The Indian infrastructure sector remains muted despite valiant efforts by the Indian government to revive it. The reasons behind that is mainly because of legacy reasons and the reluctance or inability of the private sector to invest and the reluctance or inability of banks to finance projects. The steel and power sectors are the main culprits. There are, however, a few bright spots as well. The roads and highways sector is once again humming with activity. The railways sector is also chugging along. Rural infrastructure and agriculture have also seen increased investments. These sectors are mainly responsible for the government spending 13 per cent of its annual outlay on infrastructure in the first two months of the current financial year - much higher than in any previous year as government departments typically backload their spending to the second half of every fiscal. Finance Minister Arun Jaitley had budgeted for spending $70 billion on infrastructure this year in a bid to restart the stuttering investment cycle. This massive dose of public spending is expected to grease the wheels of private industry as well and set off a virtuous cycle of investment-led growth that will gradually rub off on private investments as well. Roads, Transport & Highways Minister Nitin Gadkari has moved fast. According to a Deutsche Bank report, investments on roads and highways has jumped an incredible 1,275 per cent in the first two months of the current financial year compared to 2014-15. His department has spent 22 per cent of budgeted funds during these two months. The spend last year in the comparable period was only 2 per cent. The ministry has already rolled out projects worth $93 billion, including $45 billion on the flagship National Highway Development Programme (NHDP), which proposes to upgrade 20,000 km of national highways into world class roads over the next three years. Then, the government has unveiled the $12-billion Bharat Mala Project, which plans to connect Gujarat on India's west coast to Mizoram in the North East via a road that will run along the foothills of the Himalayas. Another road, connecting West Bengal in the east to Maharashtra in the west along the coast of Peninsular India will complete the so-called “mala” or garland around the territory of India. There is also a plan to build 350 bridges and rail overbridges, connect the four “dhams” (four of Hinduism's holiest pilgrimage sports) and construct highways to connect almost 125 district headquarters at a cost of $15 billion. The ministry has already awarded projects for several thousand kilometres of highways and expects to meet its targets within schedule. The railways' investment plan is also on track - high speed trains, upgradation of 400 railway stations, bullet trains and the freight corridor are proceeding apace. The ministry has unveiled plans to invest $137 billion on railway infrastructure and this should begin to show up in the growth numbers from next year onwards. However, the steel and power sectors are a cause for conern. According to a recent report by rating agency Crisil, about 46,000 MW of power capacity are stressed because of a variety of reasons ranging from the absence of power purchase agreements to problems in fuel supply. These projects have availed of Rs 2.1 lakh crore ($35 billion) of banks loans. About $6 billion worth of projects are by companies that have strong financial backing and so, look safe. “Projects with loans of Rs 1 lakh crore $16 billion) could become viable if their payment profiles can be structured appropriately. This leaves the remaining Rs 75,000 crore of loans at risk,” the Crisil statement said. There is another Rs 1.9 lakh crore of loans taken by mostly state-owned power distribution companies for which there is a moratorium on the repayment of principal amount. This moratorium will end this and in the next financial year. And this, according to State Bank of India Chairperson Arundhuti Bhattacharya, is a ticking time bomb, especially as state electricity boards and distribution companies have accumulated losses of Rs 3 lakh crore ($50 billion). These companies are in no position to repay their loans. In fact, many of them are refusing to buy power from producing companies as they are losing money hand over fist for every unit of power they sell to end customers. This is putting further pressure on the already stressed generating companies and complicating plans to revive the sector. This near-bankruptcy of the distribution companies is also putting at risk the Narendra Modi government's ambitious plan to set up 100,000 MW of solar power capacity across the country by 2022, which has received a tremendous response from Indian, Chinese, Japanese, German, British and US companies. “The biggest challenge will be the enforcement of renewable purchase obligation and the poor bankability of India's distribution companies,” Bridge to India, a leading boutique consultancy firm said in its “India Solar Handbook, 2015”, which was released at Intersolar Munich on June 9. The steel sector, which is facing the double whammy of slow local and export demand as well as dumping by Chinese producers, is also gasping for air. The Reserve Bank of India's Financial Stability Report, released recently, said: “As on date, five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors.” The Finance Ministry is considering the possibility of bailing out the sector by reducing the import duty on coking coal, a major input, and also increasing import duty on flat products, which Chinese producers are dumping in India, by 5 per cent. It is also discussing with the Ministry of Mines and the state governments of Karnataka, Goa and Jharkhand ways to expedite the auction of iron ore mines. Experts say that as the publicly funded investments in highways, railways and rural and agricultural infrastructure gather pace, demand for industrial products should slowly pick up and lead to a gradual recovery in the investment cycle. But that is a slow and tedious process and though the early benefits should start trickling in by next year, a full recovery may still be some years away.
