With the Indian economy hitting a rough patch, the Narendra Modi government is betting on the infrastructure sector to rekindle growth. However, a task force set up recently faces several hurdles.
The rate of highway construction is projected to slow to about 27 km per day in the current financial year ending March 2020, compared to 30 km last year, according to the Mumbai-based Care Ratings.
The government’s target for financial year 2020 has also been reduced to just 6,000 km from 20,000 km last year, according to Care Ratings.
Weighty issues
The rising cost of land acquisition for new projects is the biggest hurdle.
“Even as land acquisition processes have improved over the past few years, prices have jumped. So, for the National Highways Authority of India (NHAI), it’s a question of viability as they look to acquire land for new projects,” said Ashish K Nainan, a research analyst at Care Ratings.
Land prices, accounting for 30% of the total capital expenditure on national highways construction, has nearly tripled in recent years.
Compared with Rs90 lakh ($1.25 million) per hectare in 2013-14, the cost of land acquisition stood at Rs2.47 crore per hectare in 2018-19, even as the overall land parcels acquired for roads construction has increased.
Public sector banks’ reluctance to lend to infrastructure developers and the implosion of the non-banking financial companies have also hit new projects.
Thus, many ambitious projects are under threat. Case in point: the government’s Bharatmala Pariyojana.
Under the ambitious programme, announced in 2017, the Modi government had awarded 178 roads projects with an aggregate length of 7,998 km till March 2019. This is just 23% of the planned length of 34,800 km by 2022. As of June 30, up to 46 projects were delayed by three months due to lack of funds and land acquisition trouble.
Further, maintaining the pace at last year’s 30 km per day requires private sector participation under the build operate transfer (BOT) model, Care Ratings has suggested in its note. This model, though, is under threat as developers and lenders are wary of a mismatch of traffic estimates (road/NH users) and construction risks.
Fixing the problem
Experts claim finance minister Nirmala Sitharaman’s recent allocation of Rs100 lakh crore for the sector over five years may not help much.
“Going by the union budget, highway construction was expected to be the leading catalyst of infrastructure growth,” said Sagar Dua, research analyst at Advisorymandi.com, an online advisory firm focused on investments, infrastructure, and the retail sector. “But recent statements from the prime minister’s office (PMO) to NHAI, expressing reluctance to provide enough liquidity to construct highways and manage surging land purchase costs (citing the Right to Fair Compensation Act, 2013), does not enthuse much confidence,” added Dua.
There are other alternatives that authorities could look at.
“Creating greenfield projects is bound to result in delays. Authorities must explore the possibility of developing more infrastructure using existing land,” said Nainan of Care Ratings.
The government must also mitigate and eliminate traffic usage and construction risks to attract private investment in BOT road projects. It can look at extending the concession period in case of a shortfall in traffic estimates, recommended Care ratings.
Further, to raise funds for infrastructure projects, the government could look at selling off non-performing PSUs, said Dua. “This could curb the liquidity crunch.”