Wednesday, May 06, 2015

Heavily indebted infra cos may slow down India's growth: Wall Street Journal

By Our Representative
America’s premier business daily, "Wall Street Journal" (WSJ), has said that a large pile of debt on the books of India’s big infrastructure companies has complicated Prime Minister Narendra Modi’s “plans” to boost the country’s economy and improve its “woeful roads, electric grids and other public works.”
“The companies that build big projects owe more than 3 trillion rupees ($48 billion)”, the daily says in a hard-hitting piece, “India’s Debt Pileup Complicates Growth Plans” by Shefali Anand. It adds, this is largely because of the “failed effort by the previous government to get businesses to help improve India’s infrastructure.”
“The total amount of debt for Indian infrastructure companies is at its highest in more than a decade, affecting the overall economy because banks, fearing the loans won't be repaid, are reluctant to lend to other companies”, the daily underlines.
Pointing out that high debt levels could “limit” India’s ability to help drive global growth at a time when China is slowing and many of the world’s economies are weak, the daily says, “Foreign portfolio investors have poured $42 billion into Indian stocks and bonds over the past year, leaving them vulnerable to cracks in the country’s economy.”
Pointing out that infrastructure projects developers are refusing to take up new project, the daily quotes Ankineedu Maganti of the Soma Enterprise Ltd, into roads projects, as saying, “At this point, we’re still trying to recover from the past.”
This is true of Bangalore-based GMR Infrastructure, which built international airports in Delhi and Hyderabad, whose net debt of $6.3 billion at the end of September last year, the daily says, adding, “Its total debt to equity ratio stood at 3.7 times compared with 1.9 times at the end of 2010.”
Jaiprakash Associates Ltd., a developer of the Narmada Dam, and a maker of several hydropower projects, has been quoted as saying that it “has been selling assets to pare debt, which stood at around 700 billion rupees at the end of March 31, 2014”.
The Government of India decided to involve private sector in the infrastructure sector in a big way in 2006 via so-called public-private partnership (PPP), as a result of which, “India’s economy grew rapidly--at more than 9% between 2006 and 2008 — and capital was relatively cheap, companies bid aggressively to build roads, airports and ports”, the daily says.
“Investments in infrastructure involving private partnerships touched $73 billion in 2010, a nearly tenfold jump from 2005, according to World Bank data. These projects typically involved 20% to 30% equity from the developer, and the rest was borrowed money, often from Indian banks”, it adds.
However, more recently aggressive bids have become costly, with many projects being stalled due to “corruption scandals and lack of government approvals”, the daily says, adding, “Even completed projects such as toll roads aren’t paying off because traffic levels have been 20% to 30% lower than builders’ initial expectations.”
The result is that, “In 2014, bank credit to infrastructure was 14% of overall credit, and now infrastructure companies account for among the biggest portions of the bad and stressed loans on the books of Indian banks”, the daily points out.
“The bad debt has made banks less willing to lend, weighing on the overall economy, according to a Finance Ministry report in December”, says the daily, adding, “Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend.”

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