The new tax regime will boost GDP growth in the long run, and the benefits will eventually reach all the sectors in five-six years, says Sandeep Upadhyay, MD & CEO, Centrum Infrastructure Advisory Ltd.
What is your view on the impact of the GST rollout on industry?
In general, our view is that GST is going to bring in a lot of efficiencies as far as logistics goes and logistics also has a direct bearing on the cost of some of these raw materials which are going to be core to the development of any infrastructure project.
From a taxation point of view, of course you get into a bit of a complex kind of number crunching. Plus, there is speculation around how the GST law is going to be rolled out and what kind of sectors will or will not get exempt. But if you just take up examples of higher visibility sectors like renewable energy for example, from a developer´s point of view, it is certain that the cost will increase. Let´s say today if the capital cost is X, it may be anywhere between 1.15 to 1.2X in terms of the overall impact of GST on the cost of the project from a developer´s point of view.
Please elaborate on the ramifications on capex requirement...
What we are suggesting is that from a capital expenditure point of view, when you look at it purely from a developer´s model, the capex is slated to increase by 15 to 20 per cent. As the capex increases, the direct impact would be that either you will have an erosion of the equity value for some of the assets which essentially could be a reduced equity IRR or a reduced equity NPV over a period of time, or if this increase in cost can be factored in as a pass-through, then it may result in an increase in tariffs. So there are two implications which are possible: one is a reduced kind of equity IRR from a developer´s point of view, because of the increase in capex and if the tariff remains the same, obviously you will end up with a lesser equity IRR. However, if the tariff also moves on, if one is able to absorb this increase in cost and bid at a higher tariff, the result will be that the consumers will end up paying slightly more.
Whom are you referring to when you say consumers of infrastructure projects?
When I say consumers, it is basically consumers of electricity. Now, if I am an IPP and my capex increases for whatever reasons, then I will have to ask for a higher tariff if I have to maintain my equity IRR. So when I ask for a higher tariff from the government, ultimately it will be the consumers who will have to pay the higher tariff. They will have to consume electricity at a marginally higher tariff. Everything is not seamless, but the indirect repercussion is that the cost of electricity may go up. We have done some math on this; we came out with a theme paper concept also partially covering the impact of GST on higher visibility sectors like renewables. One part of it actually covers the GST impact on renewables.
I am just trying to get a sense of what the industry is going through right nowà Is there anxiety?
There is certainly an element of anxiety. I just finished a meeting with a very large IPP. My question to them was how are you guys preparing for a post-GST launch in terms of bidding for these projects.. and it is very certain that everyone is just in a wait-and-watch kind of mode in terms of whether this sector will be exempted or not. If it is not exempted, they will have to re-strategise their entire initiative as to how they go about sectors like solar and all, where essentially they were banking on huge volumes to really pick up.
There are some synergies and interactions with the government on this issue. Which are the main areas where the government may be able to help?
We are a bit differently placed from some of these other countries where application of GST has happened, or a similar kind of a concept has been imposed. India is a country with very high degree of inefficiencies with which some of these fundamental segments do not cater to. The district is at the top of it. The call that the government has taken, and the kind of conviction level with which they have been pushing for GST, was not just a function of making the whole tax thing work out. It was from the point of view of also pushing some of these fundamental sectors or segments. When you do an application of GST, the direct beneficiaries would be players catering to various parts of the chain in the logistics segment, and that invariably is going to build in a lot of efficiencies over a period of time which will percolate down to all these core sectors including cement and steel.
The purpose of calling for such a massive reform, initiating it at this massive scale, was not just driven by the fact that it should cater to one sector and not to the other. It was basically to bring in efficiencies in some of the core sectors.
If you look at the EPCs, the government has to revise the interest pack from a financial sentiment point of view. EPC is one segment where we see that there is going to be a lot of flexibility in terms of getting the cost level down, and we certainly see the cost of construction for a lot of these core infrastructure projects coming down from an EPC perspective. From a developer´s perspective, there are high visibility sectors like renewables. I think these are sectors which will certainly be considered in terms of getting a waiver, given the targets that we have set for ourselves, and where we stand currently, along with the subdued investor sentiment. I think these are things which are in our control and these are things which can actually have a resultant effect on the equity IRR to an extent of 3-4 per cent. So these are sectors where we see that the government is going to be flexible in terms of according favours to them.
What are the things that you are telling people to do while we wait and watch, so to speak?
Our advice to our clients is to get aligned with the projects where either the capex is pass-through, or the capital expenditure is largely likely to happen on the government´s balance sheet, and not commit to capex on individual balance sheets as far as projects are concerned, which are on a lump sum turnkey basis or on a BOT basis.
Isn´t the government already doing enough? Why isn´t the industry enthused already?
Personally, I am of the view that the government is making all the right moves in terms of the policy and regulatory measures in the transportation sector; I think they are spot on. As far as the roads sector is concerned, I think they are bang on. Looking at everything that Nitin Gadkari is doing, I would rank him 9 out of 10 today in terms of the policy initiatives which he has taken. I would not say that the same goes for the power sector. So as far as Gadkari is concerned, regarding his history and his initiatives, I am fully with you that the right noises are being made and the right initiatives are being made, and the political intent is at an all-time high. Now, the same cannot be said for all the ministries.
So while all these positive things are happening, they may not be happening comprehensively across sectors. The second part is that despite all these things happening, in India we tend to get a bit judgmental very fast. If everything is happening in the right direction, then why are they not yielding results? Now, the results are not just a function of driving the policies efficiently, you can do everything right on the policy front, and still the results may take a longer time than what you would have expected.
I am not in a position to say all these things have happened in the right way for railways, or for aviation or power for that matter. There are certain things fundamentally still going wrong in the power sector, and we need to get it back on track. Despite the fact that today we have a cumulative capacity of 9 GW, a lot of things to boast about in the solar sector and all that, I really have my doubts on whether it is really sustainable or not.
When will the benefits of the new tax regime percolate to all the relevant sectors?
As I said, GST is not done from the objective of influencing one sector or reviving one sector, and it is definitely a much needed move. Now whether in the short term, it works out for some of these sectors positively or negatively, that´s just speculation. But from a long-term point of view, in terms of getting the economy back on track, it is definitely a good move. Over the next five-six years, the benefits will start percolating across sectors, not just for one or two.
I would highly commend this initiative which comes with a higher level of political will. It may be disruptive for the next two three years for certain sectors, but in the long term, I think it is going to be beneficial for most of these sectors.