Government's booster not enough for core sector

New Delhi: One target of the fiscal stimulus announced by the government is to give a boost to the broad-based construction sector which includes all infrastructure and road projects.
But analysts feel that the booster shot in the form of allowing a specialist lending agency, India Infrastructure Finance company Ltd (IIFCL) to raise tax-free bonds of Rs 10,000 crore is not likely to have an impact on the construction sector in the next few months.
Associate director, KPMG, Manish Sharma said, the immediate impact of this stimulus will be on demand side, but the package that the government has worked out is not likely boost construction activity in the next quarters. Analysts feel that IIFCL is a refinancing window, it is not a short-term measure but a long term one.
The macroeconomic data shows that while the construction sector held up relatively well in the September quarter, with a year-on-year (y-o-y) growth of 9.7%, it is unlikely to happen in the next two quarters.
A Subbarao, GMRs CFO and president said the 11th Plan envisages an investment of $500 billion of which, $100 billion or Rs 5,00,000 crore is required on an annual basis.
If that is the benchmark that the government has set for core sector investment per year, a package of Rs 10,000 core or $2 billion is very disappointing.
Rao says, government should have started with a $50 billion package to infuse confidence in the economy and perk up the infrastructure sector. If infrastructure kickstarts it will automatically boost the construction sector. The funding crunch hits construction firms hard because they don't have free cash flow and most rely on short-term debt. Though a fall in commodity prices will help these firms, analysts say the benefits will be seen after a few months.
However, financing problem is only a part of the problem. Sharma of KPMG said, "While financial stimulus is inadequate. There are issues with the project process which the government needs to address immediately".
That is especially true of the road projects. In case of the roads, bidders interest has waned due to the outdated project costs and consequent difficulties in achieving the financial closure.
A Pandurangi of PwC, who is also an expert on infrastructure also echoes similar views when he says, "It is equally important to remove the glitches in the procedures for the developers and construction companies so that contracts can be awarded effeciently and that would work as an effective stimulus to kickstart construction activity."