Vinayak Chatterjee: There is clear evidence that the rural demand is not as buoyant as it was in the April, May, June, July period of last year, and remember it was buoyant largely because there was a slew of special packages that were given to the rural sector including a step up in the MNREGA in rural, small infra works, special packages all those have not been seen now. And therefore from sales of tractors to retail demand for cement etc, rural demand is showing stress vis-à-vis last year so it is not going to be that much of a demand support in current times.
There is a limitation to how much the highway sector can actually absorb. There is also a limitation to the highway needs of India. So where is that sector headed, more like a late single-digit growth or early double-digit growth?
Vinayak Chatterjee: So what you find is a structural change in the highways business. The first 10-15-20 years was about expanding existing alignments. You took a road from Delhi to Jaipur and if it was a four-lane highway you made it six or eight and you did this number across the country. We are now finding that there is a limit to how much you can expand existing alignments because they go through very crowded clusters. So the new focus is on greenfield expressways. If you see the Mumbai-Pune under Mr Gadkari, that was one of the first examples of a greenfield expressway. Now you have four greenfield expressways in UP. Mumbai-Nagpur, Chennai-Salem, Delhi-Mumbai, Delhi-Amritsar-Katra are also greenfield expressways. The market is shifting to more greenfield expressways than the traditional method. This is a new market for national highways and even so for state highways because once India gets back to normal, it has to have a new series of express ways to carry the growth of GDP.
How the next three years would be different from the last three years for Railways?
Vinayak Chatterjee: Railways capex has multiplied. If you go back four-five years, their capex was Rs 30,000 crores, Rs 40,000 crores. Now we are talking of a budget of Rs 2,15,000 crore, which is five times more compared to the last three years ago. It has seen a massive jump and also there has been a fairly high level of discipline in project management. I for certain know that the ministry has taken some key decisions where whenever there was a period of two-three months of liquidity stress, it has actually stopped some of the low-end projects and prioritised ongoing projects.
Where will Railways be able to fund so much of capex? The privatisation drive in Railways has started but is that enough?
Vinayak Chatterjee: This year’s budget for Railways capex is Rs 2.15 lakh crores of which Rs 1.1 is allocated from the budget. So half of it is coming from the budget, the other half is basically saying off-budget resources which means Railways have to float bonds, it has to attract private capital, it has to take loans from public systems, it has to manage the balance one lakh from its own. Now can it manage one lakh crore from its own? I am not sure. The answer is not very clear under current circumstances. But I am saying even if it does 40% of that, say Rs 1.1 lakh crores comes from the budget, let us say if it is another one lakh crore it raises Rs 40,000- Rd 50,000 crores, it is still Rs 1.5-1.6 lakh crores of railway capex, even if one is downplaying their ability to raise finances in the current situation. It is still a very high capex and they have demonstrated 1.6 lakh crores last year so obviously 1.6 lakh crores was found from somewhere or the other last year, that is the capex on the ground last year.
How exactly are companies dealing with the parabolic rise in commodity prices?
Vinayak Chatterjee: Most will suffer because first of all there are fixed contracts, under many of the PPP or various contracts there is a fixed fee contract, there very clearly they will suffer unless they can wriggle out of it. Then there is these contract which are PWD type contracts which say that we will compensate you for increases in major items like steel and cement based on the index of whole price index for construction material. Now traditionally the index of construction material inflation index has been mathematically so constructed that it by and large does not quite reflect the humungous increase in commodity prices. Even if it does, by the time that mechanism comes into play and payments are released based on a series of approvals, the project already suffers because the working capital has been used up because of the high prices. The best of course is when you have a construction contract like you are building a factory and the client tells you I will give you the steel and cement you only charge me for your construction-related activities then it is safe because the owner is taking the can. But where the owner is not taking the can and a large portion of the risk is either in a fixed-term contract or in a contract that mandates a sarkari type increases based on the inflation wholesale index of construction material, by and large, there is sufferance.
