spending since 2008-09. The Finance Ministry has already directed ministries and departments to go full speed ahead on budgeted expenditure in line with government thinking. The minister said capital expenditure increased by about 17.8 per cent in the first quarter as the government looks to target 8 per cent growth this year. Public spending has indeed outstripped private investment.

India needs to seize the moment to emerge as a manufacturing hub as China slows. The current outlook just in, indicates a marginally positive report: GDP growth for the first quarter of the current financial year grew at 7 per cent versus 6.7 per cent in the previous year. Manufacturing growth slowed down to 7.2 per cent versus 8.4 per cent. Agricultural growth also slowed down to 1.9 per cent versus 2.6 per cent. However, foreign direct investments are up 30 per cent from a year earlier. Collections of indirect taxes indicate that there are green shoots of recovery. In the words of the finance minister, this has created an ¨enabling situation, wherein we are in a position to spend more. The government will spend Rs 70,000 crore, raised from additional revenue mobilisation measures, towards infrastructure.¨ Public spending is yet to reach the markets through tenders that get converted into orders for building materials and equipment. Mr FM, we are waiting for the green shoots to grow beyond the roots! What´s more, the Ministry of Urban Development recently released the list of 98 nominated cities, with two cities yet to apply. Over the next three years, these 100 cities will take part in a competition to receive funds from the Centre on the path to becoming ´smart cities´. The announcement of these 100 cities – covering 24 capitals, 64 small and medium category cities and at least one city in every state and union territory – has been rolled out under a time-bound plan. Although the impact of this mission will be felt in 2016-17, it is addressing a compelling need to fortify our cities, which are crumbling under the pressure of migration. The return on this investment is high as cities generate 60 per cent of the GDP and take only 0.6 per cent of the GDP. This will lead to opportunities in water management, waste management, mobility management, power-efficient equipment, solar power generation systems, security management, HVAC management, and so on.

The 10th CW Architect & Builder (CWAB) awards were celebrated on August 21, in pomp and splendour with India´s best architects and builders celebrating their glory by walking the ramp and striking a victory pose. A room full of winners has an energy that can send spirits soaring and this is precisely what is needed for our infrastructure industry, which is spending more time and effort with bankers than on sites building assets. In order to get the infrastructure story back on track, while we may have new investors like Canadian realty investor Brookfield, which snapped up Gammon Infra´s road assets, arbitration and dispute resolution should be made into a fast-track programme to secure a better future.