According to the FY12 RBI annual report, "envisaged total fixed investment by large firms in new projects, which were sanctioned financial assistance during FY12, dropped by a whopping 46 percent to about Rs 2.1 trillion from Rs 3.9 trillion a year ago."
The report, released over the weekend, further says the drop was led by the infrastructure and metals sectors. "Envisaged investment in infrastructure declined by 52 percent to Rs 1 trillion in FY12 from Rs 2.2 trillion in FY11, led by the power and telecom sectors," says the report, quoting data collated from banks and financial institutions, adding while investment in the telecom sector has dried up, that in roads, ports and airports has also decelerated sharply.
About infrastructure financing during FY12, gross bank credit to infrastructure outstanding as of April 2012 was Rs 6.2 trillion, says the report. However, the flow of bank credit to the sector has decelerated, on the back of policy delays and higher interest rates, it notes.
Data on sector-wise gross deployment of bank credit shows that its year-on-year growth has declined to 14 percent in FY12 compared to 38 percent growth in FY11.
Noting that over half of the envisaged corporate fixed investment in large projects has been coming from the infrastructure space since 2008-09, the report says its share, however, dropped to 48.6 percent in FY12 from a high 54.8 percent a year ago.
This massive slippage has had a ripple effect on the economy. Order books of capital goods producing firms have declined as the size of the pie has reduced. Their share has also gone down as they have been out-competed by cheaper imports by foreign firms, points out the report.
In addition, investment climate in the power sector has been affected by rising losses of public sector utilities.
Though power tariffs have been raised by many SEBs over last two years and several other steps have been initiated to improve the financial health of SEBs, drought in many parts could put additional pressure on their profit line during 2012-13, warns the report.
On the impact of losses in power sector on balance sheets of banks, the report says a significant portion of trillions of rupees is locked up with loss-making SEBs which will have to be restructured and may even become non-performing.
The exposure of banks to the power sector is about Rs 3.3 trillion as per the sector-wise deployment of credit obtained from 47 scheduled commercial banks that account for 95 percent of total non-food credit.
Attributing the reasons for the poor show by the infra space, the report underlines that lower coal production and supply shortages have emerged as a major bottleneck in the sector.
Blaming the current state of affairs in power sector to inadequate planning and coordination between power and coal sectors, as also slow execution of coal projects, the report says majority of 60-75 GW new capacity planned for the 12th Plan is facing coal linkage issues, apart from not having no power purchase agreements. During the 11th Plan, the country added 54 GW of new capacity.
The report goes on to add that apart from capital expenditure slowdown in the power sector, investments in FY13 is also at the risk from falling interest in PPP projects in road sector.
The National Highways Authority undertook a record road tendering in FY12, awarding contracts for 6,491 km, 28 percent higher than in previous year.
Estimated spending on NHAI projects was also higher by 33 percent at Rs 362 billion. However, the road tendering activity has suffered significantly during Q1 of the current fiscal.
Attributing the slowdown in road projects to issues in land acquisition and problems with legal, procedural and environmental clearances, the report notes that availability of finance has also emerged as an added constraint.
On the government's stated plan to invest a whopping USD 1 trillion in the infra space during the current plan period, the RBI reports doubts whether this will be achieved at all.
"The projected investment of USD 1 trillion in the 12th Plan presents a formidable challenge in view of limited fiscal space available in the public sector," says the report, adding a notable concern is the lack of private sector participation in certain key sectors like railways, irrigation, water supply and sanitation, ports and power distribution.
There is also a need to create a conducive environment for private sector participation with a transparent and credible regulatory mechanism.
In this regard, there is a need to identify the hurdles and weaknesses in regulatory, financing, and incentive structure (both taxation and debt) and project implementation related issues that may be inhibiting," concludes the report.