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Financing is the key PDF Print E-mail
Monday, 22 December 2014 11:18
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PM Modi taking control of the PMG won’t really help

Given the $300 billion worth of projects that continue to remain stuck for several years now, it is good news that prime minister Narendra Modi plans to take charge of the Project Monitoring Group (PMG) himself. Given that most of the projects are stuck due to inter-ministerial issues, it is only the prime minister’s direct involvement which can help resolve these—as a case in point, till Narendra Modi came centre-stage, the BJP was against bringing in commercial miners in the coal sector, but it is now planning this. A brand-new digital platform, e-SamikSha, is to be used for this since it allows a real-time look at where files are stuck and why—the project allows for email and SMS alerts as well and even generates a unique ID for each task. Should even a fraction of these projects come on stream, the impact on the investment cycle can be quite significant—overall capital formation has fallen from 38% of GDP in FY08 to 34.7% of GDP in FY13 and, within this, that by the private corporate sector has almost halved, from 17.3% of GDP to 9.2%.

It is important, however, not to simplify matters and reduce them to just a matter of getting clearances. For one, apart from the central clearances that Modi can still push, there are those from the state governments and, were all these to be available, there is the issue of how land is to be got—there has, so far, been no progress on this. Two, there are issues that go beyond the PMG’s clearances. Around 40,000MW of power capacity is idling due to lack of coal and gas, and there has been nothing so far to suggest progress. Indeed, the gas pricing fixed so far does not make it lucrative to produce in the deep waters where most of India’s gas is and the coal pricing—benchmarked to Coal India’s prices for coal for the power sector—may be too low to attract investors. Which is why, while the PMG claims to have cleared 186 projects with an investment of $103 billion, there has been no bump in either credit demand or project sanctions from banks.

The reason for this is simple: several of the projects are simply not viable any more. Some were conceived for export demand to countries like China while others were predicated on India’s growth being in the 8-10% range, a number that cannot be achieved for at least another 2-3 years. In the case of infrastructure projects planned as PPP projects, as the government’s mid-year economic analysis admits, the private sector simply does not have the capacity to deliver given its vastly leveraged balance sheets; nor do banks have the capacity to lend at much more than the pace they are doing so right now. Getting PMG clearances is one part of the Rubik’s cube that Modi needs to solve, the other part that needs a simultaneous solution is cleaning up the banks’ balance sheets by, if need be, setting up a separate SPV to take over the bad loans. And given the washout the current session of Parliament has been, it doesn’t look as if much headway is going to be made on critical land issues.

 

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