Slowing economy disrupts investment in infra sector

UR Associates has come out with its report on infra space.

The depreciating rupee coupled with slowing Indian economy may propel the Planning Commission to revise downward the initial target of $1 trillion investment in the infrastructure sector during the 12th Five Year Plan (2012-17). According to Planning Commission Deputy Chairman Dr. Montek Singh Ahluwalia, the Commission had set the $ 1 trillion target with an assumption that the economy will grow at the rate of 9% during the 12th Plan period and if that growth target looks difficult the investment target needs to be toned down.

India's economy grew at its slowest pace in almost a decade in the year's first three months, an evidence of its growth story turning sour amid global uncertainty and its government's failure to push through reforms. Given the gloomy economic scenario in India and around the world, achieving 9% for five year average, is not looking feasible. Investment climate in India has slowed down tremendously with investments across the board taking a backseat with corporate capex activity still looking some time away. Order inflow has slowed down since the last two years and a sudden revival in the order inflow is not expected. Currently, financing costs and rupee depreciation, among other factors, have led to a record number of projects moving into the freeze mode, resulting in reduction in capital expenditure of companies.

Amidst all uncertainty, government has plans of increased infrastructure investment by the private sector and has targeted for private investment contribution of 50% in 12th Plan as compared to 37% in the 11th Plan and 25% in the 10th Plan. However, looking at the economy’s current scenario and tight liquidity conditions, it appears to be a difficult task. The slowdown in the economic activity, especially in the infrastructure space, has resulted in poor financial performance for most of the companies in this sector. The infrastructure investment target in the 12th Five Year Plan may be revised downward; but the government needs to trigger some policy action and should display speedy decision making towards its endeavour to create an environment for a meaningful recovery in the investment cycle.

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