By John Richardson
NARENDRA Modi looks as if he will end up leading the BJP-coalition to victory in India. This has led to a surge in optimism that he can repeat the “economic miracle” he achieved in Gujarat at a nationwide level.
We wish him every success, but, of course, politics is the art of the possible, perhaps especially so in India. What will be possible in India at a national level seems likely to be radically different from what Modi has achieved at state level.
Take infrastructure as an example – an area of critical failure in India which has held back the growth of its economy and with it, of course, chemicals and polymers demand. Stalled infrastructure projects also account for 30% of stressed bank loans.
JP Morgan, in a recent research note quoted in this Beyondbrics blog post, made the following comments on the infrastructure challenge:
“The belief in certain quarters is that as long as the next government were to go all out at de-bottlenecking projects, sentiment would surge and this would spark an investment revival in the economy. However, this appears to be an overly-simplistic read on the situation
“The vast majority of projects are currently stuck because of issues that are under the purview of state governments, over which the central government has little jurisdiction.”
The bank estimated that 55% of projects in value terms were stuck because of state-related issues, with 46% held back by land acquisition disputes and 9% stalled back by contractual and legal issues relating to individual states.
“In comparison, only 8% of project value was stuck on account of environmental clearances, which are directly under the purview of a central government and could, in theory, be immediately addressed by a new government,” wrote JP Morgan.
There had been an alarming increase in leverage ratios across all the key infrastructure areas with debt-equity ratios at a ten-year high, warned the bank.
“If economic growth were to accelerate and capital markets become buoyant, the speed of deleveraging could accelerate as companies issue fresh equity and sell assets that will be higher-valued. But, at best, this is a multi-quarter process that would militate against sudden lift in the capital expenditure cycle,” said the same research note.
India faces many other challenges, which we will detail in later blog posts, including the need to unite rather than divide, politically and socially.
There are tremendous opportunities in India.
But, as is the case with China, chemicals companies need multiple scenarios for all the potential outcomes. Wearing rose-tinted spectacles is not the right approach.