SUPERCHARGING the INFRA PUSH

The imperatives for attracting investments & hastening execution.

As the spectre of the pandemic recedes, the government has spelled out its policy lever of choice loud and clear — it will be spending heavily on infrastructure for economic growth.

The reason is not far to seek. Investment in infrastructure and its natural corollary — construction — is known to trigger multiplier ripples through the economy, spurring employment and supercharging growth in core industries such as steel, cement, materials, construction equipment, and capital goods.

Of the total planned capex of Rs 12.2 lakh crore by the central Government in Union Budget 2022-23, Rs 6.5 lakh crore has been allocated to infrastructure ministries.

Of the infrastructure outlay, Rs 4.3 lakh crore is expected from gross budgetary support, or direct outlays for the ministries — almost a threefold rise from the last fiscal. The balance would be through internal and extra-budgetary resources, or outlays through public sector undertakings and parastatals such as the National Highways Authority of India (NHAI).

An infra master plan as the blueprint for a new India

At the heart of the infra outlay boom is the government's flagship Gati Shakti Master Plan — an ambitious integrated transport infrastructure investment plan until 2024-25 to construct a pan-India network ensuring last-mile connectivity to the country's many regions and industrial centres.

The resultant improvements in transport capacity, efficiency, reliability, and service levels are expected to save time and cost, enhance productivity and competitiveness, drive supply-chain efficiencies, and spur economic growth.

The master plan has targets for each infrastructure ministry.

For the Ministry of Road Transport and Highways (MoRTH), the goal is to build a national highway network of two lakh km, complete 5,590 km of four- or six-lane national highways, and connect all state capitals in the northeast with four- or two-lane national highways.

The Railways is envisaged to handle 1,600 million tonne (MT) of freight by fiscal 2025 (up from 1,210 MT in 2020) and implement two dedicated freight corridors (DFCs).

For the aviation sector, the goal is to double the existing footprint to 220 airports, heliports and water aerodromes by 2025, which will entail construction of an additional 109 such facilities.

For the ports sector, the target is to increase cargo handling capacity to 1,759 million metric tonne per annum (MMTPA) by 2025 from 1,282 MMTPA in 2020.

Similarly, the country's gas pipeline network is targeted to quadruple to 34,500 km by fiscal 2025 and renewable energy capacity is targeted to rise to 225 gigawatt (GW) from 87.7 GW currently.

Union Budget 2022-23 serves to kick-start the steep climb of the ministries towards the Gati Shakti targets. For instance, the target to expand the country's national highways by 25,000 km next fiscal is highly ambitious, as it is 29% more than the combined achievement in almost two years — 6,185 km in the first nine months of this fiscal and 13,200 km last fiscal.

The other areas of infrastructure-linked focus in the budget are clean energy, water and housing. The 'Water for All' mission will get a further push from continued large allocations. It will target connectivity for 3.8 crore households under the 'Jal Shakti' scheme. While the Rs 60,000 crore allocation to the drinking water scheme is flat on-year, the cumulative spend in this and the last fiscal is equivalent to that in the past nine fiscals through 2021.

Energy transition is another area of significance the budget has laid emphasis on. The leap towards clean energy is lent a sturdy helping hand through the production-linked incentive (PLI) scheme in the solar sector and the electric vehicle adoption-linked policy push. The in-principle approval of Rs 24,000 crore for PLI allocation towards high-efficiency photovoltaic modules is expected to lead to the setting up of a 30-35 GW of solar module capacity and a 25-30 GW of cell capacity by 2024. This will reduce dependence on imports, which is 90% for cells and 75-80% for modules.

Overall, the budget provides an outlay-linked directionality, though the outcome will be a function of the state of each sector.

Here's a brief overview of some of the key sectors:

Roads and highways

The momentum in outlays over the past five years has been sustained by national highway-linked capex, which grew 30-33% in fiscal 2021 (31% CAGR over fiscals 2016-20) due to higher construction.

The NHAI's brisk pace of awards stood at 4,818 km in fiscal 2021 — a three-fiscal high. The hybrid annuity model accounted for 54% of the awards, followed by engineering, procurement and construction (EPC) 43%, and build, operate and transfer (BOT) 3%.

The trend is expected to continue in fiscal 2022 on the back of higher awards (to be in the range of 4,500-5,000 km).

The key to sustaining this rate of awards will be de-risking liabilities in road projects. About 40 projects awarded by MoRTH had an annual aggregate liability of Rs 37,587 crore in fiscal 2021. This is only expected to grow in the near future, till the share of BOT starts increasing, potentially in response to an altered, more favourable public-private partnership (PPP) landscape.

Logistics and warehousing

Last year, the Government of India released a draft of the National Logistics Policy, which emphasised on the development of multi-modal logistics parks (MMLPs) for enabling seamless multimodal freight transfers to enhance last-mile connectivity, providing world-class storage and handling, and delivering value-added freight services.

The objective was to reduce logistics cost as a percentage of gross domestic product (GDP) to about 10% by 2022 from 13-14% currently, optimise the modal mix, and enhance the logistics value chain through digitisation, standardisation, and modernisation of warehousing.

Consequently, the NHAI has envisaged development of MMLPs at 35 strategic locations across the country, as a key policy measure to rationalise logistics costs in India and improve its competitiveness.

Added to this, Union Budget 2022-23 envisages awarding of contracts for the implementation of MMLPs at four locations through the PPP mode next fiscal.

Further, 100 PM Gati Shakti cargo terminals for multimodal logistics facilities are expected to be developed over the next three years. This augurs well for the rural economy and local supply chains as the benefits of on-ground improvement in supply-chain efficiencies will reach the small farmer/trader and unleash the power of 'One Nation, One Market'.

The outlook for warehousing is robust in the post-pandemic period. Demand for warehousing declined 20-30% in fiscal 2021 due to volume declines in end-user segments such as retail, consumer durables, and auto & components. The trend is expected to reverse with a recovery of 65-75% in fiscal 2022, as most end-user industries are expected to witness double-digit growth on the low base of last fiscal.

Housing

The housing sector has enjoyed a consistent focus, given the government's Housing for All objectives. In fiscal 2023, 80 lakh houses are targeted to be completed for the identified eligible beneficiaries of PM Awas Yojana (PMAY), both rural and urban. And Rs 48,000 crore was allocated for this purpose in Union Budget 2022-23. PMAY Urban has witnessed healthy construction over the past three fiscals, particularly 2019 and 2020.

Ports

Port traffic is expected to rise by 5-7% this fiscal, after declining by 4.8% in the last. Port traffic growth was already slow at just 2.2% in fiscal 2020, compared with the last five-year CAGR of 4.6%.

Over fiscals 2022-26, traffic at Indian ports  is expected log a CAGR of 3-5%.

However, tapering growth in the coal, and petroleum, oil and lubricants (POL) segments — led by slower consumption of crude oil, import substitution and plateauing of iron ore exports — is expected to moderate cargo traffic over the long term.

Overall impact on construction

The construction sector is projected to recover 26-30% this fiscal from a low base in the last, driven by deferred investments across sectors and a healthy growth in infrastructure led by the investment push from central and state budgets.

The sector is expected to clock a 6-10% CAGR over fiscal 2022-26, as against 10% over fiscal 2016-20.

The imperatives

To truly attract private-sector investments in the infrastructure-led construction build-out as a meaningful complement to the immense public-sector infrastructure outlays, the following aspects deserve consideration.

First, payment risk needs to be significantly mitigated. To appropriately widen the base of eligible developers to relatively small players with lower working capital capabilities, timely payments need to be made on due completion of project milestones. The provision in Union Budget 2022-23 mandating payment of 75%  of running bills within 10 days is an excellent step in this regard. Simultaneously, settlement  of disputes through conciliation  also likely to help break the logjam of stuck payments.

Second, counterparty risk needs to be duly understood, mitigated where possible and priced appropriately. A significant part of the capex will be made by the states, buoyed by the incentive of Rs one lakh crore from the Centre to states in the form of interest-free loans with a tenure of 50 years, up from Rs 15,000 crore in fiscal 2022RE. However, the credit profiles and payment terms of states vary. Developers need to pay due regard to this variation in the credit profiles of states.

Finally, a case may be made for re-imagining PPP — undertaking measures to improve the underlying financial viability of projects by adopting the global best practices in risk  allocation and capacity building through technical assistance from development partners will be useful here.

Only then can the vision and blueprint of building the world-class infrastructure for a new India in the next 25 years — ushering in Amrit Kaal — be realised.

– Jagannarayan Padmanabhan

Director and Practice Leader, Transport & Logistics, CRISIL Infrastructure Advisory

– Supa Ray

Associate Director, Infrastructure and Public Finance, CRISIL Limited

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