Will budget offer a remedy for the creaking infrastructure?

The Hindu, February 21, 2013

India’s infrastructure is bursting at the seams, unable to cope with the pressure from the growing economy. Developing the sector will help to create jobs and result in higher economic growth

The Gross Domestic Product (GDP) is likely to grow 5.5 per cent and the economic slowdown shows no sign of halting. India’s infrastructure is bursting at the seams, unable to cope with the pressure from the growing economy. Spurring infrastructure growth will help to create jobs, result in higher economic growth and fuel entrepreneurship.

Over the years, the government took a conscious decision to involve the private sector in infrastructure development nationwide. However, the UPA government, hit by a slew of scams and suffering from a policy paralysis and red-tapism, has failed to calibrate the policies to the changing needs to build a sound infrastructure. This has caused the sector to grow haphazard.

What hamper infrastructure growth are lack of policy direction, absence of proper regulatory mechanism and lack of proper financing instruments to facilitate smooth operations for stakeholders. As the country enters the 12th Five Year Plan (2012-17), intending to spend around $1 trillion, industry players reckon that the coming Union budget should rather focus on holistic and total development of industry than on a piecemeal approach as in the past.

The budget, to be presented on February 28 by Finance Minister P. Chidambaram, could give the much-needed direction and lay out policy measures for building infrastructure in an economy that is growing and promises to grow at a faster clip.

India Inc and foreign players believe that the budget should drive up infrastructure spending, create a single window clearance system, ease interest rates, make borrowings easy and ensure effective environmental clearance.

In the power sector, generation and transmission projects worth thousands of crores of rupees have been stalled by fuel shortage, lack of environmental clearance and problems in land acquisition. The country sits on coal reserves of nearly 500 billion tonnes, but only a small portion has been exploited because of the inefficiencies plaguing the sector, especially the monopoly of Coal India Limited (CIL).

The story is the same in the telecom and roads and highways sectors, which have been hit by scams, lack of a proper policy mechanism and absence of an effective regulator. Hemal Zobalia, partner, Global International Corporate Tax, KPMG, says infrastructure developers are reeling under pressure, and they expect an impetus from the budget. They look primarily for long-term stability and certainty in the tax policy and wish that the profit-linked tax holiday will continue till 2017. To channelise more funds, the budget could re-introduce infrastructure bonds, grant higher tax exemption to retail investors and reduce withholding tax on overseas borrowings.

Samir Kanabar, tax partner, Ernst & Young, says the government’s recent decision to allow companies to raise cheaper funds overseas to refinance their rupee loans is good. The budget, he says, should fast-track infrastructure growth as projects are not being awarded for various reasons. He stresses the need for a single window policy for infrastructure projects and a special focus on land acquisition and environmental clearances.

Pradeep Mehta, secretary-general, CUTS (Consumer Unity & Trust Society) International, and chairman, CUTS Institute for Regulation and Competition, says: “Unless the regulatory architecture is improved, high growth in the infrastructure sector will be difficult. The Planning Commission has developed a piece of legislation to… improve the functioning of our infrastructure regulators, but it is not moving at all, owing to turf wars and inertia.”

The Confederation of Indian Industry (CII) wants the budget to focus on boosting private as well as government investment. Adequate infrastructure is the most critical prerequisite to revive economic growth. “Given that the 12th Plan envisages an investment of $970 billion (nearly Rs.50,000 crore) in infrastructure over the next five years and nearly half of which is to come from the private sector, urgent measures are required to make the sector viable and capable of attracting capital,” it says.

To boost investment, the CII has suggested several measures, including exempting infrastructure companies from the Minimum Alternative Tax. Currently, infrastructure projects are entitled to a tax holiday under Section 80IA for 10 consecutive years during the first 15-20 years of their operation. It also wants the tax benefit to continue for the power sector under Section 80IA, which entitles a company to tax benefits only if it starts generating power by the end of the current fiscal.

Indian infrastructure debt funds are expected to attract investor interest in overseas markets, given a marked improvement in economic sentiments and the low interest rate abroad. The evolution of the newly created infrastructure debt funds as key financing vehicles is also expected to meet the needs of the sector. Of the nearly $1 trillion expected to be earmarked for the sector in the next five years, $350 billion is likely to come through debt contribution.

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