GLOBAL ECONOMY OVERVIEW
The acceleration in global activity that started in 2016 gathered steam in 2017,
reflecting firmer domestic demand growth in advanced economies and improved performances
in other large emerging market economies. Global growth is set to be just over 3.5% in
this calendar year 2018, the fastest in seven years, with improved outcomes in both
advanced economies and the EMEs. Confidence measures and levels of new orders for
businesses remain strong. This long awaited lift to global growth, supported by policy
stimulus, is being accompanied by solid employment gains, a moderate upturn in investment
and a pick-up in trade growth.
Trade in goods will grow 4.4% this year after a decade averaging 3.0% a year following
the financial crisis. The continued expansion depends on robust global growth and
governments support for right trade policies. However, there are signs that escalating
trade tensions may already be affecting business confidence and investment decisions,
which could compromise the current outlook.
(Source: IMF and OECD)
INDIAN ECONOMY OVERVIEW
Indian economic growth is giving a positive signal for the current and future scenario.
It is projected to strengthen to above 7%, gradually recovering from the transitory
adverse impact of rolling out the Goods and Services Tax (GST) and measures to choke off
the black economy, including demonetisation. Indias GDP grew 7.2% in the third quarter of
2018, surpassing expectations and wresting back the mantle of the fastest growing economy
from China on the back of a rebound in industrial activity, especially manufacturing and
construction, and an expansion in agriculture. The Reserve Bank of India has estimated GDP
growth in a range from 7.4% to 7.9% for the Financial Year 2019-2020.
(Source: OECD and Economic Times)
Fiscal deficit for 2017-18 is revised to Rs. 5.95 lakh Cr at 3.5% of the GDP, which is
approximately the same as 2016-17 in spite of transformation in the economy. In addition
to initiatives like; ‘Make in India, ‘Housing for All and ‘Digital
India, the government has also introduced ‘Sagar Mala and ‘Bharat Mala
initiatives, which will help to boost the domestic growth of the country.
(Source: IBEF and Trading Economics)
Indias Infrastructure
"The link between infrastructure and economic development is not a once and for
all affair.
It is a continuous process; and progress in development has to be preceded,
accompanied, and followed by progress in infrastructure, if we are to fulfil our declared
objectives of generating a self-accelerating process of economic development." - Dr.
V. K. R. V. Rao
The Government of India has taken major initiatives to strengthen the economic
credentials of the country and make it into one of the healthiest economies in the world.
India is fast becoming home to start-ups focused on high growth areas such as mobility,
e-commerce and other vertical specific solutions - creating new markets and driving
innovation. Owing to higher infrastructure spending, increased fiscal to states, and
continued reforms in fiscal and monetary policy, the Indian economic outlook has
strengthened. The Government of India is striving to move steadily to minimise structural
and political bottlenecks, attract higher investment and improve economic performance.
Infrastructure is the spine of our economy and society, from the roads, rails to
electricity that lights or heats our homes to the water we drink by investing in core
infrastructure businesses that deliver essential services throughout the economic cycle.
The Government of India is extremely keen on developing the infrastructure sector in the
country. This is clearly evident through the several initiatives announced for this sector
as part of the Budget 2018-19. Infrastructure has been made the priority segment in the
Union Budget.
Indias Roads & Transportation Sector
India has the second largest road network in the world, constituting over a total of
5.6 million km in length. Over 65% of all goods in the country are transported through
roads, while 90% of the total passenger traffic uses road network to commute
in their day to day lives. (Source: IBEF Research/ Newsroom)
The governments ambitious infrastructure development plan aims to provide significant
opportunities for investors and market players to help change the sector and partner
Indias socioeconomic progress.
India has surpassed its own capacities by extending its capabilities beyond the
national boundaries via road connectivity. The transportation sector has been highly
responsible for propelling Indias overall development. The Government of India has
intensified this sector by initiating policies that would ensure time-bound creation of
world class infrastructure in the country at a breakneck pace.
Indias total road length includes National Highways (NHs), Expressways, State Highways
(SHs), district roads, PWD roads, and project roads.
The network can be sub-divided into three categories for a total length of 56,00,000
km:
State Highways
They form 3% of the total roads in India totalling a length of 1,76,166 kms.
National Highways
They form merely 2% of the total roads in India envisaging a total length of 1,15,530
kms.
District and Rural Roads
They form 95% of the total roads in India envisaging a total length 53,26,166 kms.
(Source: IBEF Research)
Roadways have been the key focus area for budget allocations over the years. As per
Union Budget 2018-19, the government provided an outlay of Rs. 1.21 lakh Cr (US$ 18.69
billion) for the road sector. The graph below, provides a clear idea of the trend of
outlay for roads under the respective Union Budgets.
(Source: IBEF Research)
There were also several policy proposals made in the Budget Speech by the Finance
Minister which can be seen as follows:
Road and Infrastructure cess
The existing Road Cess (cess on motor spirit and high speed diesel) has been converted
to the Road and Infrastructure Cess. This cess on petrol and high-speed diesel has been
increased by Rs. 2 per litre, while the excise and customs duty have been cut by the same
amount.
Under the Bharatmala Pariyojana, about 35,000 km of roads will be developed in Phase-I
at an estimated cost of Rs. 5,35,000 Cr.
To raise equity from the market for its mature road assets, NHAI will consider
organizing its road assets into Special Purpose Vehicles and use other innovative
monetizing structures like Toll, Operate and Transfer (TOT) and Infrastructure Investment
Funds (InvITs).
The government will come out with a policy to introduce toll system on ‘pay as you
use basis.
The two key authorities in the road development segment of the country are NHAI and
MORTH. Just in the year 2017, NHAI and MORTH have been awarded 16,000 km of road projects
– the highest in the sectors history. While the target was set at a highly ambitious
scale of 25,000 km – of which the department achieved 15,000 km, despite land
acquisition and management change troubles, is really creditable. The pace of construction
of highways also reached 28km/day from 14km/day in 2014.
(Source: Phillip Capital Research)
For the last three years, the government has been ironing out issues hampering growth
of the Roads sector. In FY17, early signs of revival in the sector became evident, with
project awards at 16,270 km (up 56%) and construction at 8,230 km (up 37%). The government
has set steep targets for FY18 to award 25,000 km and construct 15,000 km. Moving ahead,
the trend looks promising, with industry reports indicating that NHAI would award over
31,000 km of road projects executable over FY17-21E, entailing an estimated investment of
Rs. 3.6 Tn (civil construction works). Expect awarding activity to stabilize at 15,000 km
per year, and execution activity to pick up – 9,300 km in FY19 and 10,000 km in FY20.
(Source: MOSL Research)
Investment programs worth Rs. 7 Tn have been identified, ensuring a strong pipeline of
projects Bharatmala is to constitute 56% of the ordering. Total projects of 9,304 km could
come up for award under the NHDP scheme. Given that 50% of the highways in India are
two-laned, four-laning itself promises to be a big opportunity. The outlook for the Roads
sector has improved considerably over the last two years, with roads being a key focus
area for the new government to revive capex activity in India. In its previous tenure as
well, the NDA government had chosen the Roads sector to accelerate the capex cycle and had
awarded 23,000 km over its five-year tenure. In its current tenure, it has set an
ambitious target to ramp up road construction activity from 23 km per day to 40 km per day
and has prepared a strong pipeline of road projects, which entails an investment of Rs. 7
Tn (centre and state put together). Multiple states like Maharashtra, UP, Telangana, and
Karnataka have a strong pipeline of projects. Between the centre and the states put
together, there exists an opportunity of over Rs. 7 Tn (Centre: Rs. 4.0 Tn; states: Rs.
3.4 Tn).
(Source: MOSL Research)
The HAM model is being preferred for new . tenders, as it requires lower government
funding as compared to the traditional EPC model. There has been an ease in the pressure
from the government side for the model, as 40% of the funding will be coming from the
government and the remaining 60% is coming from the private player vis--vis an EPC model
where 100% of the funding requirement comes from the government authority.
Since introduction in FY16, HAM has steadily emerged as the preferred mode of project
award from the government. These projects formed 62% of the cost of projects awarded in
FY17; in FY18, this share has inched up marginally to 63%. EPC mode contributed 35% of the
cost of projects awarded in FY18. The share of toll projects continued to dip with mere 2%
of the cost of projects belonging to this mode.
Impetus towards HAM & EPC Model
With build, operate and transfer (BOT) projects losing flavour among developers in the
last two years, given (a) their weak financial position, and (b) weak economic activity
impacting traffic growth, EPC and HAM would be the preferred routes for NHAI to award road
projects. EPC and HAM projects would attract higher interest, as they require limited
upfront capital and involve less risk than BOT projects. Maximum ordering will be for NHDP
phase-4, which is a two-lane program, with low traffic density. It is expected that about
45% of projects will be awarded on an HAM/annuity basis in the near term, constituting Rs.
269 Bn of market potential for HAM players in the national highways segment.
(Source: NHAI/ MOSL Research)
HAM project financing may become incrementally challenging for companies with leveraged
balance sheets. With many few PSU/ Private banks facing asset quality headwinds, HAM
lending may be selective and limited to Tier 1 road developers.
Government Boost: Bharatmala Pariyojana
Bharatmala Paryojna is the mother scheme of highway development over the next 10 years
– just like the current NHDP has been for the last 15. MoRTH has taken two years to
prepare the detailed plan of this mammoth scheme, intended to decongest and expand the
existing highway network of the country.
At the same time, it seeks to decongest the existing corridor network – for which
185 choke points were identifiedacross the country and are planned to be removed by:
28 Ring Roads
KEY GROWTH DRIVERS
The Roads sector has been identified as one of the top-3 capex themes by the current
NDA government. The Ministry of Road Transport and Highways (MORTH) has taken multiple
steps to revive the ailing sector over the last three years. The framework required for
the speedy award and execution of projects is in place. Activity will pick up with the
government addressing issues like:
• Execution hurdles – awarding projects after 80% land acquisition under BoT
and 90% land acquisition under EPC.
• Funding arrangement – cess trebled from Rs. 2 per litre to Rs. 6 per litre;
market borrowing plans in place. The road cess on petrol and diesel has been one of the
major sources of funding for NHAI projects over the years (from Rs. 60 Bn in FY13 to Rs.
96 Bn in FY15).
• Faster forest and environmental clearances.
• Change in project model to ease funding burden of cash-strapped developers.
• Exit policy for developers to help unlock equity from completed projects, making
it potentially available for investment in new projects.
Premium deferment scheme to ease cash flow issues faced by developers.
(Source: MOSL Research)
To meet the capex requirement of constructing 83,677 km of roads, the government has
laid out a clear cut plan of funding the same. Of the total anticipated cost of Rs. 6.9
Tn, the major source of the funding (65%) would be met from raising money from market
borrowing (Rs. 2.1 Tn) and central road fund (Rs. 2.4 Tn).
However, NHAIs share of the road cess was reduced in 2016-17. While it was given Rs.
150 Bn in 2015-16 from the Central Road Fund, the budgeted amount for 2016-17 is only Rs.
121 Bn. Government allocation of Rs. 2.4 Tn fund to CRF will bring in stability and
certainty of funds available for road development in the long run.
(Source: Industry/ NHAI/ MOSL Research)
Diversification
• Most players are now opting for inorganic growth routes and are diversifying
into other businesses (IIML, a subsidiary of IL&FS is into private equity business
with over USD 3.2 Bn under management).
• Many players are entering into technical partnerships with foreign players to
match their R&D levels with MNCs.
Promotion of R&D
• Companies are ramping up investment for better and cost effective ways of road
construction.
• As of November 2016, three memorandum of understanding (MOUs) were signed
between National Green Highways Mission (NGHM) and ITC Ltd, Yes Bank Ltd and Teri for
setting up a Centre for Innovations in Green Pathways in order to enhance research and
innovations in the field
Training of labour
• Companies are hiring and training staffto reduce the shortage of skilled
manpower and focusing on policies to retain labour.
• Firms plan to increase minimum wages in the construction sector as well as women
participation.
• Companies are partnering with technical institutes and colleges such as CSTI
(L&T and Govt. of Odisha).
• The Roads Ministry will give grant of USD 1,52,765 to private companies and
state road transport corporations willing to set up or upgrade driver training schools.
Geographical expansion
• Indian companies are increasing their footprints abroad, thus tapping outside
the market.
• IL&FS won a road contract worth USD 216.7 Mn in Botswana, through its
subsidiary Elsamex SA.
POLICY INITIATIVES TO DRIVE GROWTH
Infrastructure – a key government priority
• Infrastructure investment is a major focus area for the government.
• The government has given a massive push to infrastructure by allocating USD 61.8
Bn for this segment in the Union Budget 2017-18.
Support from the Union Budget
• The planned outlay under the Union Budget 2017 -18 for development of road
transport and highways is USD14.67 Bn.
• Moreover, as per Union Budget 2017-18, the government has set targets to develop
almost 2,000 kilometres of coastal connectivity roads.
Rural Development
• The Prime Ministers Gram Sadak Yojana (PMGSY) is a scheme for development of
rural roads in India. The Government of India has succeeded in providing road connectivity
to 85 per cent of the 1,78,184 eligible rural habitations in the country under the scheme.
• Under the Union Budget 2017-18, the Government of India allocated an investment
of USD 4.21 Bn for the Pradhan Mantri Gram Sadak Yojana (PMGSY).
• The Government of India will spend around Rs. 1 lakh Cr (USD 15.26 Bn) during
FY18-20 to build roads in the country under the Pradhan Mantri Gram Sadak Yojana (PMGSY).
Taxes and other sops
• Companies enjoy 100 per cent tax exemption in road projects for 5 years and 30
per cent relief over the next 5 years.
• Companies have been granted a capital of up to 40 per cent of the total project
cost to enhance viability.
Value Engineering Programme
• The Ministry of Road Transport and Highways, Government of India, plans to
implement ‘Value Engineering Programme in order to promote the use of new
technologies and materials in the execution of highway projects in the country.
Transport Sector Growing in Proportion to Roads Sector
• In India, roads remain the most important means of transport, accounting for
around 80% of the passenger traffic and 65% of the freight
• The number of total vehicles in India increased at a CAGR of 9% during the
period of FY06-17, from 9.7 Mn to 25.3 Mn.
• As of FY17, 2 wheelers accounted for 78.73% of the total number of vehicles in
India.
INDIAS BUILDING SECTOR
Under the ‘Housing-For-All by 2022 programme, the government envisages pucca
houses with water connections, toilet facilities, and 24x7 electricity.
Pradhan Mantri Awaas Yojana (PMAY): The government intends to construct 22 Mn
affordable houses by spending Rs. 3 Tn by 2022 under this ambitious plan:
• 12 Mn units in urban entailing a cost of Rs. 1.86 Tn.
• 10 Mn units in rural entailing a cost of Rs. 1.27 Tn.
Rural housing
The government plans to spend Rs. 3.5 Tn to build 30 Mn houses under the National
Gramin Awaas Mission (NGAM) for the homeless by 2022 in rural areas.
Urban housing
The central government has a plan to roll out the following schemes for the
development:
• This involves redevelopment of slums with the participation of private
investment helped by a central grant of Rs. 1,00,000 per beneficiary. State governments
can use this grant as viability gap funding for any slum redevelopment scheme.
• An interest subsidy of 6.5% on housing loans up to tenure of 15 years to EWS and
LIG beneficiaries will be provided for loan amounts up to Rs. 6,00,000.
• Central assistance of Rs. 1,50,000 per beneficiary, to promote housing stock for
urban poor with the involvement of private/ public sectors – 35% of proposed units to
be earmarked for the EWS category.
• Subsidy for beneficiary-led individual construction or enhancement: Central
assistance of Rs. 1,50,000 each to eligible urban poor beneficiaries to help them build
own houses or undertake improvements to an existing one.
(Source: Phillip Capital Research)
Smart Cities Project
Smart Cities Mission referred to as Smart City
Mission is an urban renewal and retrofitting program by the Government of India with
the mission to develop 100 cities across the country making them citizen friendly and
sustainable.
Smart Cities Mission envisions developing an area within 100 cities in the country as
model areas based on an area development plan, which is expected to have a
spill-overeffect on other parts of the city and the nearby cities and towns. Cities will
be selected based on the Smart Cities challenge, where the eligible cities will compete in
a countrywide competition to obtain the benefits from this mission. As of January 2018, 99
cities have been selected to be upgraded as part of the Smart Cities Mission. (Source:
Wikipedia) Cities selected have started project preparations and implementation:
• The projects launched by Ahmedabad are ‘sewage treatment plant, housing
project and smart learning in municipal schools.
• Bhubaneswar launched ‘railway multi-modal hub, traffic signalisation
project and urban knowledge centre.
• New Delhi Municipal Council launched ‘mini-sewerage treatment plants, 444
smart class rooms, WiFi, smart LED streetlights, city surveillance command and control
centre.
(Source: Phillip Capital Research)
It is a five-year program, where all the Indian states and Union territories are
participating apart from West Bengal through nomination of at least one city for the Smart
Cities challenge. Financial aid will be given by the central and state governments between
2017-2022 to the cities, and the mission will start showing results from 2022 onwards.
The central government will provide Rs. 500 Bn for the scheme, translating into each
city getting Rs. 1 Bn per annum for five years.
(Source: Wikipedia)
AMRUT (Atal Mission For Rejuvenation and Urban Transformation)
The AMRUT project is a reuse of the Jawaharlal Nehru National Urban Renewal Mission.
Under
AMRUT, state governments will get the flexibility of designing schemes based on the
needs of identified cities (unlike JNNURM). State governments will submit annual action
plans to the Centre for the funds to be released.
AMRUT seeks to ensure basic infrastructure for 500 cities. Under this, the central
government will provide each city with Rs. 1 Bn for improving its amenities. The state
government/ULB will also invest an equal amount, implying total investment of Rs. 1 Tn.
The central assistance will be provided as follows:
• 50% of the project cost for cities and towns with a population below 1 Mn
• 33% of the project cost for those with population above 1 Mn.
AMRUT aims to spend Rs. 500 Bn over the next five years, ensuring basic infrastructure
for 500 cities. (Source: Kotak Research/ Wikipedia/ Phillip Capiltal Research)
INDIAS POWER SECTOR
Indias power sector is one of the most diversified in the world. Sources of power
generation is notably distinguished between conventional sources such as coal, lignite,
natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind,
solar, and agricultural and domestic waste. In order to meet the increasing demand for
electricity in the country, massive addition has to be made to the existing installed
generating capacity. In order to address the lack of adequate electricity supply to the
people in the country by March 2019, the Government of India has launched a scheme called
‘Power for All. This scheme will ensure continuous and uninterrupted electricity
supply to all households, industries and commercial establishments by creating and
improving necessary infrastructure. Its a joint collaboration of the Government of India
with states to share funding and create overall economic growth. The countrys total
installed capacity of power plants as on 31st March, 2018 stood at 3,40,527 Mega
Watts (MW). (Source: Wikipedia)
| Sector |
MW |
% of total |
| State Sector |
84,517 |
24.8% |
| Central Sector |
1,03,968 |
30.5% |
| Private Sector |
1,52,402 |
44.6% |
| Total |
3,40,527 |
|
(Source: Government of India, Ministry of power)
GENERATION
The utility electricity sector in India has one National Grid with an installed
capacity of 340.53 GW as on 31 March 2018 with renewable power plants constituting 32.2%
of total installed capacity. India is the worlds third largest producer and third largest
consumer of electricity. The per capita electricity consumption is low compared to many
countries despite cheaper electricity tariffs in India. Installed capacity increased
steadily over the years, posting a CAGR of 5.73% in FY10–FY18. Energy generation from
conventional sources stood at 1,206 Bn units (BU) between April-March 2018. Coal-based
power generation capacity in India, which currently stands at 197 GW, is expected to reach
330-441 GW by
2040. Initiatives taken by the Energy Efficiency
Services (EESL) have resulted in energy savings of 37 Bn kWh.
(Source: Government of India, Ministry of power)
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