The finance minister’s master plan to boost infrastructure through a ₹105 trillion investment over the next five years will be music to the ears of construction and capital goods companies. Yet, there are near-term hurdles that suggest the plan is ambitious.
A report by Nomura Research suggests spending of about ₹74 trillion to be a reasonable expectation under the National Infrastructure Pipeline (NIP) between FY20 and FY25, versus ₹50 trillion in the last six years. Of course, even this spend is nothing to sneeze at, as it represents a 50% increase. “We expect reasonable levels of private capex only in roads, airports and renewables. In other segments, capex is likely to continue at the current low levels as many sectors still have low capacity utilization and also stressed balance sheets and a declining bank appetite to fund private infra. Thus, we do not expect a major increase in private capex in other areas of infra,” analysts at Nomura said in a note.
The brokerage’s views are similar to that of several others. There is consensus that the investments targeted in railways and power- also in renewables- are slightly ambitious and may fall short during the investment horizon.
The government too has its share of battles. Its fiscal constraints are a challenge and hence it has taken recourse in the recent past to extra budgetary resources and borrowings by central public sector enterprises. For instance, the National Highways Authority of India borrowed to fund road projects.
Apart from fiscal issues, “reducing bottlenecks and resolving issues which have resulted in significant cost and time overruns is also vital for efficient utilisation of the planned investment, “says Shubham Jain, senior vice-president and research head, corporate ratings at Icra.
Delayed land acquisition, which has put a spoke in the smooth and timely execution of even the recent Hybrid Annuity Model road projects, calls for structural reforms.
Industry experts say that slow dispute redressal in infrastructure projects, redressal of stuck projects and increasing trend of reneging contracts by predecessors in power also needs to be addressed. To be sure, the government target to scale up investment in infrastructure is commendable, as it can aid in kick-starting the economy. The government reckons that the cleaning up of the financial system has put institutions too, in a better position to provide credit.
Even the corporate tax cuts will release additional profits that may help firms deleverage and invest more. Not surprisingly therefore, the BSE capital goods index moved up by about 3% since the announcement, driving up shares in related sectors such as steel, cement, power transmission and distribution too.
Hopefully, if all is well, capital goods and infrastructure construction firms’ orders should swell up after being in slow lane for last 12-18 months.
