An old saying, 'Follow the Money' often helps clear up apparently mysterious business developments. Financial inflows can be a very good indicator of rising demand and activity. A look at inflows to the so-called core and infrastructure sectors over 2015-16 makes one wonder if there has been much in the way of genuine growth in these areas.
Data are available from several sources of funding such as bank credit, external commercial borrowings (ECBs), initial public offerings (IPOs) and foreign direct investment (FDI) inflows. Overall, gross bank credit to mining, petroleum, gas & coal, cement, iron & steel, construction, power, telecom, roads and other infrastructure grew only four per cent, up from Rs 14.3 lakh crore in 2014-15 to Rs 14.9 lakh crore in 2015-16. Credit growth was flat in construction, and shrank in telecom, cement and petroleum.
There were a total of six infrastructure IPOs in 2015-16. Of these, InterGlobe Aviation (IndiGo) was a large issue, raising Rs 3,000 crore. The others were all in the Rs 300-500 crore range. FDI fell substantially after the bumper inflow of 2014-15 and ECB increase only five per cent.
ECB rose five per cent in dollar terms to $17.17 billion, from $16.4 billion in 2014-15. However, increases were spotty. Infrastructure finance and ports & shipping saw substantial rise in ECB exposure. These fell in the oil & gas, aviation, telecom, renewables and conventional power sectors.
So, bank credit growth was nominal; FDI flows have slowed and ECB flows have also grown only nominally. Given only a moderate increase in financing, it is reasonable to assume activity across these key sectors is muted. This means capacity creation in infrastructure will continue to lag.
The constraints imposed by inadequate infrastructure are obvious. It becomes difficult to do business with high efficiency if infrastructure is poor. Trade runs into problems if there are transport choke points. Power shortages impose high costs on the entire business environment and it is practically impossible to run any modern business without stable telecom and internet services. Low construction activity indicates projects are stalled or progressing slowly, which means future capacity is also not being built.
If one region is power surplus and another is deficient, the grid must be capable of transmitting power to sort things out. Similarly, roads (or rail, or waterways)) must exist for goods to be transported. Food often spoils before it is delivered from farm to table because of poor roads and lack of refrigeration. Sugar recovery is less because cane cannot be crushed instantly after harvesting, due to poor roads. Hence, poor infrastructure contributes to high food prices.
Sustained gross domestic product (GDP) growth is always hard when infrastructural constraints exist. A strong infrastructure focus helps kill two birds with one stone. GDP growth is stimulated with a counter-cyclical effect and the capacity to sustain future growth is created. And, infrastructure creation is a long-term process, since projects take years. There is another source of funding which we have not discussed. That is government expenditure. Unfortunately, the Centre cannot spend more without a negative impact on the fiscal deficit. The finances of most states are also stressed. We will simply have to wait for private financing to pick up.
The issues and constraints hobbling private financing are well known. Many of these have persisted for decades. There are land acquisition difficulties, slow clearances, unclear and contradictory policy, difficulties in enforcing contractual agreements, etc. Added to this, resources are also stuck in stalled projects.
The government has to cut through the policy tangles, since no other entity can do that. Tall targets have been set but the issues have not been tackled. Given the cautious attitude of the National Democratic Alliance government and the long-gestation nature of infrastructure projects, there might not be much pick-up during the current financial year either. Unfortunately, shock prices are hitting the sort of levels where double-digit growth would be required to justify the current valuations.
Data are available from several sources of funding such as bank credit, external commercial borrowings (ECBs), initial public offerings (IPOs) and foreign direct investment (FDI) inflows. Overall, gross bank credit to mining, petroleum, gas & coal, cement, iron & steel, construction, power, telecom, roads and other infrastructure grew only four per cent, up from Rs 14.3 lakh crore in 2014-15 to Rs 14.9 lakh crore in 2015-16. Credit growth was flat in construction, and shrank in telecom, cement and petroleum.
There were a total of six infrastructure IPOs in 2015-16. Of these, InterGlobe Aviation (IndiGo) was a large issue, raising Rs 3,000 crore. The others were all in the Rs 300-500 crore range. FDI fell substantially after the bumper inflow of 2014-15 and ECB increase only five per cent.
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According to the Department of Industrial Policy & Promotion (DIPP), FDI inflow to infrastructure totalled $3.9 billion in 2015-16, compared to $ 5.6 billion in 2014-15, a drop of 31 per cent. The big losers were telecom, where inflow dropped to $1.3 billion from $2.9 billion in 2014-15, and petroleum, where inflow dropped to $106 million, from $1.1 billion in 2014-15. Renewables, aviation and shipping actually saw rising inflow, although the amount was moderate in each instance.
ECB rose five per cent in dollar terms to $17.17 billion, from $16.4 billion in 2014-15. However, increases were spotty. Infrastructure finance and ports & shipping saw substantial rise in ECB exposure. These fell in the oil & gas, aviation, telecom, renewables and conventional power sectors.
So, bank credit growth was nominal; FDI flows have slowed and ECB flows have also grown only nominally. Given only a moderate increase in financing, it is reasonable to assume activity across these key sectors is muted. This means capacity creation in infrastructure will continue to lag.
The constraints imposed by inadequate infrastructure are obvious. It becomes difficult to do business with high efficiency if infrastructure is poor. Trade runs into problems if there are transport choke points. Power shortages impose high costs on the entire business environment and it is practically impossible to run any modern business without stable telecom and internet services. Low construction activity indicates projects are stalled or progressing slowly, which means future capacity is also not being built.
If one region is power surplus and another is deficient, the grid must be capable of transmitting power to sort things out. Similarly, roads (or rail, or waterways)) must exist for goods to be transported. Food often spoils before it is delivered from farm to table because of poor roads and lack of refrigeration. Sugar recovery is less because cane cannot be crushed instantly after harvesting, due to poor roads. Hence, poor infrastructure contributes to high food prices.
Sustained gross domestic product (GDP) growth is always hard when infrastructural constraints exist. A strong infrastructure focus helps kill two birds with one stone. GDP growth is stimulated with a counter-cyclical effect and the capacity to sustain future growth is created. And, infrastructure creation is a long-term process, since projects take years. There is another source of funding which we have not discussed. That is government expenditure. Unfortunately, the Centre cannot spend more without a negative impact on the fiscal deficit. The finances of most states are also stressed. We will simply have to wait for private financing to pick up.
The issues and constraints hobbling private financing are well known. Many of these have persisted for decades. There are land acquisition difficulties, slow clearances, unclear and contradictory policy, difficulties in enforcing contractual agreements, etc. Added to this, resources are also stuck in stalled projects.
The government has to cut through the policy tangles, since no other entity can do that. Tall targets have been set but the issues have not been tackled. Given the cautious attitude of the National Democratic Alliance government and the long-gestation nature of infrastructure projects, there might not be much pick-up during the current financial year either. Unfortunately, shock prices are hitting the sort of levels where double-digit growth would be required to justify the current valuations.