‘Stalled’ projects coming down: Good news, but it is partly due to scrapped projects

The latest data on economic activities from the Centre for Monitoring Indian Economy (CMIE) offers some good news for the Narendra Modi government. It shows the value of stalled projects in the country has declined substantially to Rs 79,300 crore at the end of June-quarter, compared with Rs 2,00,000 crore in the year-ago period. From a peak of 8.4 percent of gross domestic product (GDP) in the quarter ended 31 March 2014, stalled projects’ stock declined to 6.6 percent in the June 2015 quarter. Also, the number of projects under implementation increased by 8.4 percent in the quarter ended June 30. The numbers should offer comfort to the NDA government, which has faced criticism for slow-paced reforms and widespread distrust on the new GDP numbers. High number of stalled projects, mainly on account of environmental clearance delays and land acquisition issues, have had a cascading impact on the economy since this contributed to the stress in the banking sector, spiking the stressed assets (about 13 percent of total loans now) and, in turn, constraining banks’ ability to lend further. In that context, the Modi government deserves credit for initiating efforts to unclog the stalled projects. [caption id=“attachment_2327106” align=“alignleft” width=“380”]  Reuters[/caption] This has indeed set the stage ready for a major growth pick-up in the economy, which suffered from inaction and lack of political will during the UPA rule. There has been some increase in capital expenditure by the government in April-May in the infrastructure sector, which is evident in the recently released core sector data. To be sure, the pick-up in public spending is not substantial yet. On a closer look, the unstalling process has happened mostly on the manufacturing and transport services (road and rail mainly), notes an HSBC report. These segments together account for half of the total stalled projects-stock. Similarly, there has been an increase in the pace of approval process as well. Going by a June 22 Deutsche report, this trend is evident from January-March, when a pick-up in clearances for projects were witnessed, mainly in coal and mining. New projects halve But, to get a clearer picture, the unstalling should be seen proportionately and along with the trend on new as well as abandoned projects. According to the CMIE data, at an absolute level, the number of project announcements in the first quarter of 2015-16 has gone down by 53 percent compared to the previous quarter. According to CMIE chief Mahesh Vyas, new projects announced during April-June stood at Rs 1.2 lakh crore. Also, in the first quarter, the announcements of new government projects have seen a second straight quarter of decline. Vyas attributes the fall in stalled projects partly to the abandoned projects in the first quarter. Companies typically abandon projects when the project becomes unviable due to cost escalation due to prolonged delays or demand slowdown. Also, since the new project investments have been falling, the stock of projects that could be stalled is growing at a lower pace than earlier, Vyas said. The bottom line is that while it is highly critical to get the stalled projects back on track, the government also needs to work on getting fresh investments done. As Firstpost noted earlier citing a study by rating agency, CARE, only a fraction of the investments committed in the five years have actually happened in India. The actual investments made across all industries in the last five years stand at Rs 2.71 lakh crore, while Rs 31.93 lakh crore investments were proposed across 11,784 projects in the country. Besides the sluggish economy, delayed project clearances have acted as a turn off to investors. According to the CARE study, there has been a continuous slowdown in the proposed amount and number of investments over the last five years with the former declining from Rs 15.4 lakh crore in 2011 to Rs 4.05 lakh crore in 2014 and further to Rs 1.5 lakh crore for the five months of 2015. Similarly, the number of investment proposals declined to 1,843 in 2014 as against 4,336 in 2011. During the first five months of 2015, number of proposals stood at 826, compared with 868 in the corresponding period of 2014. According to Soumya Kanti Ghosh, chief economic advisor at SBI, the pick-up in project implementation should be seen with a pinch of salt. “As far as project implementation numbers go, they are coming from a very low base. Government’s planned capital expenditure slowed down in May versus April," Ghosh said.