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State Scan

Lofty promise, tardy action

The impact of delay in investment implementation is going to cost the State dear, according to an ASSOCHAM report

Lofty promise, tardy action

MADHYA Pradesh is centrally located and it is very important from the perspective of the Indian economy. The State’s contribution to India’s GDP at constant price is 4.1 per cent in 2013-14, and which was 3.80 per cent in 2004-05. In terms of the size of the economy, currently the State is ranked 10th amongst the major 20 States in India.

During 2013-14, the State recorded a remarkable economic performance—the highest amongst the major 20 States in India—and its growth rate is also more than double the national growth rate at constant prices. A noticeable point is that the State’s economic performance has surpassed the leading performing State, i.e. Bihar.

Madhya Pradesh registered 11.08 per cent economic growth during 2013-14 while India registered 4.9 per cent growth during the same period. If we compare with the previous year, the State is the second largest State in terms of economic growth addition among the major 20 States and the growth has increased from 9.9 per cent in 2012-13 to 11.08 per cent in 2013-14.

The trend analysis indicates that before 2010-11, the State’s economic growth rate was fluctuating but since then it has recorded a stable growth rate.

Sectoral analysis indicates that the State’s economy is largely dependent on agriculture and allied activities, which contribute 29 per cent of GSDP at constant prices. If we compare with the sector’s contribution to India’s GDP, it is more than double.

Industry and services play a very important role in economic growth and development. But both the sectors are contributing less than India’s contribution. The State’s industry contribution to GSDP is 22.3 per cent in 2013-14 whereas India’s industry contribution is 24.3 per cent to GDP during the same period. The State’s service sector contribution to GSDP is 45.4 per cent whereas India’s services sector contribution is 59.9 per cent to GDP.

The sectoral performance indicates that the robust economic growth of Madhya Pradesh during 2013-14 is largely on account of the spectacular performance of the agriculture and allied sector. In 2013-14, the State’s agriculture and allied sector registered a robust growth rate of 23.3 per cent as against 18.6 per cent in 2012-13. The State’s agriculture and allied sector growth performance is almost five times that of India’s.

However, in 2013-14, the State’s industrial sector performance was 2.8 per cent as against 0.8 per cent of India during the same period. The performance of the services sector also recorded a downfall but in 2013-14, it has shown an upward trend.

Since the State’s economic performance is largely dependent on the performance of the agriculture and allied sector, a drop will result in the State’s economic performance getting exaggerated. Importantly, agriculture and allied activities in the State are dependent on traditional methods of cultivation, which, in turn, are dependent on the climatic condition and the monsoon. Therefore, it is necessary that the State needs to reduce the dependency of agriculture and allied activities on traditional methods of cultivation and natural resources. This can only be possible when the State can attract adequate investment in the sector.

INVESTMENT plays a paramount role in economic growth and development but the analysis reveals that industrial and services activities have slowed down in the State.

img-feb2015-27-gfilesindiaIn 2013-14, the State attracted Rs. 5.6 lakh crore outstanding investments but analysis suggests that the State’s outstanding investment has recorded sharp deceleration and even recorded negative growth rate in 2013-14. If we compare with India’s outstanding investment growth rate, the State’s outstanding investment growth rate was lower. Madhya Pradesh has recorded a negative growth rate of 8.4 per cent in 2013-14 whereas India’s outstanding investment has managed to maintain the growth rate at almost 1 per cent during the same time. The negative outstanding investment growth rate is indicative of worsening investment activity in the State and it reflects a situation where new investment has recorded a drastic fall.

The long project gestation periods have been costing the investors as well as dampening investor sentiment towards the State

The sector-wise analysis suggests that electricity, manufacturing and services are the top three priority sectors for investors looking at Madhya Pradesh. These three sectors together account for almost 87 per cent of total outstanding investment.

Interestingly, the current level of investment flows has recorded a significant shift when seen against the 2004-05 investment pattern. In 2004-05, electricity, manufacturing and irrigation were the top three priority sectors, constituting almost 90 per cent of total investment.

img-feb2015-28-gfilesindiaNoticeably, agriculture and allied activities are the lifeline of the State economy; unfortunately, the sector’s investment share has recorded a robust fall from the level of 2004-05. In 2004-05, the irrigation sector was the third most important priority sector but currently irrigation is at fourth position and the investment share has declined significantly.

The sectors that have recorded significant increase in the share of total investment are electricity, services, mining, and construction and real estate. The electricity sector—also called the fuel of the economy—is very critical for economic growth and development. The State has realised the importance of power and the investment share recorded significant increase, from 37.9 per cent in 2004-05 to 56.1 per cent in 2013-14.

Similarly, service sector investment share increased from 8.7 per cent in 2004-05 to 12.2 per cent in 2013-14; mining sector share increased from 1.2 per cent to 3.4 per cent; and construction and real estate share rose from 0.03 per cent to 3.1 per cent during the same period.

At the same time, sectors that have recorded a decline in investment share are manufacturing and irrigation. Both sectors are important and play a major role in economic development but unfortunately in Madhya Pradesh, both sectors have witnessed decline in investment.

IN fact, the manufacturing sector contribution to the State economy is shrinking over the years and has fallen from 11.1 per cent in 2004-05 to 10.1 per cent in 2013-14. Therefore, it is important that more investment should be encouraged for the revival of the manufacturing sector in the State but recent manufacturing sector investment activities indicate that the share has declined from 33.8 per cent to 19.1 per cent during the same year.

Madhya Pradesh is an agrarian economy (the agriculture sector contributes almost 29 per cent of GSDP). Therefore, the State needs to invest more on the irrigation sector and also needs to encourage private investors in this sector. However, the investment trend suggests that the irrigation sector has recorded a drastic fall in its share in total outstanding investment. Irrigation investment share has declined from 18.3 per cent in 2004-05 to 6 per cent in 2013-14.

If we look at the regions of Madhya Pradesh in which most of the investments have taken place in 2013-14, the Damoh–Sidhi region attracted 45.8 per cent of total investment followed by Indore–Bhopal–Betul region with a share of 13.5 per cent and Chhindwara–Jabalpur region with a share of 12 per cent. The top three regions together account for almost 70 per cent of total investment, while the balance 30 per cent is spread among the other regions of Madhya Pradesh.

The other regions that have attracted investment are Jhabua–Nimar (8.9 per cent), Morena–Raisen (4.6 per cent), Ratlam–Rajgarh (2.9 per cent) and Multi region of Madhya Pradesh (13.5 per cent).

One can notice from the graph, new investment has declined sharply in the State year after year. In 2013-14, the State’s new investment growth rate has declined by almost 83 per cent. New investment has declined on a national basis, but the State’s rate of decline is worse than India’s.

Moreover, the State has recorded a worsening of its investment implementation over the years. In 2013-14, 399 projects worth Rs. 3.37 lakh crore were under implementation. The benefits of investments can be transferred into the economy only once the investments get implemented.

THE silver lining is that the rate of projects currently under implementation in the State is higher than the all-India figure. In 2013-14, projects under implementation were 57.4 per cent in India while the figure in Madhya Pradesh was 60.1 per cent. Noticeably, the State achieved a significant improvement of the under implementation rate in 2007-08, and thereafter it has been on an upswing. In 2004-05, the projects under implementation rate in Madhya Pradesh made up 57.1 per cent of outstanding investment and reached 36.9 per cent in 2007-08.

In comparison with the major 20 states, in terms of projects under implementation rate, currently the State is ranked sixth.

If we look at the sector-wise break-up of projects under implementation, the analysis suggests that most of the projects are in the electricity sector, constituting almost 62 per cent of under implementation projects in the State followed by services with 13.1 per cent and manufacturing sector with 11.8 per cent.

The irrigation sector has 7.9 per cent share in under implementation projects, mining 3.3 per cent share, and construction and real estate 1.8 per cent share.

The long project gestation periods have been costing the investors as well as dampening investor sentiment towards the State. From the analysis, we have observed that recent investment slowdown is largely a result of slowdown in new investment activities and delay in implementation. A slowdown in new investment implies less addition to outstanding investment but an increase of under implementation projects implies increase in the cost of investment which only adds to outstanding investment.

The delay in implementation could have many reasons. Several departments of the State government play a rather crucial role in project implementation. Activities like land acquisition, shifting of utilities, and so on, are performed by the State departments. Moreover, economic and geographical features of the State may also may affect project time and costs.

The State needs to invest more on the irrigation sector and also needs to encourage private investors. However, the investment trend suggests that the irrigation sector has recorded a drastic fall in its share in total outstanding investment—from 18.3 per cent in 2004-05 to 6 per cent in 2013-14.

THE important factors affecting the implementation of projects are manifold: regulatory approvals from several agencies leading to delay, delay in environment clearance, delay in land acquisition and site handover, lack of skilled labour force, imperfect techniques and contractual incompleteness, lack of finances, and so on.

img-feb2015-34-gfilesindiaThe delay in project implementation has been an important concern for policymakers because its cost is very high to the economy. Delayed investments have the evident effect of lowering the growth rate. In general, if cost overruns are pervasive and increase the cost of investment in real terms, they raise the capital–output ratio, an effect that can spread to other sectors also. We see price increases of investment and intermediate goods at a higher rate than price increases of other goods.

The most important question is what could be the possible impact of delayed implementation on the investors and on the economy. The impact on the economy is difficult to identify and related data is also not available. For the impact on investors, we observe that while many projects are running over the time-frame, many of them have not yet declared the cost escalation but some of them have declared a further time overrun.

The study has observed that there are 399 projects under implementation. Out of these, 224 projects have reported either time overrun or cost escalation.

Surprisingly, for only 41 projects is the time overrun between one month and 20 months whereas for 77 projects, the time overrun is 20-50 months. The rest report more than 50 months of delay.

Only 134 out of 224 delayed projects have reported cost escalation. The others have not reported so far.

In terms of cost escalation, the ASSOCHAM analysis has observed that due to long delays in implementation, the img-feb2015-35-gfilesindiacost of projects have increased by Rs. 96.7 thousand crore while the actual cost of the time overrun or cost-escalated projects is Rs. 3.6 lakh crore. The cost escalation as per cent of actual cost on the invested investment is almost 26.9 per cent.

The sectoral pattern of cost escalation indicates that the electricity sector has recorded the highest cost escalation followed by irrigation and aluminium and aluminium products. The share of the electricity sector in total cost escalation is 53 per cent, irrigation 22.2 per cent and aluminium and aluminium products 12.7 per cent. These three sectors have a combined share in total cost escalation of almost 88 per cent.

Timg-feb2015-36-gfilesindiahe other important sectors which have a significant share in cost escalation are infrastructure services (6.7 per cent), cement (2.6 per cent), and cotton and blended yarn (1.8 per cent).
IF we look at cost escalation as a percentage of actual cost, the sectors which have recorded the highest escalation are irrigation (74.8 per cent of actual cost) followed by aluminium and aluminium products (61.5 per cent), cotton and blended yarn (30.4 per cent), electricity (22.2 per cent), cement (17.2 per cent) and infrastructure (16.8 per cent of actual cost).

Despite the fact that the State is largely dependent on agriculture and allied activities, investment in the sector had not been implemented successfully,
resulting in the second largest cost escalation and a significant fall in investment activities. The delay in implementation of irrigation projects could be one of the most important reasons for the substantial decline in irrigation investment.

img-feb2015-37-gfilesindiaIf we look at cost escalation of projects by ownership, the analysis suggests that projects owned by the State have a higher percentage of actual cost of projects (at 46.4 per cent) than those owned by the Central government (17.5 per cent) and private sector (25.7 per cent).

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