Industry observers have promptly branded the growth in some of the core sectors in the second quarter as ´encouraging´ and ´first signs of recovery´ for the infrastructure sectors. Banks and several private industries posted not-so-bad figures at the end of the second quarter of the year, but this hardly presents the complete picture. Indeed, it may be too soon to call it a recovery in a broader sense.
Firstly, the issue is not so much of ongoing, already financed projects, as it is about those that are in the post-approval, pre-financial closure stages. After all, national road projects are down to a trickle. The Planning Commission and the finance ministry have been seriously rethinking the Model Concession Agreement (MCA) that led to the 2011 euphoria (not that there was an anomaly in the MCA itself, but the private sector´s exuberance reflected their confidence in it). The revised MCA may provide for a firmer and more structured way to avoid and resolve disputes, to provide for any leeway in the contract for re-amortisation of premium payments, and to rethink the selection process of concessionaires in PPP projects.
Secondly, the decline itself has been largely artificial, because the so-called ´learning process´ in policy and implementation was mostly avoidable (because many obvious recommendations were ignored). One such would be a preeminent clause in contracts to check unrealistic bids. Mileage extraneous to the projects has become somewhat mandatory in our highly politicised environment, and obstinacy and uncertainty have taken their toll on growth and project implementation.
Then, thirdly, there is the domino effect wrought by a sudden urge last November to clean up state-owned power distribution companies. This was followed by a braking of infrastructure financing as RBI asked banks to go slow on financing that sector, and many banks (somewhat gladly) took that directive as a blanket ban on infra financing. The government has taken steps to clear nearly Rs 1.8 lakh crore worth of power generation projects.
The slow lending to infrastructure has helped banks focus more on recovery. One of the aspects of ´recovery´ last quarter among banks has been an almost-dramatic improvement in NPAs. Instead of recommending to RBI and the ministry on how infrastructure financing can be facilitated, banks have turned to the high-growth retail accounts of home and vehicle finance the main factor behind the growth.
An increase in electricity consumption, which occupies the largest share among the eight core sectors, grew at a massive 12.6 per cent in September, compared with 3.9 per cent in the year-ago period. Cement grew 11.5 per cent against 13.8 per cent in the same period last year and steel at 6.6 per cent, against 1.3 per cent in September 2012-13. This has some substance in the recovery theory.
Further fillip can be provided by infrastructure debt funds (IDFs). The finance ministry is in talks with the RBI to liberalise the rules to allow newly created IDFs to take over more loans from banks without having to make provisions as part of restructured loan norms. The current sombre mood despite clearances is downcast as financing has cropped up as the biggest issue. RBI must direct banks not to let up on lending to infrastructure. While these initiatives are sure to ease the flow, it is the bankers who would need to get back their faith and back projects once again. When a recovery genuinely happens, it will be in the form of moderate but optimistic numbers in bidding, with banks more willing than now to finance projects that are truly viable.