Infrastructure

2020-06-25 16:09:58

Infrastructure

Goods and services that require high investment, considered esseor the proper functioning of a economy is called infrastructure of economy. Power, Transportation and communication are globally considered infrastructure.

![[1.3 Infrastructure, Liberalisation, Land Reforms in India#Ujwal DISCOM Assurance Yojana UDAY]]

Includes physical, natural and organisational structures.
Soft infrastructure means social infrastructure.
Critical Infrastructure are those assets which rest of the economy depends upon : ex Electricity, gas production, telecom, oil, agriculture etc.
Urban Infrastructure
Green Infrastructure
Natural Infrastructure ex forests, agricultural lands, estuaries etc

Recent Challenges faced by Infrastructure sector

Project delays causing high cost over runs.
Delay in land acquisition.
Scarcity of fund due to longer gestation period REIT etc has improved scheme but not by much.
Weakness of existing PPP model
Slowdown in economy since 2008 financial crisis

Railways

Challenges facing Indian Railways are Huge resources required for capacity creation and the limitation of public resources
Focus is on prioritising investment in important ares like dedicated freight corridors, high speed rail, high capacity rolling stock etc.
High speed rail project in partnership with Japan at a cost of Rs 140 crore per Km has been approved from Mumbai to Ahmedabad.
Train 18 is Indias firs engine less semi high speed train aka Vande Bharat express.

Roads

India has the 2nd largest road network in the world with 59.64 lakh km of road network.
The NHDP is financed through a cess imposed on Petrol and Diesel for the purpose this cess is leveraged by NHAI to borrow more using bonds and short term overdraft facility. Loans from WB, ADB etc.

National Critical Information Infrastructure Protection Centre NCIIPC

protects the critical information infra they are computer resources whose destruction will cause debilitating impact on national security, economy etc.
India Infrastructure Finance Company Limited IIFCL : finance involving long gestation periods mainly in transportation, energy, water, sanitation etc.
Public Private Partnership PPP : Appropriate allocation of Resources, Risks, Responsibilities, Rewards.

Various Types of PPP Models

Build Operate Transfer Model BOT or Build Own Operate Transfer BOOT

Type of PPP.
Initial concession of finance, design, construction, own, operating is given to a private firm.
After a set time limit it is transferred back to the Public entity.

VBOT : Variable - Build Operate and Transfer

In BOT model there is a chance where contractor realizes his investment and profit ahead of his contract period
In Variable - BOT the contract is terminated in such cases
Concession - it is an agreement of grant of rights, land or property by govt, corporation, etc. Here either the govt can pay the other party or vice versa as per various scenarios.

Hybrid Annuity Model (HAM)

Introduced in 2016 by NHAI
Govt contributes 40% of capital of project cost is paid upfront for first 5 years through annual payment.
while remaining 60% of the cost is paid over the life of the project on the basis of the assets created and performance of the developer.
Gov pays only 40% so developer has to find the remaining 60% in form of equity or loans.
No right of toll for the developer. Revenue collection is the responsibility of NHAI.
Developer bears the construction and maintenance risks similar to BOT-Toll.
Gov wants to use this in stalled projects where other models are not applicable.
In BOT model if there is a low realisation of tariffs the contract would still be terminated and lead to loss for the concessionaire, it also led to building of NPAs, risks were unevenly distributed among Public and Private parties.

Toll Operate Transfer (TOT)

Toll highways operated by NHAI for more than 2 years
Auctioned to private player whoever bids the highest to operate(collect toll) and maintenance
Highways are bundled out and given to offset the risks

Swiss Challenge

A third party is asked to match the previous proposal, expert committee decides on which is the best proposal
Advantages :
- Efficient use of capital, speeds up process
- Good citizen services, transparency
- Genuine competition, cost saving for gov
Disadvantages :
- Politics-business nexus does not let real competition
- Chances of large scale corruption
Kelkar committee discouraged it
Viability Gap Funding : one time grant is given for projects that have economic viability but financial support is missing. Ex UDAN

Take out Financing

loan on a property will be paid back over a long period which replaces a short term loan .
Done to address Asset-Liability mismatch
Expand sources of finance for infra projects

Plug and Play Model

Companies can start implementing projects immediately without worrying about all regulatory clearances
Done for big projects
Help attract foreign and domestic investment

Infrastructure Debt Fund IDF

Have long payback periods are capital intensive
Financed by NBFCs, present bond market lacks depth which limits its effectiveness
IDF can be structured either as a trust would be managed by SEBI or as a company managed by RBI
Infra Investment Trust InvITs

Design-Build/ Engineering, Procurement, Construction EPC/ Turnkey

Contractor designs and builds the facility for an upfront payment of fees.

Lease -

Operator is responsible for operating and maintaining infra facility but not required to make any large investment
Used with other models like BOT, Gov bears the investment risk

Suitability and Selection of Model

PPPs can be complex
Creation of a SPV Special Purpose Vehicle is a key feature - it is a legal entity that undertakes a project and negotiates contract agreements with other parties
- Their funds cannot be diverted
- Helps bring together of other investors, sharing risks

PPP in Various Sectors

PPP in ports has been encouraged, FDI is 100% automatic route
To attract investment/PPP in social sector reimbursement of service cost will help reduce time and cost over-runs, inc efficiency, improve quality
PPP in education - 20 IITs were to be established in this model
- Criticismprivatisation of education and dilution of the role of the govt
PPP in Health Care Services -
- National Health Policy 2017 advocates PPP
- Proposed for treating non communicable diseases NCDs
- Pros
  - Check rampant absenteeism
  - inc gov expenditure has failed to give results
  - Unable to attract and retain talent
  - High growth rate of private sector
- Cons
  - Risk is unequally spread towards gov
  - Implementation is a challenge
  - Conflict of interest b/w Gov run centres and private
PPP in Skill Development
- PM Kaushal Vikas Yojana, Apprentice promotion scheme uses this model
PPP in Digital India - ex Bharat Net project
In Swacch Bharat Abhiyan - in social sector PPP model allows local citizens to become direct stakeholders

[[1.3 Infrastructure, Liberalisation, Land Reforms in India#Static Infrastructure - Energy Ports Roads Airports Railways etc Investment Models]]

Logistics Sector

It is the backbone of supply chain and includes transportation, inventory management, warehousing, materials handling, packaging and integration of information. It is largely unorganised
Is around $215 billion growing at the rate of 8%.
Gives employment to more than 22 million people.
A 10% cut in logistics cost could boost up export by 5-8%.

Housing Sector

2 major issues associated with it are Rental Housing and Vacant Housing

Rental housing
- Important for horizontal and vertical mobility.
- share of rental housing has been declining in India since indepedence
Vacant Housing
- Mumbai has most vacant houses of 0.5 million then Delhi and Bengaluru
- Reasons could be unclear property rights, weak contract enforcement and low rental yields.

India needs a holistic housing policy capable of resolving existing constraints and issues. ![[ESI 2020 II - State of Economy#PMAY-U]]

Services Sector

03-01-2022 14:08

#todo
Growth has moderated to 6.9% in 2020 from 7.5 last year and contributed around 55% of GVA.
FDI inflows into services sector has increased significantly reaching 2.3rd of total FDI flow in the country.

Trade in Services

Services growth rate had annual growth rate of 6.4% and services improt inc 7.9%
Traditional services export ex transport, value added services has declined
Share of travel services has inc over the past decade.
But there is deficit in education services with education imports.
Commercial Services Exports : are total service exports minus exports of government services not included elsewhere
- India ranks 8th in worlds largest commercial services exporters and grows at more than 1%.

Sub-sectoral Growth

Tourism

There was a brief deline in this sector in 2019 due to Coronavirus from 5.2% to 2.7%.
Forex earnings have also decreased.
Top 5 states that had the highest domestic tourists were TN, UP, Karnataka, AP and Maharashtra
Top 5 state having highest foreign tourists were TN, Maharashtra, UP, Delhi and Rajasthan.
Govt steps to inc tourism includes e-Tourist Visa for 46 countries has shown year on year 21% growth.

IT-BPM

By March 2019 size was about $177 billion.
IT constituted 51% and Software and engineering services 20.6%.
About 83% of it is export driven out of which 55% is IT services and rest is Software Products & Engineering.
USA is the largest destination.

Ports and Shipping Services

Thera are 14 major seaports in India and mroe than 200 non major seaports.
Total capacity of ports is 1,500 Million Tonnes per Annum MTPA.
Overall traffic handled is decreasing since 2018.
Turnaround time of ships is a key indicator of efficiency of the ports sector had declined continuously and is lowest in ports like Cochin, New Mangalore, Chennai etc.
- Turnaround time is defined as the time taken by the ship to reach the anchorage of a port and then sailing out from the birth.
- It is currently in 2020 2.1 days for India and globally median as per UNCTAD is 0.97 days.

Space Sector

India spends about $1.5 billion on its space project. It includes design, dev of launch vehicles, related technologies, satellites etc.
Key areas for India have been Satellite communication, Earth observation, Satellite aided navigation ex GAGAN and NavIC.
Private investments are needed in areas of :
- Production of PSLV
- Satellite Integration and assembly
- Production of composite assembly
- Production of solid, liquid, cryogenic and semi cryogenic propellants.

Offshore Fund Management

Offshore funds are mutual fund/ collective investment schemes that invest in overseas or international markets.
On shoring the fund management companies from tax havens such as Hong Kong etc to India would benefit in the following ways :
- Contribute to Asset management industry. Potential here is upto $217 billion.
- Employment for high skilled finance professionals.
- Increased management fee for service providers.

Challenge : Stringent eligibility conditions under Income tax act to get registered in India. It leads to dual compliance burden for offshore investors since they also need to register with RBI and SEBI

Issue of domestic barriers and regulations

They include licensing requirements, licensing procedures, qualification requriements, qualification procedures and technical standards.
Interstate movt of goods; Multimodal Transportation of Goods Act 1993 needs revision; restrictions on free movt of cargo b/w Inland Container Depots and Container Freight Stations and Ports.
Certains states have not repealed Urban land Ceiling Act which had hindered acquisition of land and construction. Restrictions are also there on floor area ratio.
Number of statutory audits of companies is limited to 20. FDI is also not allowed in the Accountancy services sector.
FDI is not permitted in Legal services and international law firms are not authorised to advertise and open offices in India.
New Medical colleges have restriction of having atleast 25 acres of land and Load factor regulations hinder it.

![[ESI 2020 II - State of Economy#Services Sector ESI 2020]]

Public Sector

2020-06-25 16:10:21

![[1.3 Infrastructure, Liberalisation, Land Reforms in India#Changes in Industrial policy and their effects on industrial growth]]

Public Sector Undertakings PSUs

Various Forms of PSUs

Departmental undertaking ex Railways, postal dept.
- Not formed with consent of legislative authority but by executive decision.
- Expenditure from CFI through annual budget.
Statutory Corporation ex ONGC, IOCL etc.
- By an act of legislature.
- Enjoy legal autonomy, rules, functions, duties defined by act of Parliament.
Registered under the Companies act 2013. ^d7da2a
CPSE overall net profit is growing, they contribute through payment of dividend interest, corporate taxes, excise etc.

Imp of CPSEs

Supply services like power, irrigation etc
Model employer
Reduce regional economic imbalance
Non-inflationary growth process is facilitated

Disinvestment

In Divestment no change in management takes place
In Strategic investment the management is handed over to Private sector
Corporatisation is when Gov units are reorganised along business lines to focus on profit maximisation.

Advantages of Disinvestment

Helps restructuring PSEs
Additional finances for social sector
Market discipline inc making them more efficient
Maintain Fiscal discipline
Discounted Cash Flow is a method of valuing business based on its stream of future profits or cash flows

Buy Back of shares from existing shareholders is a type of disinvestment

Gives exit route to shareholders
Enhance consolidation of stake
Return surplus cash to holders
Cross Holdings
PSE - Exchange Traded Funds - equity of PSEs is sold to private fund manager who floats it on the stock exchange. Ex Bharat 22 ETF

Various Methods of Disinvestment

Token Disinvestment : symbolic selling of stocks of PSU to the tune of 5-10%.

Strategic Disinvestment : is the transfer of ownership and control of a public sector entity to private sector.

IPO, FPO (Further Public Offering) : IPO is the process of offering shares of a private corporation to the public. Further Public offering is the issuance of shares to investors byt a company already listed on a stock eschange.

Offer for Sale : Shares are bought directly from the owners/promoters of the company this takes places in a stock exchange. Anyone including retail investors, companies, FIIs etc could bid on these.

Strategic Sale : Process of selling a substatial portion ie 50% or more of ownership and control of a company.

CPSE Exchange Traded Fund ETF : They are mutual funds that invests mainly in shares of govt owned companies or CPSEs.

Cross Holding : Is when a publicly traded corporation owns stock in another publicly traded company.

Current Disinvestment Policy : - promote public ownership of PSUs - Gov to hold minimum 51% shares in minority stake sale. DIPAM to identify such PSUs - Strategic disinvestment to be done after consultation with NITI Aayog. NITI to identify such PSUs.

Proceeds Of Disinvestment

Earlier til 2000 proceeds used to go towards fulfilling budgetary requirements.
From 2000 - 2003 fulfilling budget deficit and other purposes such as re investment in PSEs, pre payment of public debt and on social sector.
2005 National Investment Fund was formed and in 2009 it was restructured.

National Investment Fund.

this fund was to be operated outside the Consolidated Fund of India and was to be of a permanent nature.
75% of annual income of the fund was to be used to finance social sector schemes.
Fund was to be professionally managed.
From 2009 for 3 years disinvestment proceeds was not to be submitted into the account and instead was to be used for selected social sector schemes.
Since 2013 Disinvestment Proceedings are credited to it and is utilised for :
- Subscribing to shares of CPSEs to ensure 51% ownership through rights basis and through preferential allotment.
- Recapitalisation of PSBs and Insurance companies.
- Investment in RRBs/IIFCL/NABARD/Exim.
- Investment in RRBs, IIFCL, NABARD, Exim Bank.
- Equity infusino in metro projects, Investment in BNVNL.

DIPAM : Department of Investment and Public Asset Management DIPAM

Manages Central gov investment in equity and disinvestment of equity.
Advise on financial restructuring of CPSEs.

Proceeds of

Maharatnas

to give more powers to Boards to facilitate expansion of their operation. Eligibility
Navratna status
Listed in stock exchange
Annual turnover avg last 3 yrs more than Rs 25,000 cr.
Avg annual turnover for last 3 yrs more than Rs 15,000 cr
Avg annual net profit after tax last 3 yrs Rs 5,000 cr
Significant global presence
Maharatnas are 8 in no
- BHEL
- Coal India
- GAIL
- IOCL
- NTPC
- ONGC
- BPCL
Navratnas - gives autonomy to PSEs to compete with Private Sector. Ex HPCL, MTNL, EIL, BEL, BPCL, HAL etc
Miniratnas
Amendment of Article 12 that defines PSEs as part of the state having the obligation to welfare of citizens and employees.
Appointment of CEOs and other Board members for longer periods and ensuring their tenure.
Multiple audits decrease the initiative and spontaneous decision making.
Ministry should not try to micromanage the affairs of PSEs.
Burdened with sick units - should be able to spin off loss making units or close operations.

Arjun Sengupta #committee

Ad-hoc Group of Experts AGE report on Public Enterprises:
Greater autonomy.
Centres PSUs to have truly independent boards.
Ministries should not interfere.
Supplementary audits by CAG should be an exception rather than the rule.
Accountability of PSEs to the Parliament.

Sectoral Concerns of PSUs

Steel Industry

IN 2nd biggest producer of steel, 3rd largest consumer.
Global demand for steel has been falling since 2015 which has led to dumping of steel in Indian market.
It has higher borrowings, higher raw material costs with lower productivity.

Measures by govt - Inc in custom duty - Anti dumping duty on steel imports from China, Malaysia and S Korea. - Safeguard custom duty of 20% on hot rolled steels. - Minimum import price on steel products - Reduce export duty

Aluminium Industry

2nd largest producer, 3rd largest consumer
World Al prices have dropped and imports have increased
Capacity increase in CN and slowdown of global growth
Indian capacity has also inc but consumption has not and neither have production costs.

Footwear and Apparel

India has under performed as compared to their East Asian counter parts who have seen growth of 20% and in some cases even 50%.
Could be used for social transformation through women empowerment
China’s space is being vacated and is being filled by Bangaldes, Myanamar, Vietnam. Indian apparel companies are relocating to these countries.
Logistics cost of tranporting goods from factory to destination is higher
Labour laws issues :
- overtime wages to be paid at double the ordinary rate
- Lack of flexibility in part time work
- mandatory contribution ex employee funds etc results is lower disposable salary.
Tax and Tariff policies impede India’s export competitiveness ex higher tax on non-leather footwear and lower on leather ones.
Discrimination in export market ex US and EU have imposed tariffs on Indian tarrifs but Bangladesh and Vietnat attract zero tarrif in EU.
Export of Cattle hides is declining from India due to lower cattle slaughter.

FDI policy in Manufacturing sector ![[Pasted image 20220212130746.png]]

![[1.2 Inclusive Growth and Budgeting#Issues with Make in India and PLI scheme]]

Prelims PYQ Industry and Trade

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