Modi Faces Greece-Sized Snag to Economic Revival

Narendra Modi swept to power in India on a pledge to revive economic growth. He’ll have to unlock $255 billion of stalled projects to achieve that goal.

As many as 12 of 25 chief executive officers surveyed before election results were announced last week said reviving stuck projects should be the top focus of the new government, with another three giving it the second highest priority. Seven of 11 economists surveyed also said pushing projects that are stuck should be the No. 1 task.

At least 284 projects -- valued at more than the size of the Greek economy -- from thermal power plants to steel mills are stuck for reasons ranging from delayed environmental clearances to blocked land acquisition. Modi’s biggest challenge will be his ability to work with states to remove hurdles and iron out differences between federal ministries as triggering investments will spur an economy where growth is at almost the weakest pace in a decade.

“This will demonstrate the government as tackling the policy paralysis and red tape, and show it as a decisive one,” Sushil Kumar Maroo, CEO of Essar Energy Plc, India’s second-biggest non-state oil refiner, said before poll results were announced. “Speeding up projects will slowly take care of the inflation problem as most of it stems from supply side, and that in turn will help the Reserve Bank of India reduce rates.”

Seven of the CEOs surveyed picked the implementation of a goods and services tax as their top choice. The goods and services tax revamp seeks to swap an array of state and federal levies for one at the time of sale. Preventing a product being taxed more than once would spur commerce, while casting a wider net over services would help buoy revenue, according to the Finance Commission.

Majority Verdict

Modi led his Bharatiya Janata Party to its biggest electoral victory, winning 282 seats in India’s lower house of parliament, giving the party a majority on its own. His government will replace the coalition led by Manmohan Singh for the past 10 years.

Indian President Pranab Mukherjee today named Modi as the country’s prime minister and invited him to take oath of office on May 26. Modi pledged to work for India’s poor in a speech to BJP lawmakers in New Delhi.

Projects that are stuck include 76 power plants and 44 steel mills, according to the website of the Cabinet Secretariat, office of India’s top bureaucrat.

Almost half of the projects are stuck because of land acquisition, lack of funds and raw material supply problems and will revive gradually, according to a May 15 note by Deepali Bhargava, chief India economist at Espirito Santo Securities India Ltd. The Cabinet Committee on Investment, set up early last year, cleared about 144 stalled projects, she said.

‘Coordination Mechanisms’

Getting projects rolling will need close coordination with states. Some hurdles such as land acquisition delays can only be resolved by state governments.

The BJP and its allies rule six of the country’s 28 states, with the rest governed by rival political parties. Modi will lean on his more than a decade’s experience of running the western Gujarat state to push forward.

“With a Modi government, I anticipate new coordination mechanisms where approvals by different agencies will be looked at holistically,” said T.S.R. Subramanian, who served as India’s top bureaucrat between 1996 and 1998 and is author of the book ‘India at Turning Point, The Road to Good Governance.’ “A new paradigm will emerge, where whoever doesn’t want to participate will be left out. Projects will go to those states which participate.”

Companies are counting on the new government to iron out differences with states to push through projects.

State Relations

NTPC Ltd. on May 7 terminated a contract to develop and operate the first coal mine for India’s biggest power producer. The mine in eastern state of Jharkhand has been stalled for more than three years after villagers demanded higher compensation for their land.

“We are keenly watching how the relationship between the central government and the government in Jharkhand change,” NTPC Chairman Arup Roy Choudhury said in New Delhi on May 15. “An improved relationship between the center and the state can make a major difference to project implementation.”

Veerappa Moily, who took over as India’s environment minister at the end of last year, approved $24 billion of projects in his first month in office to undo a logjam of clearances. Some companies that won approvals said in January they would wait for the outcome of elections to proceed with their projects.

Addressing concerns of ecological damage and ensuring adequate safeguards will be also key to smooth progress of several projects.

Time & Effort

Removing hurdles is not going to be easy, according to N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi.

“It will take too much time and effort of Modi,” he said. “There are very subtle issues in reviving investments, which are not limited to the central government alone.”

The new government will have to reduce spending as one of its first steps, Jagdish Bhagwati, a professor of economics at Columbia University, said yesterday.

India’s benchmark S&P BSE Sensex has surged 15 percent since election dates were announced March 5 on optimism a new government will push implementation of policies and revive investments. The index gained 9 percent in 2013.

Investments by private companies as a percentage of gross domestic product is estimated to have declined to 9.2 percent in the year ended March 2013, the lowest in at least nine years, according to data from the Ministry of Statistics and Programme Implementation.

Giving Momentum

“By kick-starting stalled infrastructure projects, the entire economy can be pushed into momentum,” said Aditya Rao, vice chairman of Pennar Industries Ltd., a Hyderabad-based maker of metal products used in construction and railways. “It’s the easiest of the available alternatives as the government would not have to depend on any other entity to see this through.”

Companies across different industries see benefits from quick action.

While Sterling Holiday Resorts India Ltd.’s CEO Ramesh Ramanathan said tourism will benefit from infrastructure projects such as construction of highways, C.K. Ranganathan, chairman of CavinKare Pvt. said steps will result in higher disposable incomes in the hands of consumers. Cash flows will increase across industries and disbursements by banks will rise, said Ramesh Iyer, managing director of Mahindra & Mahindra Financial Services Ltd.

“India needs to execute, implement and start projects on a war footing to make us more productive in generating new economic growth,” said Shashi Kiran Shetty, managing director of Allcargo Logistics Ltd. “We need to get the groove back in the economy immediately.”

Before it's here, it's on the Bloomberg Terminal.