It’s a stale news that the Indian economy is on an upswing now. The world is looking at the future and trying to gauge how high this swing will take us? Are we set on a course to unleash our potential? Are we going to announce our revival on a global scale with a bang or we will build it our way – one stone at a time. From the recent announcements at the Annual Budget, it seemed like that bang was the preferred mode of communicating. The wish list was long and very exhaustive from every sphere of the society.
The FM made all the right noises with regard to policy without leaving anyone out in the cold. Noise indeed it was with nothing so concrete. Noise to gather attention and let the world know that India is open for business. He tried to woo the investor community by laying down clear policies for future investments. He appealed to the aspirational Indian by announcement of Bullet Train & Metro Rail projects in tier two cities. When I say noise, it’s because of the fact that these announcements come with a long gestation period and few of them might never leave the drawing board.
Given the time, the new government has done a good job with the economy by deciding to pluck the low hanging fruits such as opening up various sectors such as FDI in Railway (ex-operations), Defence & Insurance.
The biggest announcement that came for the short term was not the special committee to look into retrospective tax cases. It was not even the INR 70 billion announced towards 100 new cities. The biggest announcement was the clarity and paving the way in terms of tax reforms for REITS & Infrastructure Investment Trusts (InvITs) and further support from the central bank by means of allowing the bank to raise low cost loans for infra & low cost housing. SEBI swung in action and released a consultation paper on the same. This was most needed for the highly indebted real-estate & engineering companies involved in infrastructure development.
The Investment Trusts will pave the way for housing & construction sector to deleverage itself and get much needed capital to meet the obligations towards current projects. In its proposed state, it means that an Infra company can bring in completed & under construction projects in the ratio of 80:20 in an InvITs and raise equity for the projects. For an engineering company the expertise lie in developing the projects and not in operating them. Just for REITS, the expected amount that is waiting on the sidelines is upwards of USD 20 billion. This one initiative alone has the potential to get the infrastructure ball rolling. It will have a positive impact on the banking system as the stress on the banks will reduce and at the same time it will help the allied sectors such as Steel, Cement & Aluminium in terms of incremental demand.
Banks will be impacted the most with this infusion of liquidity in the system as the NPA position of banks will improve and the overall cost of debt will also come down for other industries. Steel & Cement will be impacted the most with the construction upswing. Cement plants have built up excess capacity and situation for them will start to look up in coming 24-30 months but Steel will be impacted in coming 4-7 months. We will see capacity utilizations picking up in the near term and then demand increasing at pace faster than supply.
From all the announcements and focal points in the budget, it’s evident that the new government is looking to provide a major push to the domestic economy and especially the manufacturing sector. As banks NPA situation eases and more avenues to raise funds for infrastructure companies open up with buoyancy in the primary capital markets, recovery might come at a pace faster that initially expected. The government scores high on making the right noises and laying down a credible plan of revival for the economy. Now, it has to be seen how it tides over the execution hurdle but looking at the track record of Mr. Narendra Modi as a facilitator of big infrastructure and industrial projects in Gujarat, the future looks brighter than today.