Demonetisation Effect On Construction & Road Industry

Indian Private Sector expects increased growth rate in infrastructure Sector in 2017-2018 after the demonetisation of Indian Currency with special focus on roads and railways said a recent report published by ICRA.

The Union Budget for FY2018 will be presented at a time when the consequences of the withdrawal of the legal tender status for the old currency notes of Rs. 500 and Rs. 1,000 (Specified Bank Notes or SBN) from November 9, 2016 onwards continue to unfold, and the outlook for the monetary policy appears somewhat hawkish. With the note ban likely to have a negative impact on the economic activity in some sectors in the next two to three quarters, the manner in which the Government of India (GoI) seeks to offset this and boost consumer and investment sentiment in the upcoming budget, would be keenly watched. However, the need to demonstrate continued fiscal consolidation would impose a constraint on expansionary fiscal policies. The note ban would also generate some one-time revenues in the near term, and contribute toward a widening of the tax base over the medium term. In our view, the augmentation of the revenue base is likely to be directed toward infrastructure and social spending, and any significant reduction in the corporate tax rate would be accompanied by lowering of exemptions.

Sector-wise Expectations

• Infrastructure/Construction

Demonetisation is going negative Impact on economic some sector in the next One to Two quarters. After the union budget 2017 government allocations large infrastructure project such as bullets train, Smart cities, Sagar Mala, Road Project, Bharat Mala, Inland waterways development etc.

Last Year budget Government Announcement on re-negotiation of PPP agreements, but there has been no update yet on. Some measures are also expected to improve the long-term fund availability to the sector. Continued focus on the Smart Cities Mission and AMRUT will aid in improving infrastructure facilities and livability in urban areas, thereby having a positive effect on housing demand. From the perspective of real estate developers, clarity on certain issues relating to GST implementation, such as applicable rate, abatement scheme to be followed, input credit availability for projects transitioning from the current regime, etc

• Increased public sector spending and incentive's private sector to take up new projects thereby aiding in revival of investment cycle. For this budgetary allocation towards infrastructure sectors including railways and roads needs to be further increased
• Independent regulators for specific infrastructure sub-sectors with the aim to speedier resolution of issues constraining private sector sentiments towards taking up newer projects.
  
• Measures to further improve long-term funding availability to the sector including allocation towards NIIF
  
• Select infrastructure companies/finance companies can be allowed to raise long-term funds in the form of Infrastructure Bonds with investors getting deduction under Section 80CCF

Road Sector

The last budget made an announcement on Guidelines for re-negotiation of PPP concession agreements. However, there has been no update on this yet. Setting up of PPP Project Review Committee and the Infrastructure PPP Adjudication Tribunal for re-negotiating concessions, if there is evidence of distress in projects (not because of aggressive assumptions/irrational bids), which is likely to result in default.

Some measures are also expected to improve the long-term fund availability to the sector. A majority of infrastructure financing is currently supported by the banking sector.

Corporate and infrastructure sectors put together account for less than 30% of bond issuances. The appetite for long-term and papers rated below AA category is low. Deepening of the bond markets is required to support long-term infrastructure financing, especially given the twin challenges faced by commercial banks – asset-liability management and increasing share of stressed assets.

Compliance with the Right to Fair Compensation and Transparency in Land Acquisition, the Rehabilitation and Resettlement (RFCTLARR) Act has increased the land acquisition cost for road projects. This, coupled with an ambitious target execution rate of 30 km/day, would require increased budgetary allocation for the sector by around 60%. Further, setting of an independent regulator can also expedite the dispute resolution mechanism.