Investments slump in Q3; but expert says not a time to panic

While he agrees only a narrow uptick is being seen in terms of investment, he adds the private space needs confidence to enter the public-private partnership (PPP) space.

Below is the transcript of Mahesh Vyas and Vinayak Chatterjee's interview with Latha Venkatesh, Anuj Singhal & Guest Editor Aditya Narain on CNBC-TV18.

Latha: Can you tell us the latest findings? That is what churned the market’s stomach as it were you saying that there was a record fall in new investments in the last quarter?

Vyas: That is giving too much of weightage to these investment numbers that it can churn the market. I do not think that could be a fair comment. I would be too flattered to hear that. But, yes the numbers have not been very good. The December, 2015 quarter, new investments show that investments are still very tepid. So, we saw new investment proposal worth only Rs 1 trillion in this quarter and that is very low compared to what we saw in the recent past. In the quarter ended September, 2015, we saw Rs 3 trillion worth of new investments and in the year ago quarter, we saw Rs 4 trillion.

Now, both these Rs 3 trillion and Rs 4 trillion are kind of small spikes in the trend currently and compared to that Rs 1 trillion looks quite low. But the trend has been to have low investments. If you see one spike in one quarter, it now looks like it is predictable. It will have an impact on the coming quarters to see lower numbers. So, Rs 1 trillion is low and it shows that there is no pickup in new investment proposals.

Aditya: In many senses I would second what Latha said that he data really of two days ago obviously has been an area of massive concern. What would your reading be for some of this --one can call it volatility which would mean it come back or is it just structurally that you had a couple of blips and it is back to a trend line that is much lower, but effectively, what is your read on why things are a] not steadying out, and b] why they have tended to be softer in the most recent quarter?

Vyas: It is difficult to figure out what the exact reasons for the slowdown are because what we essentially do is to look at what the numbers aggregate. The decline seems to be quite secular across all sectors. So, one sees a decline in manufacturing, a very sharp fall in mining, construction, so it is quite secular. So, it looks like there are some macro reasons, there are some larger reasons that seem to be holding back investments.

The commonly known factors seem to be that we do not have a slightly better environment for land acquisition, there is delay in some expected reforms, there is delay in pushing through executive powers, even the normal clearances or better to say that there is a large capacity utilisation decline or there is a very low capacity utilisation currently. Interest rates need to come down a little more. So there are whole sort of, large numbers of factors that seem to be playing a role in keeping these new investments low. Global prices of commodities._PAGEBREAK_

Latha: Would you at least say that most of the poison is known and out there in the system. This falling gas prices that anything should re-ignite some power stocks should perhaps see some Discoms buying a little bit more of power? Should we see some more roads getting constructed? Is the worst over for infrastructure?

Chatterjee: Let me step back a little, because I was reading with great interest Mahesh’s December numbers of 74 percent down of new project announcements and 40 plus down on fresh commissioning, etc. They are broadly in line with what is the general perception in the market. I think all of us know that investment is down. That is not news because we all know that for all the reasons enumerated by both the panellists. The important point is that the government when it took over was aware of this fact that investments had crashed around the time they took over and therefore, they unleashed this policy of public expenditure driven infrastructure investments which itself would possibly be a kick-start for the larger economy. So, therefore, we must examine in the short-term what is happening to public expenditure.

Now, I am one of those who agree with the government’s view that the current requirement is public expenditure in infrastructure. Now, if you agree with that proposition, then you have to look at public procurement processes. Everybody in this country knows that a public procurement process for an infrastructure type project takes anything from 18-20 months from the time you conceive the project to the time you issue out the engineering, you get the inputs, you request for proposals, pre-bid meetings, etc. There is a whole process laid out which practitioners in the trade know pretty well is about 18-20 months.

However, effectively, when I look back, this government started getting its hands dirty on public expenditure investments around September, 2014, three months after they settled down. So, we are, on an 18-20 month chain, we are today at month 15, so I would still believe that any logical analysis of the public procurement chain would lead us to suggest that if projects are being conceived, if enough public sector push is being given, both in terms of out-takes and projects, then we should be able to see action in three or four months from now and that would be very logical and I for one, would like to believe that because of the following reasons: One, there are some sectors where project activity has certainly shown an uptick. In your market analysis, you will see that there is an uptick in the prices of stocks that they are doing better, of midcap road construction companies. So, road sector, midcap road construction companies are doing better than the rest and anecdotal evidence from their CMDs, etc. tell me their order books are in pretty decent shape. Transmission, distribution, the beginnings of railway orders, urban infrastructure, these are sectors that are already beginning to show an uptick. And if you co-relate this with the Care report two days back, the Care report also says that there is a narrow band of uptick which is visible related to the sector that we are talking about.

So, Mahesh’s report which is generally in the right direction, it is in keeping with the perception has to be seen in the perspective of public expenditure, public procurement, length of the chain and the beginnings of an uptick in some of the sectors.

Aditya: I actually have two questions for you. The first one is on the policy front, particularly because you are so closely associated with it. What would your sense be in terms of the policy logjams that existed at a point of time? How far down the line are we in terms of those being largely cleared out? I recognised you mentioned a lot of procurement processes, but in terms of the big picture policy at a generic level, how much work has being done? Are there snags at that level?

The second question, through this programme we have talked about the need for public investment which is what is beginning to come through, where do you see the challenge in terms of the private sector coming through because at this point in time, there is a sense that risk appetite is low. There is a financial aspect to it, there is once bitten, twice shy aspect to it, so do you see that as a material issue looking out 18-24 months, where you have exhausted to some extent the big public spend and the private one tends to remain a little cautious. And I probably want to juxtapose it against a possible perception that we are kind of extrapolating the effected capex cycle with what you saw in 2006 and 2008, which by most accounts was irrational at many levels. So, is there a challenge that we have that our expectations are benchmarked or set to an era where you do not want those excesses because everyone got stuck?

Chatterjee: Let me first attack public expenditure. I think there is a fear that the expected discipline in maintaining the fiscal deficit at the levels predicted, 3.9 whatever will serve as an effective constraint to public expenditure. I would like to debunk this by saying that in the last few years and particularly this government has recognised the power of budget vehicles; the National Investment and Infrastructure Fund (NIIF) being the most prominent and similar such vehicles, special purpose vehicles (SPV) that are being created, which are getting equity and debt from other systems outside the consolidated fund of India. So, broadly, I do not think we should be, whether it is the Rs 86,000 crore loan from Japan for the bullet train or similar sources of funding from the World Bank for sanitation or cleaning Ganga. These are all sources of funding outside the consolidated fund of India. So, there is a plethora of activity which is now gathering momentum about off-budget financing. So, that should take care of the short to medium-term concerns on public expenditure being able to fuel the public investment growth.

The concern there is the capacity of the public systems group to utilise the funds available, which I believe is not a constraint, to actually transmit them very quickly into meaningful projects on the ground. That challenge remains and there are ways to tackle that. You require iconic leaders like Mr Sreedharan fully empowered given autonomy and told to run, but we can get on with this topic. Everybody can talk about empowerment and iconic leaders.

Coming to the question on private sector, of course, the private sector has been bitten very badly, it is more than shy. Shy is an understated word in the context of private sector’s appetite for public private partnership (PPP). Most CMDs of Infra companies will clearly tell their boards I am not touching PPP anymore till the action of the kind of suggestions that have been put on the table by Mr Kelkar and his committee about renegotiation, about independent regulation about arbitration, about level playing field, unless all these factors once again give confidence to the private sector, they are not going to come with balance sheet exposure on PPPs. Does that mean that private sector has therefore, no action on infra? Of course, not. This huge push on public expenditure is ultimately going to be executed by private sector either by engineering procurement and construction (EPC) contracts which will go to the construction and related engineering companies or by people who supply goods and services.

So, if there is a major push in transmission and distribution, then there are companies that make transformers, insulators, cables, towers, etc. who benefit from this. So, there is a lot of action on the plate for private sector. Let us not confuse that with eagerness of participation on PPP projects. The two are completely separate.