In a trough: private sector CAPEX lowest since fy08
The share of private investments in the infrastructure sector has fallen to a decadal low of around 25% in FY18, sharply down from a high of 37% cent in FY08, according to a Crisil Infrastructure Advisory report released on Friday.
Private investments, which averaged 37% between fiscals 2008 and 2013, fell by 600 basis points (bps) between fiscals 2013 and 2017 to 31%, which fell a steep 600 bps further to 25% in FY18, as a plethora of stalled projects and stressed assets dampened investor interest and risk appetite.
“A material ramp-up in government spending in the past few years has meant the share of private investments in infrastructure has fallen to a decadal low of around 25% in FY18,” the Crisil report said.
This means that between fiscals 2008 and 2018, there was a massive plunge of 1,200 bps in private investments.
While the highways sector has seen a revival in public private partnerships (PPPs), and the renewables sector some buoyancy, private investments in other infrastructure segments have remained stagnant or weak, the report said.
“Resumption and broad-basing of private investments are critical to sustain the share of infrastructure investments at around 6% of GDP over a medium-to-long-term,” Crisil managing director Ashu Suyash said in the report. “This requires new PPP frameworks, expeditious resolution of stressed assets, and steps to deepen financing sources,” she added.
Infrastructure developers agree that the private capex remains subdued; however, there are no easy answers on when it would come back on stream. For instance, the private sector investments in sectors that engineering major Larsen and Toubro (L&T) is involved with continue to be slow. R Shankar Raman, chief financial officer, L&T, said recently that the private sector, by and large, is on a wait and watch mode and would possibly make the move once the environment is conclusively favouring economic activity for their respective businesses.
MS Unnikrishnan, managing director and CEO, Thermax, told that the kind of orders that are coming in cannot move the needle for Thermax or for the country. “The ones that are missing in the bargain are larger power plants, where hardly anything is happening. There has not been a single refinery expansion post the Cochin refinery expansion completed few years back. There has not been any significant cement expansion in the country,” he said.
It would take perhaps another 12-18 months for any meaningful private spending to start in few sectors like cement and steel, he added.
Govt forced to weigh import substitutes for better trade balance as the rupee slides
To achieve greater trade balance by curtailing imports at a time when the rupee is weakening against the US dollar, an inter-ministerial panel under commerce and industry minister Suresh Prabhu has asked 15 import-sensitive ministries/departments to come up with specific suggestions urgently to increase local production within two-three months.
The exercise — touted to be one of the largest ever on “import substitution” — involves various departments, including petroleum, industry, chemicals, heavy industries, IT and electronics, economic affairs, telecoms and coal. Products which come under these 15 departments accounted for close to 80%,
or $402 billion, of the country’s annual imports over the past five years through 2017-18, a senior government official told.
For instance, the official said, state-run Coal India may have to scale up its production or Steel Authority of India has to produce more steel, to reduce reliance on imports.
However, Coal India’s production in the first five months of this fiscal stood at only 32% of its full-year target of 680 million tonnes. Similarly, the ability of SAIL, which has reportedly refused to offer any dividend to the government in 2018-19, to raise production is impaired by a “cash crunch”. “We can’t entirely substitute import, but even if it’s reduced by 5%, that should be a good beginning,” he said.
Apart from “import substitution through higher local output”, to reduce demand for the dollar for crude oil imports, the possibility of rupee/barter trade with Iran, Venezuela and Russia needs to be explored by the Reserve Bank of India (RBI) and the department of economic affairs (DEA), the panel has suggested. It has also recommended that the DEA and the RBI weigh the option of trading in local currency with China, with which it incurred a record trade deficit of $63 billion in 2017-18.
The panel also asked the RBI and the DEA to promote gold related schemes — such as monetisation, sovereign bonds and coins. Similarly, arrangements like deferred payment or increasing barter system with Russia need to be considered to improve trade balance in diamonds from that country, the panel suggested.
This was the second part of the government’s efforts to trim imports through higher domestic output, having already raised customs duty on 19 products totalling annual imports of Rs 86,000 crore. Current account deficit (CAD), stoked by elevated trade imbalance, is blamed for the sharp depreciation of the rupee in recent months, apart from global factors including the US interest rate hike.
Private investments plunge to 25% in fy18; fall 1200 bps from fy08 high: report
The share of private investments in the infrastructure sector has fallen to a decadal low of around 25 per cent in FY18 steeply down from a high of 37 per cent in FY08, says a report. Private investments, which averaged 37 per cent between fiscals 2008 and 2013, fell by 600 basis points (bps) between fiscals 2013 and 2017 to 31 per cent, which fell a steep 600 bps further to 25 per cent in FY18, as a plethora of stalled projects and stressed assets dampened investor interest and risk appetite.
“A material ramp-up in government spending in the past few years has meant the share of private investments in infrastructure has fallen to a decadal low of around 25 per cent in FY18,” according to an Crisil InfraIndex. This means that between fiscals 2008 and 2018, there was a massive plunge of 1200 bps in private investments. While the highways sector has seen a revival in public private partnerships (PPPs), and the renewables sector some buoyancy, private investments in other infrastructure segments have remained stagnant or weak, the report said.
“Resumption and broad-basing of private investments are critical to sustain the share of infrastructure investments at around 6 per cent of GDP over a medium-to-long-term,” Crisil managing director Ashu Suyash said in the report. “This requires new PPP frameworks, expeditious resolution of stressed assets, and steps to deepen financing sources,” she said.
According to the index, the highway sector saw the biggest rise from 6.9 per cent in 2017 to 7.4 per cent in 2018, riding on private sector interest in the hybrid annuity model (HAM) and success of asset monetisation under the toll-operate transfer model.It said the scores of last year’s toppers, power transmission and renewables, lagged a tad given the high suo motu allocations to public sector in the former, and policy and pricing headwinds in the latter. Ports and airports saw an improvement, too, but conventional generation, power distribution and urban infrastructure continue to lag, it said.
RBI monetary policy highlights: surprise, surprise! RBI keeps repo rate unchanged at 6.5%; spooks rupee, SENSEX
The Reserve Bank of India (RBI) kept the repo rate unchanged at 6.5%, spooking the market, which had widely expected a rate hike of 25 basis points. While the RBI decided to maintain the status quo, it turned hawkish and ruled out any rate cut in future by changing stance from ‘Neutral’ to ‘Calibrated Tightening’.
The central bank held its fourth Monetary Policy Committee (MPC) meeting of FY19 against the backdrop of the sharp depreciation in the rupee, rising crude oil prices, intense pressure on current account deficit (CAD) and liquidity issues. Market watchers and top economists were expecting a 25 basis point hike once again after June and August.
Reacting to the RBI’s surprise decision, the rupee breached 74 vs dollar mark for the first time, before paring some losses, while Sensex closed almost 800 points down. The central bank had hiked interest rate by 25 basis points each in June and August, citing upward pressure on inflation and volatility in crude oil prices.
‘I’m in absolute disbelief’, ‘it’s a mistake’: 5 strong reactions from experts on RBI’s surprise status quo
The RBI was widely expected to hike the repo rate again in October monetary policy decision. And it didn’t. Before one could figure out why the RBI chose to hold rates, rupee rout had already begun. Amid all this, some strong reactions came from experts, who said that decision to hold the interest rate was a mistake or risky move.
Addressing the post-policy conference on Friday, RBI governor Urjit Patel pressed that the mandate of the central bank was inflation and not rupee, which was below the target of 4% in August. He, however, tried to calm the situation by saying that the change of stance from ‘Neutral’ from ‘Calibrated Tigethening’ was crucial as it took off any rate cut off the table.
Reacting to the decision, Ajay Srivastava said that he was in “absolute disbelief”. “I am in absolute disbelief; what’s happening at the regulatory front. With all due respect to the regulator but are they in the same world we are in? There is a bigger crisis at hand, the fixation on inflation targeting mandate is unbelievable”, he told CNBC-TV18.
A similar reaction came from Taimur Baig, who called it a mistake. “It was a mistake. The world is going through a major recalibration in terms of monatey policy and India does not live in a vacuum,” Taimur Baig told CNBC-TV18, referring to hawkish outlook by the US Fed.
“This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence… A narrow focus on inflation targets perhaps not desirable in the middle of a financial crisis,” Abheej Barua said.
“The status quo decision along with a slight downside revision to inflation comes as a surprise given the sharp upside risks to the inflation trajectory in the months ahead on the back of elevated crude oil prices and the weaker rupee,” Upasana Bhardwaj said.
“We believe inflation is expected to overshoot RBI’s estimate in 2H (3.9-4.5%) by 20-30bps. Additionally, tightening global financial conditions may further weigh on Rupee. We continue to expect 25-50bps of rate hikes in the rest of FY19 to ensure financial stability amid global and domestic headwinds,” she added.
“The decision to stand pat must have been a tough one, for going by the consensus view in the market, a rate hike was almost a given, considering the macroeconomic pressures. Without a doubt, the double whammy of rising oil prices and weak rupee have increased the upside risk to inflation since the last policy meet,” CRISIL said.
The RBI on Friday kept the repo rate unchanged at 6.5% after two back-to-back 25 basis points rate hike in June and August while changing the stance to ‘Calibrated Tightening’ as there were upside risks to inflation due to volatility in crude oil prices. After the decision, the rupee breached 74 vs dollar mark within minutes, before paring some losses at close. Sensex also ended about 800 points lower at Friday’s close.
Rupee crashes below 74 as RBI opts not to hike rate
The Reserve Bank of India (RBI) on Friday decided to leave the repo rate unchanged at 6.5%, a move that sent the rupee crashing all the way to 74.2237 against the dollar. The currency markets had priced in a 25-50 basis points hike, believing that was needed to defend the rupee, and was in keeping with the US Fed’s tightening. Again, although a flat repo should have cheered the stock market, the fear the rupee would weaken further sent the Sensex crashing by nearly1,000 points at one point during the session. Bonds, however, rallied slightly with the benchmark yield falling to 8.02% post the announcement.
While lowering projections for retail inflation in H2FY19 and Q1FY20, the central bank altered its stance to one of ‘calibrated tightening’ citing upside risks to the inflation forecasts. Economists explained that while the earlier neutral stance had allowed for the possibility of a rate cut, the current stance meant rates could stay constant or go up.
“The stance is not necessarily a deferred action but it indicates we are focussed on our mandate of flexible inflation targeting,” RBI governor Urjit Patel observed.
The governor observed that depreciation of the rupee had been moderate compared with peers.
Friday’s pause doesn’t help consumers since banks have already raised loan rates in recent weeks, since they are paying more for customer deposits. Given how the money markets have been tight in recent weeks and short-term borrowing rates have zoomed, it is unlikely banks are going to trim lending rates anytime soon. However, increasingly, banks will be in a better position vis a vis NBFCs as the cost of funds rises. Deputy governor N Viswanathan said more rules could be expected to ensure assets and liabilities of NBFCs are better matched.
The RBI governor observed that outlook for food inflation is expected to be benign, though the impact of the higher purchase prices for crops is uncertain. RBI has lowered its inflation forecasts by 30-40 basis points for Q4FY19 and Q1FY20. Patel cautioned a fiscal slippage would have a bearing on inflation and crowd out private sector investments. The central bank lowered its growth forecast for Q1FYY20 to 7.4% from the earlier 7.5%.