L&T Chairman On Infrastructure, Private Capex And Budget 2022
Augmenting and accelerating private capital investment, in tandem with government outlays, are critical to achieving the goal set by Prime Minister Narendra Modi of building a $5 trillion economy by 2024-25. Since that heraldic announcement in 2019, the country, and indeed the whole world, has been buffeted by successive waves of the pandemic. While Covid-19 has caused tragic loss of lives and much human suffering, it has paradoxically turned out to be an inflection point as economies try to boost demand, repurpose expenditure, bridge infrastructure gaps, and infuse sustainability into their operations.
Observing this, Union Economic Affairs Secretary Ajay Seth recently said that capex in the private sector is showing early signs of revival. His optimism is based on several favourable conditions.
For instance, corporate results in the first two quarters of FY22 show that demand is set for a post-Covid rebound. The central government has risen to the occasion by increasing budgetary allocation for capex by 35% and creating more fiscal space by relaxing limits set under the Fiscal Responsibility and Budget Management Act. Meanwhile, deleveraging by several large corporates has strengthened their balance sheets and sharply improved profitability. Encouragingly, the financial sector has overcome its loan apathy and displayed a welcome readiness to lend. Non-performing assets have eased to a six-year low and the capital health of banks has shown an uptick.
Ingredients Are In Place
There is good news too from around the world. In what I believe is a much-needed shift in strategy, supply chains are being more broad-based and globally inclusive. Termed ‘China+1’, it will reduce the economic and political fallout of relying on a single nation for all their needs. This should be a shot in the arm for India’s exports. It has led to India attracting increased interest from international private equity investors. Private equity investors have doubled in the first half of 2021 with a total invested value of $30 billion – an increase of 120% over the first half of 2020, excluding Jio. India generated 44 unicorns in 2021 compared to 37 in the previous year.
From a sectoral perspective, certain segments are relatively better placed to benefit from the upswing in investments. The National Infrastructure Pipeline (outlay of Rs 111 lakh crore over the FY20-25 period) has offered significant opportunities for private investment (around 20% of total outlay). Since it is a dynamic plan (up from 6,835 projects to around 9,000 now), new opportunities will continue to emerge. The National Monetisation Pipeline too offers different modes for private participation customised to asset classes. Schemes such as production-linked incentives and the new semiconductor policy provide the much-needed impetus to domestic manufacturing and present an opportunity to reduce imports and increase export competitiveness.
India is at the forefront of adopting equitable and even-handed solutions to the climate change crisis. The government has skillfully and successfully walked the diplomatic tightrope in securing approvals for the COP-26 announcements and paved the way for abundant opportunities in renewable energy, green hydrogen, energy storage, and electrification of transport.
On the realty front, improved buyer interest has been spurred by low home loan interest rates and customer-centric regulations. On their part, developers have unveiled new offerings with sweeteners in the form of payment flexibility. Better prices should prompt hesitant property seekers to cross the ‘Welcome’ mat and affirm purchase.
Other positive initiatives include the recent tax reforms, a stronger manufacturing ecosystem, and the rapid expansion and growth of the e-commerce sector. This should add more traction to investments in logistics and warehousing. Also, increasing digitalization and localization norms for handling data would further add to demand for data centres.
Avoiding Past Mistakes, Tackling New Risks
While there is much that is conducive to augmenting investment flow, it is important to flag factors that can prove detrimental to the larger interests of the economy.
During the last capex boom cycle of 2007-2011 for instance, many firms possessing neither the financial wherewithal to fund nor the technical competence to operate the assets they were bidding for, found themselves unworthy owners. This resulted in a huge NPA burden on the banking system. It also engendered risk aversion to invest in new projects. The solution to overcome such setbacks already exists in the shape of the quality-cum-cost-based selection or QCBS system. What was lacking was the will to put the QCBS into play.
Uncertainty and discontinuity are a recurring nightmare for business planners. The renewable energy sector, for instance, has seen state governments reneging with impunity on existing power purchase agreements in a bid to secure power at recently discovered low prices. This negatively impacts the internal rate of return of current investments and puts a damper on future investment.
It is also becoming increasingly clear that India’s outmoded dispute resolution and arbitration processes need to be brought in tune with current needs. Already overburdened with a backlog of cases, our country’s legal system seems ill-equipped to handle another avalanche – arbitration cases. It needs to be appreciated that all investments are based on certain projections of demand, traffic, off-take etc. Such carefully made plans are thrown out of gear when major deviations are undertaken after the project or asset gets operational. For the authorities, the arbitration route seems the easy way out - with adverse consequences for hapless investors.
The Right Policy Approach
In continuation to the point highlighted above, it would be helpful if our infrastructure planners step back and look at the big picture. Piecemeal planning and myopic implementation of projects lead to unaddressed gaps, thereby impacting demand, traffic and flow. While attempts have been made to address this through the Gati Shakti programme, it is obvious that it may not be enough. In a federal economy like India, such programmes and their acceptance need to percolate to the levels of the ULBs, municipal corporations, etc.
The wish list of every major investor, I am sure, would include cutting down of bureaucratic red tape and expediting governance processes.
The implementation of single window clearance can be prioritised, particularly in the case of environmental clearances, mining permissions, etc. States and municipal bodies could also be incentivised to integrate into this system so that investors do not run into unexpected local issues. Even government departments responsible for clearances ought to draw up Service Level Agreements. Would it not be wonderful if delays and deviations from stated timelines meant automatic approval!
As Chairman of the National Skill Development Corporation, I strongly feel that we need to focus on skilling to bridge the demand-supply gap which affects skilled manpower in India. We need to urgently enhance and expand the Skill India Mission launched by the Prime Minister. In parallel, we also need to explore the possibility of reinventing and upgrading the ecosystem of industrial training institutes and other training centres – both in terms of physical infrastructure and the calibre of trainers.
Cautious Steps Forward, Staying Alert
Like good mariners, business investors must remain alert to the slightest signs of storm clouds which could spell bad news. The stronger-than-expected resurgence in demand coupled with supply chain disruptions have led to a spike in commodity prices. This can impact the profitability of companies as well as hurt demand. Persistent high inflation may prompt central banks to increase interest rates which may again adversely affect the kick-off of the private capex cycle. Hanging over all our heads is also the threat of yet another surge of the pandemic which can pose a significant risk to economic activity.
With all these attendant risks and uncertainties, I believe we have grounds for cautious optimism.
If the authorities can summon the will to implement the remedial measures suggested, I am confident that we can look forward to healthy, invigorating, and sustainable private sector capex, which in turn will enable the country and its economy to sustain its trajectory of growth.
AM Naik is Group Chairman, Larsen & Toubro.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.