India has traditionally been a cash-based economy and the demonetisation move has shaken up many segments of the society, causing temporary disruptions to small businesses and professions which predominantly transact in cash. This will affect economic growth. Infrastructure sector being the driving engine of the economy is likely to see an impact. While a few challenges would need to be managed, we will see many opportunities emerge from demonetisation.
Predictable cash flow of underlying projects is the premise for infrastructure project assessments. This ranges from project sources (debt and equity), revenue collections to operations and management expenses. Cash based transactions are typically at the lower end of capex funding cycle, O&M expenditure (payments to labour etc.) and for user charge collections (tolls, property taxes etc.). Most other cash flow happens on electronic / formal payment mechanisms. Demonetisation has impacted cash payments to this category of stakeholders (reports indicate workers going back to their hometowns and difficulties in paying tolls). However, this is a temporary phenomenon; once liquidity improves and these stakeholders get into formal banking systems, coupled with technology adoption (digital payments), there would be better efficiency and smoother transactions. In the long run, this is a definite plus to infrastructure sector, as ease of doing business improves.
One view could be that the banks have now more money to lend, which could benefit infrastructure companies looking to raise debt. The issue however, has never been the availability of money. The larger concern which financial institutions face is the bankability of projects. Factors affecting bankability are traffic/ footfall/ rentals, cost of capital, etc. The demonetization move neither affects any of this nor does it mitigate the highly leveraged balance sheets of most infrastructure companies.
Rooting out black money and consequent reduction in corruption is an objective desired across the nation. Infrastructure sector too is characterized by unethical practices in some pockets, and any measure to reduce corruption will have a positive outlook on the sector. There will be an indirect impact in medium term on uptake of infrastructure projects as well. Many projects, particularly those on PPP formats, have used “land” as a revenue sweetener, though some have this as a primary business model. With real estate sector outlook being negative in medium term, this would similarly affect those infrastructure projects relying on real estate revenues.
Other set of stakeholders are capitalizing on this event - Many city corporations, discoms, and utility companies have also cashed in by accepting cash deposits from citizens for payment of property taxes and utility services. These entities have managed to increase their revenue significantly. This will help them pay off their debts and also plan for development works which can improve services for the public.
In the long term, however, the move will be positive for the economy with a more transparent and efficient system in place for doing business.
D T V Raghu Rama Swamy is the Director of School of Infrastructure & Director of Research & Institutional Consultancy, RICS School of Built Environment, Amity University
