After moderating consistently for several quarters, stalled investment projects rose in the July-September period, says HSBC Global Research. One of the key reasons was the languishing steel sector, with its knock on effects on India's banks, it says. "The worsening in stalling rate was confined to the private sector but has been spreading across more Indian states," it says.
According to a Business Standard report, the Centre for Monitoring Indian Economy (CMIE) said the value of stalled projects dipped to Rs 79,300 crore in the quarter ended June this year from Rs 2,00,000 crore in June 2014, indicating fructifying of some of the projects.
But come the second quarter, impact of the steel sector has been such that the stock of stalled projects increased after falling for five quarters. The steel sector contributed almost 52.2 percent of the increase in stalled projects in the September quarter. The CMIE data shows a rise on the stock of stalled projects to 7.6 percent of GDP in July-September quarter of 2015. Stalled projects had reached as high as 8.5 percent of GDP in January-March 2014 quarter.However, the otherwise subdued new investment intentions rose quickly; led not just by some high profile projects like Foxconn, the HSBC report adds. In value terms, in the July-September quarter, new investment projects worth Rs 3.5 lakh crore were announced as opposed to Rs 1.2 lakh crore in the previous quarter.The increase in new projects added to a mixed quarter for capacity expansion, according to The Economic Times. However, even as far as new projects announcements are concerned, there is more than what meets the eye. "Though the July-September period recorded a growth of 23 percent in new investment announcements, there is a big blip," Mahesh Vyas of CMIE told CNBC-TV18. A large part of this new investment comes from one big investment show in Tamil Nadu, so the larger picture is not as rosy. "So, 1/3 rd of the investment is in Tamil Nadu, while the rest is in TN and Maharashtra. In that sense, it is not a good number (new investments)," he added.
A bigger question, however, is whether new projects can continue to rise, lifting the investment cycle, even as stalled projects remain frozen. Brokerage house HSBC does not think so. "Weak demand and low capacity utilization is likely to be a drag on the rapid rise in new projects, and gains from un-stalling activity may be the best we have for now. On the supply side, only when stalled investments are resolved meaningfully, freeing up resources at banks, can new projects rise sustainably," the report stated.
The rapid fall in inflation was also expected to lower input costs, thereby bringing down the value of new projects. Instead, value of projects rose while project volumes fell, suggesting that the rise in project values was partly led by some big ticket items, the report further said. Indeed, a quarter of the overall increase came from the electronics sector, including amongst others, the USD 5-billion Foxconn deal. "Roads, shipping and electricity generation in the infrastructure sector; chemicals in manufacturing; and education in services also saw announcements of new projects, distributed between both private and the public sector investors," the report said.Cash crunch:
The other major issue is funding of these new projects. Considering that about 60 percent of new projects came from the private sector with the main financier being the country's banks, which continues to struggle under the burden of stressed loans (over 10 percent of overall loans), the future of infrastructure growth seems to be a tad gloomy. However, with about 40 percent of these projects coming from the government, the situation is not as dire. "The government has successfully directed savings from a lower subsidy payout towards higher capital expenditure. Government capital spending has risen 38 percent y-o-y in the April-August months," according to the report.
But HSBC does not think the government will be able to continue on its path high capital expenditure. "Fiscal consolidation path and 7th Pay Commission payout next year are likely to dent the space for additional capex and the government may not be able to sustain a spree of new projects," the report explained.
HSBC analysed 575 stalled projects during the September quarter and found that there is a lot of government action that is needed, as about half of them are still stuck due to policy-related issues. "Executive action on fast-tracking clearances and sorting out raw material availability, and legislative or other innovative action (like reforms by states when the Center is not as successful) to solve land acquisition problems continue to be wanting," the report said. Also, formalizing an efficient Bankruptcy Code, setting up Company Law Tribunals to tackle financial distress, revitalizing Asset Reconstruction Companies and rejigging the working of Debt Recovery Tribunals, are other pressing reforms critical for this space, the report added.
In other words, India's investment profile and economic growth will be guided by meaning reforms, unstalling activity and healthy competition between the states.
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