Project activity set to bounce back

Shashikant Hegde

Projects Investment after slowing down in the fiscals 2004-05 and 2005-06 gained momentum in the next two years. In 2006-07, the outstanding projects investment grew by 17.72 per cent and in 2007-08 by 21.32 per cent. The growth momentum continued in the first few months of the fiscal 2008-09 also. However, the collapse of international credit markets and economic slowdown seen across the developed countries slowed the pace of projects activities in India in the second half of 2008. This not only led to sharp drop in the number of new projects being announced by the private promoters but also forced them to have a re-look at their capex plans. Consequently, a record number of projects were shelved or deferred in the second half of the fiscal 2008-09.

Fresh Investment

The impact of the global meltdown was so profound on the private sector, as many of the private promoters depended largely on external funds to execute their high ticket projects that during the second half of the fiscal 2008-09, both the number of new projects and investment envisaged therein dropped heavily.

Though during 2008-09, about 12,583 new projects worth Rs 8,62,634 crore were announced, bulk of the intentions were made in the first half. As against 7,112 new projects worth Rs 5,78,912 crore announced in the first half of 2008-09, only 5,421 new projects (-23.8 per cent) worth Rs 2,83,722 crore (-51 per cent) were announced in the second half. While fall in investment intensions was observed in both public as well as private sectors, the decline was sharper in the private sector.

In the second half of the fiscal 2008-09, private companies not only put a break on their new capacity build up plans, but also started restructuring their on-going operations by pruning production and staff size. Further, the non availability finance on easy terms, fear of fall in demand pulled down the business confidence of the project promoters. This forced them to have a re-look at their projects investment plans.

Fresh Investment: 2008-09

Sectors

First Half

 

Second Half

 

Total

Projects

Rs Crore

 

Projects

Rs Crore

 

Projects

Rs Crore

Manufacturing

1,089

184,810

 

496

66,849

 

1,585

251,659

Mining

64

10,269

 

79

8,406

 

143

18,675

Electricity

218

182,735

 

170

89,580

 

388

272,315

Services & Utilities

5,528

189,369

 

4375

111,904

 

9,903

301,273

Irrigation

213

11,729

 

301

6,984

 

514

18,713

All Sectors

7,112

578,912

 

5421

283,722

 

12,533

862,634

Source: ProjectsToday.com

Shelving of Projects

Between October 2008 and March 2009 around 385 projects entailing a total investment of Rs 1,49,208 crore were shelved. This first half of the fiscal had seen shelving of 191 projects worth Rs 35,640 crore. Most of the shelved projects were in the planning stages and were awaiting arrangement of funds.

The impact of the global slowdown was though seen across the sectors, the highest number of projects cancellation happened in the Manufacturing sector. Around 83 per cent of the projects investment put on the back burner, belonged to this sector. During 2008-09, in all 265 projects worth Rs 1,54,562 crore turned dud with chances of their revival in the near future looking very dim. Within this sector the impact was pronounced in the Textiles, Cement, Steel and Automobile sectors.

Steel projects were expected to change the fortunes of states like Orissa, Chhattisgarh, Jharkhand and West Bengal. In the last two years these four states together received over 100 proposals to set up mega steel projects. Most of these projects were to be financed through foreign funds.

Even before the economic slowdown hit India, most of the mega steel projects were facing delays due to non availability of land and iron ore mines. The collapse of international financial markets made most of these projects unviable. As a result, most of the promoters were left with no choice but to shelve or postpone the implementation of their dream projects.

The second half of the fiscal 2008-09 saw 45 steel projects worth Rs 97,219 crore being shelved / deferred. Among the shelved projects prominent were the expansion plans of Tata Steel in Chhattisgarh and Jharkhand, Sterlite and JSW's steel projects in West Bengal. The global slowdown also forced the Tatas, Mittals and POSCO to further delay the implementation of their projects in Orissa. These projects also fear steep cost increases.

Buoyed by the increased infrastructure spending and the on-going boom in the construction sector, most of the existing cement manufacturers drew up ambitious capacity expansion plans in the last two years. The sector saw a number of mega projects with more than 2 million tpa capacity being announced in the first half of 2008. Some of these were by new players.

The drastic contraction seen in the construction sector post global slowdown and the failure of the government agencies in fast tracking their infrastructure projects reduced the demand for cement considerably. Fearing excess capacity build up, cement majors started deferring their expansion plans. Some of the new entrants decided to abandon their projects altogether. During 2008-09, in all 13 cement projects worth Rs 6268 crore were shelved.

The global slowdown hit the Indian Textiles sector the most. The sector was already reeling under the increasing global competition for the last couple of years. Among the sub-sectors the most severely hit was the garments sector. The demand contraction in the developed countries forced them to introduce drastic production cuts which in return led to mass retrenchment of staff. During the fiscal 2008-09, about 60 projects were shelved. Of which, 42 were abandoned in the second half.

Most of the foreign auto majors who had set shop in India wanted to convert these units as their export units. The increasing domestic demand also enticed them to go for large scale expansion plans. However, the global meltdown dashed their hopes of exporting vehicles to the developed countries. Further, demand also dropped sharply in the domestic markets. Ashok Leyland, Tata Motors, Renault-Nissan, Honda Siel Cars and Caparo Vehicles announced deferment of their capex plans.

In the Services and Infrastructure sector the impact of slowdown was seen in the Construction sector comprising Commercial Complexes, Industrial Parks and Real Estate. These are also the sectors where private investment was the maximum.

A number of corporate real estate developers purchased land paying exhorbitant prices and built homes mostly for the rich and the super rich categories in the Tier I & II citites. They expected demand for these homes to emanate mostly from the booming IT & BPO sectors. However, the financial crisis erupted in the developed countries crippled a number of players in this sectors leading to mass retrenchments and steep salary cuts. As a result, the real estate developers were left with no choice but to stall mid-way a number of their ongoing projects and shelve the proposed ones.

Slowdown was also seen in Commercial Complexes, Shopping Malls and SEZs construction activities. A number of SEZ projects were put on hold by their developers.

Projects Shelved: 2008-09

Sectors

First Half

 

Second Half

 

Total

Projects

Rs Crore

 

Projects

Rs Crore

 

Projects

Rs Crore

Manufacturing

67

26,152

 

198

128,409

 

265

154,562

Mining

3

5

 

3

190

 

6

195

Electricity

17

2,677

 

25

11,294

 

42

13,971

Services & Utilities

104

6,806

 

158

9,288

 

262

16,094

Irrigation

0

0

 

1

27

 

1

27

All Sectors

191

35,640

 

385

149,208

 

576

184,848

Source: ProjectsToday.com

What Next?

Though the first two months of the current fiscal 2009-10 have seen increase in the announcement of new project proposals, certainly the number of projects being shelved has receded considerably. On the positive side, during these period the country has seen a couple of mega projects announcing financial closures and announcement of a dozen new cement projects. The new UPA government if fast tracks some of the infrastructure projects, the country could hope for a slow but steady increase in the projects investment activities in the coming months.

Published in Projectmonitor issue date 01 June 2009