Shortage of capital for infrastructure projects

The infrastructure sector was one of the most coveted sectors till two years back. But high interest rates, galloping inflation and better opportunities for migrant workers upset schedules of power, roads and port projects. Later, investigations into graft allegations in the sector discouraged speedy government approvals, with bureaucrats stalling projects and withdrawing environmental clearances. Against such a backdrop, it isn't surprising that the Axis Infrastructure Index for March - promoted by Axis Bank - which is up compared to the December index, is showing signs of tapering off. In a conversation with MV Ramsurya, Axis Bank Chief Economist and Senior Vice-President, Saugata Bhattacharya, says the index is likely to fall sharply in the coming days as funds flow tightens and policy initiatives, that drive infrastructure projects, take a backseat. Excerpts:

The Axis Infra Index for March has increased to 386.3, from 297.6 in December, 2011. However, the index is still down 32 per cent year-on-year, indicating weak operating conditions. How reflective is the index?

To a large extent, the index reflects all that is happening in infrastructure. But as it is driven by data, any unusually large development in important components skews the index. We wanted to tell our clients that despite all the negatives in the economy - weak fund flows, policy uncertainty, and lack of coal for power plants - the index went up from the levels it was in December 2011. Fund flow is a significant component of the index, and it accounts for almost 50 per cent of it. Now, as this is the last year of the 11th Five Year Plan, there are a number of projects that were announced mainly to meet targets.

How much of the fund flow is equity? Will this trend sustain? Will investors put their money in this space where returns are prolonged?

Equity fund flows are completely gone. Barring the NBCC's IPO of Rs. 127 crore, equity raising in infrastructure has been dismal. As risk levels in the sector have suddenly risen, getting capital has become difficult. This will have an impact on new projects that have been put on hold by various corporates. While there is fund for completion of projects, there are no new projects.

How important are the other components of the index, such as policy indicators, project completion, fund flows and output indicators?

Since fund flow accounts for almost half of the index, growth in this component has offset the drop in other factors, such as policy weakness. See, the primary objective of the index is to convey a sense of investment condition and the ability of the segment to draw in capital funds. Again, while there were many announcements in the Budget, not all of them could be translated into direct funds flow. There will be a rise in investments only if other conditions are fufilled.