A review of activity across various segments of the economy confirms that there is a recovery in progress, but the recovery is uneven. Some sectors are now performing better than they did during the pre-pandemic period (2019-20) but there are others that are still running below the levels from three years ago.
Covid-19 and the associated lockdowns have led to big permanent changes in the way people work and live. New paradigms such as work-from-home and greater digitalisation across the board will lead to greater future efficiencies. However, this has, for example, changed the dynamics of commercial real estate demand while driving demand for new IT services and products.
Widespread unemployment and underemployment, plus high inflation, have clearly had a negative impact on consumption and investment. Individual spending is cautious, and corporate investment is also low. It is apparent that improvement in consumption demand and private investment will be gradual, although the latter shows signs of picking up pace.
Government expenditure has been counter-cyclical and geared towards increasing infrastructure capacities across sectors. This is sensible. It creates capacities that will serve well in future, and generates employment, which, in turn, may stimulate consumption. However, government finances are stretched with large deficits, so policymakers have to look beyond pump-priming by using public resources.
Policy must be crafted to attract both capital and skills from the private sector, and to stimulate consumption. Policymakers must also find ways to impart more efficiency to the financial markets, especially the bond market, since that would help in the transmission of household savings. Where infrastructure is concerned, this means clarity in drafting contracts, clarity in tax policy, and greater efficiencies in clearances and land acquisition processes.
There are specific areas of pain, and concern. Global supply chains have been scrambled by a combination of the pandemic, lockdowns in China, and the Ukraine war. Schemes such as Atmanirbhar Bharat and production-linked incentives in telecom and semiconductors should help in the long run, although manufacturing requires long gestation times.
There has been progress on the policy front. In telecom, a major reforms package and the successful conclusion of the long-awaited 5G auctions put the industry in a space where it could witness healthy growth with enhanced competition. Clarifications on adjusted gross revenue norms, plus the extension of spectrum licensing tenures and reduction in the quantum of financial guarantees will help service providers. The auctions raised over Rs 1.5 trillion and saw the entry of the Adani Group in the sector, albeit in minimal fashion.
The power sector has been another long-standing area of concern. Every few years, state-owned discoms need some sort of bailout as their poor financial condition starts inflating receivables, with generators and suppliers being owed money. The relief from all the bailouts over more than a decade has been temporary.
Discoms not only have huge accumulated losses, they also continue to register big operational losses. As of May 2022, discoms owed more than Rs 200 billion to developers. In turn, generators have issues paying suppliers, and this leads to stresses up the value chain. Aggregate technical and commercial (AT&C) losses have decreased, but continue to run at over 20 per cent on average with some states registering twice that. Policymakers must find ways to put discoms on a more sustainable footing and also plug gaps in the AT&C process. One can only hope that discom privatisation and the new RDSS will prove effective in curbing losses.
In better news, power generation is already above pre-Covid levels and the power mix is changing with renewables overtaking hydro in terms of both generation and installed capacity. The new Green Access Rules, 2022 lend policy support to green power.
Given the target of a total capacity of 800 GW by 2030 (double the capacity in April 2022) and at least 500 GW of it from non-fossil fuel sources, it is implied that 40-45 GW of renewable capacity will be added annually to achieve this. In addition, India aims to cut its emissions intensity by 45 per cent from 2005 levels. This is a big investment opportunity. Some of the biggest corporates, including Reliance, the Tatas and the Adani Group, are on board with the green initiative.
The enthusiastic response to the Powergrid infrastructure investment trust’s (InvIT) IPO (which raised Rs 77 billion and was hugely oversubscribed) is a good sign. It suggests investors are still interested in the sector and Powergrid will be able to comfortably monetise its base of Rs 452 billion of transmission assets by 2024-25. The third power exchange – Hindustan Power Exchange – is live now and adds depth to an already vibrant market. The launch of the National Open Access Registry is another positive.
A pickup in power consumption suggests that economic activity has accelerated. Higher railway freight movement and strong shipping traffic numbers back up this impression. Better electronic toll collections also indicate improved road traffic. These are all positive, high-speed indicators. Indeed, the high trade deficit is also a sign of faster economic growth. If we discount the energy component of imports, the rest largely consists of intermediate inputs, capital goods and raw material.
Aviation passenger traffic is still well below pre-Covid levels, but cargo traffic is doing better in terms of recovery. Air cargo has admittedly been given a boost by the need to move vaccines and other medical goods and equipment quickly. The Udan scheme and multiple associated greenfield and brownfield airport projects signal better future prospects. The new greenfield airports in Mumbai and Delhi NCR will help handle traffic overflows out of these hubs. The linkage of multiple Tier II/III destinations by air should start paying off soon since there is unserviced demand in many places. The advent of two new airlines plus the takeover of Air India also suggest optimism and there are over 1,500 aircraft orders on delivery. Unfortunately, the sector’s finances are likely to be stretched until such time as energy prices ease off and traffic picks up.
Road projects and railway projects (including metro projects) have proceeded at a commendable pace. Monetisation of running assets has been successful in ensuring cash flows for new road projects. GR Infraprojects’ private InvIT, Bharat Highway InvIT, has received SEBI registration for the transfer of six operational HAM assets (equity of Rs 10 billion) in 2022-23. In August, IRB Infra approved a 100 per cent stake transfer of the Vadodara Kim Expressway to IRB InvIT for Rs 3.4 billion. Ashoka Buildcon’s sale of five build-operate-transfer assets and one annuity asset will be completed in the second quarter of 2022-23. HG Infra and PNC Infratech are also in talks with potential investors for asset monetisation.
The sector achieved an average road construction rate of 28.6 km per day in 2021-22, but this was slower than the 36 km per day in 2020-21. In 2022-23, there is a commitment to expand awards to 25,000 km of highways under the PM Gati Shakti National Master Plan, which is over twice as much as the 12,000 km awarded by the National Highways Authority of India (NHAI) in 2021-22. The order book will ensure revenues for road developers until 2025-26. Most of the 2021-22 projects were awarded under the HAM or the engineering, procurement and construction (EPC) model. While EPC players are insulated from cost increases due to the pass-through nature of such projects, HAM could be exposed to higher raw material costs.
There are some concerns on the financial front in the road sector. Dilution of bid qualifications during the pandemic could lead to inadequately funded developers, some of whom may struggle to cover equity requirements. It is believed that the NHAI will raise the net worth requirements for HAM and reduce the upfront payment to 20 per cent of the project cost from the current 40 per cent. Lenders could, therefore, be overexposed and some lenders are turning cautious as a result. On the positive side, a reduction in bitumen, steel and energy prices could help.
Indian Railways has also continued with its ambitious expansion and modernisation plans. There could be vast opportunities across the rail sector for private enterprise and investments. This is equally true for the metro sector. By next year, there will be about 900 km of metro networks across various cities, and that network will be doubled or more in the next decade. In addition, cities are examining the feasibility of rapid transit bus corridors, and Metro Lite and Metro Neo systems. This represents a large set of opportunities across the supply chain and in various related segments. Apart from physical infrastructure, there would be opportunities for financiers and demand for construction material. Engines, coaches and buses in themselves represent another set of opportunities. Once a metro is running, monetising the asset via station branding, commercial development, advertising, etc. will offer opportunities. In addition, there will be demand for IT services.
Apart from a budgetary support of around Rs 400 billion for various urban transport projects, there are public-private partnership models. Given robust policy support, private players can find many profitable niches within the urban mobility sector.
In the energy space, the price spikes and supply disruptions in hydrocarbons are a pointer to the need to formulate focused policy for the future. Energy demand will rise continuously as it is directly related to growth and India already imports almost 90 per cent of its crude requirements and over 50 per cent of its gas. The policy thrust is towards encouraging the flow of private capital and expertise, and there is also an attempt to push demand towards gas (which has lower emissions) from crude-derived products.
The GST on ethanol blending has been cut to achieve the target of raising ethanol blending in petrol to 20 per cent. There are plans to push green hydrogen production and hydro injection into gas to move closer to carbon neutrality. Green hydrogen fuel projects will get a window for open access without a central surcharge and zero interstate transmission charges for 25 years.
In hydrocarbons, the Open Acreage Licensing Policy (OALP) is designed to more than double the area under exploration and production by 2025 and double acreage again to 1 million square km by 2030. Over five rounds of the OALP, 105 blocks have been awarded for exploration and a sixth round has been launched. The list of required statutory approvals has been reduced for exploration and 100 per cent foreign direct investment is allowed under the automatic route in state-run oil and gas companies.
The Petroleum and Natural Gas Regulatory Board is aggressively pushing the roll-out of city gas distribution. The policy has been fine-tuned to make it easier to become a marketing entity for transportation fuels. Asset monetisation is another theme with plans to monetise 8,000 km of natural gas pipelines to pull in Rs 240 billion and monetise 3,930 km of petroleum and LNG pipelines for Rs 225 billion. Two hydrogen generation plants owned by Indian Oil Corporation are also on the block.
Urban projects include water supply and sewage disposal projects under Amrut and Swachh Bharat. These suffered major slowdowns during the lockdown. There are critical constraints in servicing the rise in demand caused by urbanisation and industrialisation. Urban local bodies lack financial capacity. They have inadequate metering and billing systems and suffer large losses due to leakage, theft and poor billing. Primary freshwater sources are also under pressure, and need management and augmentation as well as the induction of desalination and recycling systems.
The sector needs transformation on a priority basis. Apart from local initiatives, central schemes such as the AMRUT, the Smart Cities Mission and the Jal Jeevan Mission aim to ensure water supply is functional, water quality is maintained, 100 per cent metering is achieved and new water sources are developed.
The National Water Mission looks at areas vulnerable to climate change and declining water resources. The mission aims to develop desalination capacity – including low temperature desalination, reverse osmosis and multistage flash distillation – using low grade or waste heat energy from coastal power plants or renewable energy. The Ministry of Earth Sciences also runs schemes focused on sustainable, efficient use of ocean resources.
Many municipalities are now embracing the 24×7 concept. They are also focused on reducing non-revenue water from the current levels of over 50 per cent to below 20 per cent. The National Mission for Clean Ganga is also developing a circular model of reclaiming, reusing and recycling water. The government is seeking ways to monetise treated sewage water, such as selling it to power plants.
Also in the urban space, there has been a slowdown in the Smart Cities Mission, with completion dates pushed back again. However, the mission has seen the completion of 228 public-private partnership (PPP) projects worth Rs 220 billion across 60 cities, while there is further scope for 160 PPPs worth Rs 150 billion.
Despite all the action, the construction sector isn’t doing quite as well as it could since things are slow in terms of private investments. The real estate sector has also seen uneven demand where high-end projects have found takers but lower-income demand has been weak.
The counter-cyclical policy adopted during the pandemic has successfully kept economic activity ticking. We finally have signs of growth acceleration and it’s time for the private sector and consumption to contribute to growth. It’s also time for policy reviews, and a focus on fixing persistent problems across sectors.