A lot can happen in a week and the stock market reflected all of it. Indices dived in deep depression at the government’s failure to recognise the economic and financial distress, compounded by harassment over tax systems.
Finance minister (FM) Nirmala Sitharaman’s mini Budget, tax rollbacks, liquidity for banks and housing finance companies, along with an assurance to release tax refunds and reduce harassment, led to a sudden surge in optimism.
However, by 27th August, the optimism was quickly eroded after the government took away Rs1.76 lakh crore of Reserve Bank of India (RBI) reserves, especially when Ms Sitharaman said, “I cannot comment on what the funds transferred by RBI will be used for.”
After all, there is a massive shortfall in government tax revenues (coincidence or not, estimated at around Rs170,000 crore) and a hidden fiscal deficit estimated by experts at Rs176,000 crore. Then there are massive holes outside Central government finances too, such as Food Corporation of India, power distribution companies, and the vast debt and contingent liabilities accumulated by the National Highway Authority of India (NHAI).
Almost exactly a year after the giant Infrastructure Leasing & Financial Services (IL&FS) had began to default on its debt of nearly Rs100,000 crore, the FM, Ms Sitharaman has announced plans for a new organisation “to provide credit enhancement for infrastructure and housing projects with an aim to enhance fund flows towards such projects.”
Remember, this has been planned even as the failed IL&FS is nowhere near resolution. Technically, a few of the 347 companies (the existence of half of these was unknown to all government regulators and auditors until after the board was sacked) have been shut down; but not a single sale has been fully completed as yet.
Meanwhile, NHAI’s gigantic debt, contingent liabilities, stalled projects and web of litigation across the country, are turning into the biggest roadblock to infrastructure development. Union minister Nitin Gadkari has ignored this for five years, even as he criss-crossed the country announcing mega projects with massive outlays. Reports that the prime minister’s office (PMO) has rapped the ministry for extensive and ‘reckless’ highway expansion, finally, led to a much-needed public discussion last week.
NHAI has reportedly been asked to discontinue construction of roads and monetise assets; this has happened only after NHAI’s debt soared from Rs40,000 crore in 2014 to an unsustainable Rs1.78 lakh crore in 2019 under Mr Gadkari’s watch.
The rating agency, ICRA Ltd, attributes this to the increased cost of land acquisition and has reaffirmed NHAI’s high ratings confident that “support from the Government of India (both financially and operationally) would be crucial for maintaining the credit profile of NHAI.” But ICRA’s rating rationale of May 2019 is oblivious about the extent of NHAI’s contingent liabilities. The rating agency has a number of Rs63,000 crore, which it considers ‘sizeable’, when the real figure may be five times larger!
In an interview to CNBC-TV, Brijeshwar Singh, former NHAI chairman, said that the contingent liability could be in excess of Rs3 lakh crore! According to an industry veteran, “Most highway companies are listed and rated. All of them have claims against NHAI in their books. Even if you discount these claims to 70%, the contingent liability would add up to over Rs3 lakh crore.”
This source tells me that this huge liability is because NHAI is not in the habit of releasing payments to contractors and concessionaires easily. It has thousands of disputes under arbitration, conciliation and litigation pending with most major contractors across India.
Way back in 2014, a top audit firm had pointed out that NHAI is one of the biggest litigants in Indian courts. At that time, it had over 5,000 cases pending in various courts and another 200 in the Supreme Court. The number may have easily doubled.
Most disputes are over cost overruns, usually caused by long delays in land acquisition and obtaining various approvals and clearances which, often, turned projects unviable even before construction commenced.
This has made many companies wary about dealing with NHAI; some private operators have found ways to ensure that costs are inflated or their contracts include dubious clauses, that allow them to even change the scope of the projects on ‘mutually accepted basis’. Eventually, India pays the price in terms of high infrastructure costs.
Disputes with NHAI are also a hurdle in the resolution of IL&FS. The government is understood to have set up a committee to look into these issues. While the IL&FS group debt is nearly Rs100,000 crore, the previous management had claimed that Rs17,000 crore was due from NHAI.
IL&FS’s new management is also struggling to reconcile the vast gap between the erstwhile management’s claims against NHAI and MoRTH (ministry of road transport and highways) and arrive at a smaller, but realistic estimate.
I learn that, unless IL&FS can resolve the legal tangles with NHAI, it will struggle to find buyers for several of the road projects. This means that NHAI, a government entity, is now a stumbling block to resolution.
With funds having dried up, the infrastructure industry is worried about NHAI being able to generate enough cash to service interest payments without constant government support. Its participation in the over-ambitious Bharatmala Pariyojana project, involving a phase-1 project outlay of Rs5.35 lakh crore, may also be canned. Of this, 19,800km of roads were to be built by the public sector giant.
NHAI, set up to implement the golden quadrilateral project under Atal Bihari Vajpayee government, has steadily become a dysfunctional and corrupt organisation. Part of the problem may also be that NHAI’s powers have been steadily diluted, affecting decision-making. Failure to fulfil its responsibility of ensuring timely land acquisition, shifting of utilities, environment and forest clearances, along with flawed processes led to disputes that ended up in a legal quagmire.
In 2015, Union minister Nitin Gadkari set up a committee for revamping NHAI. The committee’s main recommendations were to empower the board, change the method of awarding contracts (moving away from the least-cost model to the average-bid principle using standard deviation), find ways to revive stalled projects, set up a dispute resolution board to resolve issues faster, and streamline its project evaluation and project financing practices. A simultaneous study was commissioned on setting up an Expressway Development Board of India and for taking up construction work abroad.
None of the recommendations of this committee has seen the light of day. That Mr Gadkari was blissfully unaware of the looming crisis is evident from NHAI’s spending spree and spiralling debt. Mr Gadkari has continued to announce new projects that were unviable from the word go due to high land acquisition costs.
In 2017, speaking at an event, he said the government was planning Rs8 lakh crore investment in 30 rural connectivity projects of which five were set to begin. “I have no problem of money… if banks take too much time in granting approvals, we will offer them as EPC (engineering-procurement-construction mode) projects, he said.
He also announced plans to build an additional lane on national highways every three years entailing an investment of Rs80,000 crore to cater to ‘ever increasing’ traffic load.
Mr Gadkari was making these statements even when it was clear that bank funds for infrastructure were drying up; we now know that IL&FS was groaning under a massive debt taken for unviable projects and already resorting to financial jugglery.
The minister had no such worries. He said NHAI would make an IPO (initial public offering) to raise funds and bragged that it could raise Rs10 lakh crore. Although there was no IPO, in July this year, LIC was asked to provide Rs30,000 crore to NHAI by subscribing to bonds. Meanwhile, in the same month, Mr Gadkari told the Rajya Sabha that he planned to create a separate finance arm for the NHAI for which he would seek the finance ministry’s permission.
In fact, this was part of the recommendations made by a committee in February 2016; but, surely, that ship had sailed after the IL&FS crisis. Mr Gadkari neither knew nor cared. He hasn’t had a word to say on the entire IL&FS imbroglio, although his ministry worked closely with the cabal that drove that hydra-headed giant monster into a debt trap.
What is the solution to this mammoth financial muddle at NHAI? One silver lining is that the PMO seems aware of this problem with principal secretary Nipendra Mishra holding multiple meetings to sort out NHAI’s issues -- something that ought to have been Mr Gadkari’s responsibility.
NHAI is running out of options. Hopefully, the deep crisis, and the PM’s dreams of infrastructure development, will finally force a real clean-up. The question is: Will the PMO be able to find a solution that does not involve taxing the people further?
Even as the prime minister's office (PMO) has reportedly suggested to the National Highways Authority of India (NHAI) that it should discontinue constructing roads and monetise assets, Brijeshwar Singh, former chairman of the Authority told a news channel that NHAI is piling a huge debt of Rs1.78 lakh crore by 2019, up from Rs40,000 crore in 2014.
LiveMint, quoting from a letter sent by Nripendra Misra, principal secretary to the prime minister, to Sanjeev Ranjan, secretary, ministry of road transport and highways, says, "NHAI was 'totally logjammed by an unplanned and excessive expansion of roads and it is mandated to pay much higher costs for land acquisition and construction'."
“Road infrastructure has become financially unviable; private investors and construction companies are withdrawing from green-field projects," the letter says.
To solve this, the newspaper report says, the PMO has suggested that NHAI aggressively monetise its existing assets – either through the toll-operate-transfer model, where long-term concessions for collecting toll revenues are auctioned to the highest bidder, or through an infrastructure investment trust (InvIT).
"The PMO has also suggested that the NHAI can consider becoming a road asset management company and can create a blueprint for the national highway grid to see which roads need to built by 2030. To make projects commercially viable, the PMO has suggested that NHAI should take a critical look at reasons for financial unsustainability and the government can prove viability gap funding if required," the report says.
Meanwhile speaking with CNBC TV18, Mr Singh, the former chairman of NHAI had said that contingent liabilities of the Authority are worrisome and could be double of the balance sheet liabilities. "NHAI has been over generous at estimating traffic growth," he told the channel.
This interview with former NHAI Chmn was revealing. NHAI's debt up from 40000 cr in 2014 to Rs 1.78 lk cr by 2019. The contingent liabilities may be double that. Land acquisition costs have gone thru the roof due to the new law...Looks like road sector headed for a slowdown https://t.co/ujNWfvO7CZ
Industry sources tell us that the situation is rather grim and the issue had been flagged by the PMO last year. However, in the run up to the election, it was allowed to be buried. The source says, Mr Mishra, Principal Secretary has held over six meetings to discuss NHAI’s debt since September last year. According to this source, the contingent liabilities figure quoted by the former NHAI chairman is also considered conservative and could be higher than Rs3 lakh crore that he suggests.
All this paints a sorry picture of how infrastructure is being built in the country, even as Union minister Nitin Gadkari continues to announce ambitious new projects and programmes. It is also important to realise that the NHAI issue has a bearing on the resolution of the Infrastructure Leasing & Financial Services (IL&FS) debacle, because it also owes the beleaguered infrastructure company a substantial sum of money.
Renowned investor Prof Sanjay Bakshi has also highlighted rising debt of NHAI in a series of tweets. "NHAI's unsustainable debt, which I had written about in January was estimated to be about Rs1,48,276 crore as of 30 September 2018. Just six months later, by end of March 2019, it had soared to Rs1,78,000 crore," he says.
Subdued demand conditions that led to weak performance by Indian automakers in the first quarter of the financial year ending 31 March 2020 (FY19-20) will likely persist, adding to the challenges from the implementation of stricter emission norms under Bharat stage emission standards-6 (BS VI) from April 2020, says a research report.
In the note, Fitch Ratings says, "Domestic sales trends have weakened since first half (1H) of FY19 as the constrained liquidity at non-bank lenders reduced credit availability to buyers and the cost of ownership rose due to new regulations mandating enhanced vehicle insurance cover and additional safety features. Automakers appear to be cautious about production and inventory management amid weak demand conditions, and they have announced production and work force cuts."
According to Society of Indian Automobile Manufacturers (SIAM), most auto original equipment manufacturers (OEMs) reported lower volumes and profitability in Q1FY19-20 as domestic sales volumes of passenger vehicles and medium and heavy commercial vehicles fell by 18.4% and 16.6%, respectively.
In addition, the sales volume of commercial vehicles was also affected by easing in axle load standards in July 2018, which resulted in additional freight capacity in the system. The decline in sales in Q1FY19-20 was much sharper as it coincided with India's general elections in April and May 2019. Monthly volumes weakened further in July 2019 with year-on-year (y-o-y) decline of more than 25% each in the passenger and commercial vehicle segments.
Sales volumes in the two-wheeler segment have been more resilient than passenger and commercial vehicles due to their lower prices and non-discretionary demand, particularly in rural areas where they serve basic commuting needs and enable income. Nonetheless, volumes fell by 11.7% y-o-y in Q1FY19-20 and 16.8% in July 2019.
Fitch says, "We expect overall domestic auto sales volume to decline in FY19-20, although volumes may stabilise in the coming quarters due to government's focus on improving liquidity at lenders and recent measures to revive auto demand. The improved likelihood of adequate rainfall and recent cut in interest rates should also help demand in 2HFY20. However, the lower volumes will weigh on automakers' profitability in FY19-20 and could offset the benefits from lower commodity prices."
The implementation of BS-VI emission standards will require automakers to make changes to vehicle platforms ahead of March 2020—the regulatory deadline after which sale of older models will not be allowed. "This will require significant investments to upgrade existing vehicle models and assembly lines, which will put pressure on free cash generation. Automakers will also need to realign their portfolios, particularly for the diesel variants of smaller cars, which will cost more to move to BS-VI compared with 'cleaner' petrol variants. This could lead to changes in the competitive dynamics in the mass segment," the ratings agency added.
Fitch says it estimates the additional components and design changes will raise production costs by 10%-15%. "This could squeeze automakers' profitability in FY21 if automakers are not able to fully pass on costs to buyers. Increased vehicle prices after March 2020 could spur some buyers to bring forward their purchases, but we do not expect this to be material."
According to the ratings agency, weaker auto sales volumes are likely to have a bigger impact on auto suppliers, especially the smaller and less diversified players that have lower bargaining power in negotiating prices and passing on input price volatility.
Motherson Sumi Systems Ltd (MSSL) enjoys strong market position in its wiring harness business in India and its diversification outside India through its subsidiary Samvardhana Motherson Automotive Systems Group BV will help to alleviate the impact of weak demand in India. Nonetheless, Fitch says SMRP BV remains exposed to slowing auto volumes globally, with profitability, excluding recently set up plants, narrowing during 1QFY19-20.
Tata Motors Ltd's sales volume fell by more than 20% and profitability weakened for the Indian business in 1QFY19-20. This was driven by a 16% fall in commercial vehicle volumes that was in line with the industry trend and a sharper 30% drop in passenger vehicle sales volume. Consolidated volumes and margins were affected by challenges at wholly-owned Jaguar Land Rover (JLR) Automotive plc.
Fitch says its recent one-notch downgrade of Tata Motors factors in weakness in India and the JLR business, and the negative outlook underscores limited rating headroom due to a large investment plan and risks in JLR.