India Infrastructure Spending Bogs Down

Big-ticket infrastructure projects worth more than US$140 billion are stuck in India due to the country's labyrinthine land acquisition policies, government ministries working at cross-purposes and frozen environment clearances, putting the brakes on Asia's third largest economy over the past year or so.

According to data compiled by state-run banks, 255 projects straddling sectors such as power, roads, ports, cement and steel, and each worth over US$5 million or more, have hit a wall. Further delays will not only push up the overall cost of implementing the projects, bankers say, but also add to the risk for public sector banks, which have disbursed the equivalent of US$11 billion in loans to various corporations.

Ministry sources say about 20 major highways projects worth more than US$5 billion in investment are awaiting environmental go-aheads with contracts for only a marginal 1,100 km of highways being issued by the government in the first three quarters of 2012-13. Eight coal projects worth about US$20 million are also awaiting clearance. The hardest hit is the power sector with projects worth Rs5 trillion held up, followed by roads (Rs1.23 trillion) and steel (US$6 billion).

The International Monetary Fund has also pointed out that India needs to address 'bottlenecks' in its power and infrastructure sectors if it aspires to move to a high economic growth trajectory. The main reasons for slow growth in India, according to the IMF, are "more structural in nature than lack of finances."

India Ratings (IR), part of the international ratings agency Fitch Group, has maintained a negative outlook for Indian infrastructure projects in 2013 after factoring in the weak credit profiles of companies in the sector.

Indian banks, struggling to cope with a surge of bad debt in a slowing economy, could face strong headwinds if repayments on loans for building power plants, roads and other infrastructure do not come through starting April because of laggard projects. Bankers fear any further defaults will add to the woes of the country's Rs72 trillion banking system, already reeling under mounting bad loans that are chewing up their earnings.

Last year, Finance Minister P. Chidambaram warned that large projects getting stuck due to non-clearance by government ministries and departments will have an adverse impact on India's economic growth.

India's economic growth, at 5.4 percent annually, is at a decade low following weak export demand in developed markets and slow investments. The country also faces challenges of high inflation and wide fiscal and current account deficits. Meeting India's growth targets requires extensive infrastructure support. Though the UPA government envisages investing Rs1 trillion in infrastructure spending this year, tardiness in the execution of projects related to roads, ports, airports, power and mining has translated into substantial cost overruns. Industrial data shows costs on delayed projects have escalated by 13.6 percent over original estimates.

The largest overrun was in the Delhi MRTS Phase-II project implemented by the Delhi Metro Rail Corporation (DMRC) at US$2 billion, an rise of 117 percent during the 11th Five Year Plan (2007-12).

Global steel conglomerates Posco and ArcelorMittal are among the many companies whose expansion plans have been derailed due to lack of transparency in government policies and bureaucratic hurdles. Posco's proposed steel project in eastern Odisha, estimated at US$12 billion, has been stalled since 2005. The project's cost has more than doubled in the intervening years.

According to investment consultants, such delays will not only have a domino effect on other projects but have an impact on overall sentiment as well. "The problem will likely intensify with general elections scheduled for next year, and the ensuing scramble amongst corporations to get the mandatory clearances before there's a power shift," says Neha Khumb, an investment banker.

Poor show in building infrastructure impacts job creation as well. It is estimated that India needs around 10 million new jobs annually over the next 20 years to accommodate the burgeoning numbers seeking openings in the job market.

According to a recent McKinsey report, Indian has the capacity to generate 3.4 million new direct and indirect jobs via increased infrastructure expenditure, working out to 1 percent of GDP. "With an infrastructural boost to the economy, a virtuous cycle will be set in motion expanding businesses, which will in turn, contribute to employment generation by scaling up hiring," said Prabha Khatri, a Delhi-based development economist.

India's new fiscal consolidation roadmap – which envisages cutting the budget deficit to 4.8 percent of GDP next fiscal year, from an expected 5.2 percent this year, and gradually to three percent by March 2017 – can be helped by expediting the stuck infra projects, say financial planners.

In December 2012, a special cabinet panel headed by Prime Minister Manmohan Singh was formed to accelerate industrial and infrastructure projects that have investments over 10 billion rupees. But the panel, the Cabinet Committee on Investment, has not managed to clear any major projects so far. Nor has it displayed any evidence of fast-tracking projects stuck at various state government levels.

Various power projects also face protracted delays either because of technical issues such as longer plant stabilization or due to slow land acquisition, constraints in developing railway and transmission infrastructure and delays in operationalizing captive coal mines, said the IR report. Fuel shortages, off-take risks and counter-party credit profiles are compounding the issues faced by these projects, making them vulnerable to ratings downgrades, said India Ratings.

"Nearly three-fifths of the rated projects can be bracketed as being vulnerable to high levels of risk," the agency said. "At least 50 percent of the highway projects in the rated portfolio scheduled for completion in 2013 have already reported three-six months delays due to land/right of way not being handed over by the concession grantor." the agency added.

IR warns that in 2013 a number of projects are likely to default on their bank debt obligations. "Alternatively, lenders might be compelled to approve forced debt restructuring packages. This is in view of their weak financial structures and multiple risks including construction delays, plant stabilization issues and fuel supply constraints in the power sector and traffic under-performance in the transportation sector.