State of Economy-II: Private investment remains tepid in highway sector
Highway development has been in top gear on massive public spendings, but private sector appetite has remained tepid in the last four years of the NDA rule due to NPA-heavy public sector banks shying away from the sector.
 
Awarding large number of highway projects on the innovative Hybrid Annuity Model (HAM) and the popular EPC (Engineering, Procurement and Construction) contracting arrangement has given much-needed comfort to the crippled developers, but it was not enough to allow them to bid for the purely BOT (build-operate-transfer) projects.
 
Moreover, the shifting of financing risks from the private sector to the public sector (National Highway Development Authority or NHAI) has overstretched the latter's balancesheet.
 
The government has largely awarded road projects on HAM and EPC, which are purely public-funded models. The NHAI on behalf of the government releases 40 per cent of the total cost for a HAM project, which was launched in early 2016, thus kick-starting the project. Only the remaining 60 per cent is arranged by the private developers. Under the EPC model, the entire funding comes from the government agency.
 
Together the two models have largely driven highway development in the country in the last four years.
 
But sector specialists now say that even the HAM model has been losing its steam due to banks becoming "very careful and choosy" while funding highway projects.
 
"The banks are still not convinced about the costing of a lot many highway projects. They are not throwing enough money which will revive the private sector appetite. The HAM projects have definitely taken care of the current liabilities of the developers and it keeps the machines running, but not beyond that," said the chief of a private developer, wishing not to be named.
 
Vishwas Udgirkar, Partner at Deloitte India, agreed and said that the banking system was not supporting the road sector significantly.
 
"Private sector interest in the road sector has been limited because developers are in problem and the banks have higher NPA levels," Udgirkar said.
 
The NHAI had awarded 7,400 km of road in fiscal 2018, with most of the projects being awarded in March. In all, 3,400 km of HAM projects were awarded in 2017-18.
 
In the first half of fiscal 2019, the NHAI awarded about 300 km road, mostly via HAM. Ever since the HAM was introduced, a total of about 130 projects have been awarded on this model and a combination of BOT (annuity) and EPC.
 
"About 35-45 per cent of the 120-plus projects awarded on HAM are yet to achieve financial closure," said Sandeep Upadhyay, Managing Director and Chief Executive Officer, Centrum Infrastructure Advisory.
 
The reasons for the delay in fund tie-ups largely revolve around banks, but weak balancesheets of the private players and doubts about project costs too have contributed to it. There are investors who doubt if the NHAI would stick to its commitments given its overstretched balancesheet.
 
"Two years later when these projects get commissioned and repayment to banks start, there is the risk that NHAI would make sure that grant on the annuity amount comes. The risk perception is building in the market, leading to less projects getting financial closure," said the chief executive of a firm working with various investors.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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The Country That Exiled McKinsey
A dubious project in Mongolia raises serious questions about the world’s most prestigious consulting firm and its work for corruption-plagued regimes.
 
In 2010, amid a historic commodities boom fueled by the explosion of China’s economy, international companies began turning their attention to Mongolia as it opened its vast deposits of coal and copper to commercial exploitation. Mongolia, which is located on China’s northern border, stood to make prodigious sums of money if it could sell that copper and coal to its resource-hungry neighbor.
 
To make that happen, Mongolia concluded that it needed to lay thousands of miles of railroad tracks. Such a project would cost billions of dollars and throw off hefty fees for construction companies, banks, law firms and consultants of various stripes. The consulting contracts alone could be worth tens of millions over a decade. And if the railroad expansion worked out, there’d be even more opportunities after that.
 
McKinsey & Co., the global consulting beh­emoth, was interested. In the fall of 2010, Jimmy Hexter, a senior partner at the firm, began talking with Mongolia’s government about the railroad project. Hexter had spent decades in the region, at one point running McKinsey’s office in Beijing. He was a veteran of multiple infrastructure projects in Asia, a global leader of the firm’s infrastructure practice and enthusiastic about Mongolia’s potential.
 
Operating there required unusual caution. Earlier in 2010, the U.S. State Department had issued a warning. Corruption was on the rise in Mongolia, the State Department explained, and U.S. enterprises needed “measures in place to detect and prevent” it. In a section titled “current views on Mongolian corruption,” the first problem cited was a “blurring of the lines between the public and private sector brought about by systemic conflicts of interest at nearly all levels.”
 
A year after that warning was published, Hexter and McKinsey did exactly what American diplomats had cautioned could be risky: The firm signed a consulting agreement with a government entity even as the government adviser who brought McKinsey into the project also landed a piece of the same contract for his own private company.
 
McKinsey acknowledges that it did not vet the adviser or his company in any formal way. The adviser, Chuluunkhuu Ganbat, played a central role in shaping the country’s rail expansion. Mongolia’s state-owned rail company hired a team assembled by Ganbat, with McKinsey playing the leading role, to conduct an analysis of whether the railroad plan was feasible. McKinsey’s payment was little more than an introductory fee by the firm’s standards — $4 million — but the contract spelled out that McKinsey would be eligible for more lucrative multiyear contracts if the project progressed.
 
The railroad expansion quickly went bad. Construction stalled amid financial problems and political uncertainty. By 2015, Mongolian police were investigating claims of widespread embezzlement and fraud. McKinsey was drawn into the investigation, with authorities ordering the firm to hand over records related to the project.
 
The scrutiny rattled McKinsey enough that its then-head of Asia operations, Kevin Sneader, went above the heads of investigators. Shortly after police approached the firm, he wrote to Mongolia’s prime minister without copying the investigators.
 
He insisted the firm had done nothing wrong and is “committed to the highest professional and ethical standards.” The letter suggested that Mongolia’s commercial prospects might be better served if McKinsey were a partner. It cited the prime minister’s “strong interest in promoting U.S.-Mongolian business ties and growing third-neighbor investment in Mongolia.” Later in the letter Sneader offered to “discuss with you in more detail our firm’s desire to further contribute to the Mongolian economy or our work in Mongolia to date.” McKinsey says its letter had no inappropriate purpose. Sneader has since become the global managing partner of McKinsey, the firm’s highest position.
 
Mongolian prosecutors did not charge McKinsey. But the case and the events that led up to it, which have never been reported apart from limited articles in the Mongolian press, are part of a disturbing pattern for the consulting giant. The Mongolia episode bears a striking similarity to the firm’s actions...Continue Reading
 
 
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State of Economy-I: Vital Economic Indicators Suggest a Longer Slowdown
The political discourse this election season has grabbed the attention of the voters, but it offers little to soothe them as the Indian economy is far from being in good shape.
 
The economy, which braved a global slowdown and recovered from the pangs of 2016 demonetisation to stage a recovery in early 2018, is in the midst of yet another threat of a slowing GDP growth rate with an ever growing population.
 
The vital macro-economic data suggests the new government after polls will inherit an economy slipping downhill.
 
The latest shocker for the economy has come by way of third quarter GDP growth (FY18-19) numbers. In the October-November period, growth slipped to 6.6% of GDP, slowest in the last six quarters. What is worrying is the downward revision of the growth forecast for the fourth quarter.
 
The government's Central Statistics Office (CSO) has already trimmed its 2018-19 growth forecast to 7% from 7.2% estimated in the previous month.
 
An indication that current slowdown in growth rate is here to stay, international agencies such as Asian Development Bank (ADB) and International Monetary Fund (IMF) along with country's apex bank, the Reserve Bank of India, have also cut the GDP growth forecast.
 
A Kotak Institutional Equities report has even pointed towards growing unease in the corporate sector over the prospect of the economy to provide them returns over sudden deterioration in the short-term demand narrative.
 
"We see a major shift in tone (for the worse) on short-term demand narrative in the management commentaries of the companies that have reported thus far. When a generally-measured management like (Hindustan Unilever) HUVR's uses the term 'recession' in its comments in the post-results presser, it generally isn't a one-quarter blip," the report has said.
 
This also indicates that growth is not the only factor. Along with slowing GDP, private consumption appears to have declined in the first three months of 2019 and it is the government spending that is preventing a faster slide.
 
"There is a lot of probability that the rural distress has caused a slowdown in consumption. Consumption propensity is very high in the rural income and rural areas. I think rural distress and disruption of the informal sector have affected consumption and brought down GDP growth," said Montek Singh Ahluwalia, former deputy chairman Planning Commission.
 
Echoing similar sentiments, CRISIL's chief economist DK Joshi said that current slowdown is more broadbased as it is affecting both urban and rural areas. "Though it is affecting everyone, the slowdown is more prominent in rural areas. The growth has also slowed down primarily due to rural distress. Rural income is not growing and this is reflecting in the slowdown in consumption," he said.
 
However, he also said the slowdown that we are seeing is 'cyclical'.
 
Agriculture sector will throw up fresh challenges for the new government as not only the promised doubling of farmers income is nowhere near, faulty procurement policy and bumper production have depressed prices pushing farmers into abject poverty.
 
"While it is well known that the resilience of crop yields, one of the success stories of Indian agriculture, along with a poorly executed procurement policy have led to depressed crop prices, it is not so widely known that the "informal" sector in many parts of rural India is yet to recover from the multiple disruptions over the past several months," said a report by JM Financial.
 
"A reflection of a decline in private consumption is also reflected in the steep decline in the growth of two-wheeler sales, towards the end of the year. The expected firming up of government consumption expenditure in Q4 of 2018-19 is on course as growth in cumulative revenue expenditure of the Central government has been higher in recent months," as per the finance ministry report.
 
Two-wheeler sales, for instance, contracted by around 20% in February.
 
Combine the slowing growth with rising fiscal deficit that already ended up higher than budget estimates and increasing current account deficit on rising oil prices, the economic situation is expected to remain stressful even in FY20.
 
The government has already acknowledged the stress. The finance ministry in its latest Monthly Economic Report for March 2019, has said that Indian economy seems to have slowed down slightly in 2018-19 due to muted exports, declining growth of private consumption and tepid increase in fixed investment.
 
Though the exports logged a 9% growth in FY18-19, it is not in proportion to the growth of the Indian economy. Exports still stands lower at 11% of GDP in FY18-19, down 5 percentage points from 16% in FY13-14.
 
The odds are also stacked against exports growth in the coming months, as projections of global economic growth has been cut by multilateral agencies such as the International Monetary Fund (IMF). This would mean that that even if Indian exporters are pushing up overseas sales through various initiatives, they would find it difficult to woo buyers as they would not be interested over their shrinking purse size.
 
The easy run of current account deficit (CAD) could also be under pressure in FY19-20, if Iran situation escalated and current oversupplied oil market ends in a deficit. India reduced its import bill substantially in past few years due to lower oil prices.
 
If this advantage is lost, that looks a possibility with crude already rising over 30% this year (since January), it becomes a problem for country's balance of payment. It is estimated that with every $10 per barrel rise in oil prices, the CAD gets impacted by 0.4% of GDP.
 
While its true that although the extent of the current account deficit (expected at around 2.6% in FY18-19) is not as large as the one that was seen in 2012-13, a widening gap tends to push up the inflation rate and impose checks on the economy's growth potential.
 
To bridge CAD, capital inflows from abroad or foreign direct investment (FDI) plays a key balancing act. Though FDI inflows have been under stress for few years, investments have not come capital intensive and manufacturing sectors that have a multiplier affect in the economy and have big contribution in job creation.
 
The ongoing trade war, between the US and China, is affecting global trade in general and undermining India's exports recovery prospects. And if the global economy remains troubled, India may not receive steady inflows of FDI.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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COMMENTS

Ramesh Poapt

7 days ago

govt is not to be blamed fully. global factors too plays its role.
situation not easy but best possible will be followed.

REPLY

shadi katyal

In Reply to Ramesh Poapt 6 days ago

I beg to differ as unless our own economy is strong ,the world trade or conditions will have aqn effect. It is unfortunte tht we try to blame others but not look deep into our own mismanagement and incompetancy.
Kindly tell us what Modi has done for the nation in this respect

shadi katyal

7 days ago

This should not come as a surprise as there had been no GDP growth in past few years. The figures provided are fake as the basket of goods and services has been made as required.
The nation has been without much Law and Order and how can we expect any investments or industry. Most of investments are going to Vietnam and other nations while we are left high and dry.
One doubt if Modi is even concerned with the nation welfare except his Hate speeches to win elections.
We also lack any trained and disciplined labour and no amendments in Labour and Union Laws.
How long nation will suffer with Religious elephant in the room keeping it dark

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