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Infrastructure: The Key to Economic Revival

Infrastructure: The Key to Economic Revival

by Jagasheth, Independent Analyst, Core Sector 

Over the years, the Government of India has shown relentless focus on improving growth by pushing infrastructure development. Good quality infrastructure aids manufacturing competitiveness, supports growth, generates employment and improves quality of life. The Indian economy has just undergone the wrath of two Covid-19 waves which has not only led to loss of human life, but also of employment, livelihood, consumer sentiment and spending power.

Infrastructure investments have a powerful multiplier effect. They enhance accessibility and facilitate trade, improve mobility, generate greater employment opportunities, and boost overall economic productivity. So naturally one could expect the government is banking on these sectors to drive the revival engine.

Keeping the above domino effect in mind, during the 2021-22 Union Budget announcement the Finance Minister had increased budgetary allocation with respect to infrastructure development by increasing capital expenditure by 26.2% to Rs 5.54 lakh crore. Even the projects under the gamut of National Infrastructure Pipeline (NIP) has been expanded to include 7,400 projects as against the initial 6,835 projects.

Considering how the second Covid wave has led to state level lockdowns and the entire country is not reeling under a nationwide lockdown, infrastructure development, building & construction activities and transportation activities of goods have been functioning albeit with a lower capacity and staggered shifts keeping social distancing norms in mind.

India has the 2nd largest road networks in the world, spanning over a total of 5.8 million kms (comprising of National Highways, Expressways, State Highways, Major District Roads, other District Roads and Village Roads). Over 64.5% of all goods in the country are transported by road, while, 90% of the total passenger traffic commute via the road network. Development of road networks leads to opportunities for industries to make future investments in logistics parks, industrial clusters and corridors.

The centre has also increased outlay of Rs. 1,18,101 crore for the Ministry of Roads and Highways of which Rs. 1,08,230 crores (92%) is earmarked for capital formation. This is expected to augment road construction. Despite the pandemic led disruption the centre had managed to construct 33 kms/day of national highways during FY21 and aims to construct 40 km/day during FY22. In the current fiscal year, the Ministry has already been to a good start despite state lockdowns and curfews and has constructed 1,470 km of National Highways during May, 2021 as compared with 847 km constructed during May, 2020. The award figure in this fiscal has been 663 km in May as compared with 747 km in the same month previous year.

With respect to the Indian railways a paradigm shift, this time onwards is expected as, the national transporter has focused on the completion of existing rail projects quickly other than simultaneously working on the newly announced projects. According to the Railway Ministry, the thrust of the Annual Plan for the fiscal year 2021-22 is on infra development, improvement of passengers/users’ amenities, throughput enhancement, terminal facilities’ development, augmentation of train speed, signalling systems, safety works of ROBs, RUBs, etc.

The Indian railways have also been offering and formulating several innovative policies such as schemes providing freight incentives, schemes floated to attract new traffic in container trains, ease of doing business in order to boost their revenues and become a preferred cargo transporter. This also augurs well with the Government of India’s ambitious plan to bring down the logistics cost from the present 14% of GDP to less than 10% by 2022. This also led to policies and reforms being announced with respect to development of dedicated freight corridors. The concept of Logistics Park has gained attention from both public as well as private players. A large number of special economic zones have also necessitated the development of logistics centre for the domestic market as well as for trade purposes.

Post the triple shocks of demonetization, GST and RERA, the Real Estate sector has started seeing green shoots amidst the pandemic due to the availability of cheap housing loans, lucrative payment options, attractive prices coupled with favourable government reforms. While one would assume the pandemic has bought about a standstill in buying of houses on the contrary with companies declaring “Work From Home” or a blended work from home situation, had led to homebuyers buying their own space or a bigger space. Demand for townships with a range of amenities has accelerated after Covid-19 emphasised the importance of having amenities within your project.This may include amenities ranging from a swimming pool to an office centre.

According to a CARE Ratings report, as the sector slowly trends on the path to recovery, it has to realign to face new realities and meet with buyers’ new expectations. It is expected that new project launches may pick up pace in FY22 and developers are to focus on completion of projects that were delayed in FY21 due to Covid-19 induced restrictions. This is expected to have a positive impact on the demand for housing.

The affordable housing and mid-price houses are expected to witness better demand and early recovery as against units with high-ticket size especially with continuation of credit linked subsidy scheme by Government and Tier-2 and tier-3 cities is to witness greater demand as the reverse migration, caused by the rise of the remote working culture has led to homebuyers purchasing houses in their hometowns now.

The aforementioned reforms and schemes with respect to development of the roads and highways network, railway infrastructure and the building and construction segment will have a positive impact on the cement, steel and construction equipment industries.

The FY22 outlook for cement industry seems sanguine due to the government’s thrust towards infrastructure creation and development and it being the propeller of growth in the economy going forward. Cement Production is to increase sharply by 9-11% after two years of a muted growth and capacity utilisation is to be around 60%-65%. Cement production is usually closely in-line with demand which is also to increase sharply during FY22.

Domestic steel producers profitability has increased sharply as steel prices have been over the moon and are at an all-time high due to the increase in international price of the commodity as global economies have been opening up and announcing stimulus measures to boost infrastructure creation and spending. Domestic steel prices, however, are still at a discount to the international landed price which means there is still room for further price hikes. Nevertheless this will not deter with steel demand which is expected to make a strong recovery on the back of a low base of the previous fiscal year and increase in demand for steel products as the economy slowly reflates.

Construction Equipment was severely affected during the lockdown period, however, order inflow for capital goods companies are expected to gain momentum on the back of government led spending on railways, roads, renewable energy projects and transmission & distribution segments.

Going forward, Government spending on infrastructure projects will lay the foundation for revival in order to alleviate the economy from the pandemic induced purgatory.Availability of cheap funding will be important as the Infrastructure segment is set to make a strong comeback in the latter half of fiscalaided by favourable government policies which will create world class infrastructure in the country.

 




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