Stalled Projects Leading to Cost Over-Runs

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A rise in investments in the infrastructure space is one of the first signs of a pickup in economic activity. But if CMIE's data is to be believed, the current situation is anything but positive. New projects registered a sharp decline of 60% in the quarter ended June 2016 as compared to preceding quarter.

The quantum of new project announcements was pegged at Rs 1.2 trillion in the June quarter. But mind you, these are just announcements. It needs to be seen whether these get converted into actual capital expenditure.

To add to the woes, there is no significant improvement in stalled project scenario. The quantum of stalled projects as a percentage of those under implementation remained at around 12.01%.

Recently a survey conducted by State Bank of India (SBI) showed that 1,076 projects worth at least Rs 1.5 billion face cost over-runs on account of delays. The cost-over run is pegged at around 12.5%. Reportedly, the total cost of implementation for these 1,076 projects was Rs12.7 trillion at the time they were commissioned. Due to delays, the overall costs has now ballooned to Rs 14.3 trillion.

Such projects have been stalled on account of various issues such as problems over land acquisition, lack of clearances, lack of funds and raw material supply problems. Majority of stalled projects are in the manufacturing and power space. Both the sectors account for almost two-third of the stalled projects.

The slowdown is primarily on account of weak condition of the private sector enterprises. This can largely be attributed to high indebtedness, weak corporate balance sheets and excess capacities in the recent times.

Considering the weak investments from the private sector space, the government will have to ramp up its spending on infrastructure activities. Nevertheless, with utilisation levels still far from being comfortable, it does seem that the expectations from the government and its impact on India's capex revival may be a little too stretched.

The need of the hour is to strike the right balance and ensure that there are no more hurdles in ramping up infrastructure. This would be critical in ensuring a sustained high GDP growth for the country in the longer term.

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