Jaitley opens the tap on infrastructure

Finance Minister Arun Jaitley, presenting the Union Budget on Saturday, sought to set right India’s troubled infrastructure sector with increased public investments, and announced a slew of proposals that could revive private investments in the years to come.

“Our infrastructure does not match our growth ambitions. There is a pressing need to increase public investment,” Mr. Jaitley said. He, therefore, proposed Rs. 70,000 crore more as investments in infrastructure, which has had a “major slippage in the last decade.”

A large chunk of the allocation will go toward roads and railways. In addition, the Minister proposed measures such as simplified bankruptcy laws, a mechanism for easier regulatory clearances, and revisiting of the public-private partnership model. A national investment and infrastructure fund was announced, with an annual flow of Rs. 20,000 crore.

All these are measures to get the private sector serious about infrastructure again. On Friday, the Economic Survey pointed to how “weak corporate balance sheets, an impaired banking system, difficulty of exit, and the deficiencies of the public-private partnership model in infrastructure” could hold back private investments. The survey pointed out how stalled projects accounted for a high 7-8 per cent of the gross domestic product in the past four years.

The Minister said he would use the space created by relaxing the fiscal deficit targets to fund infrastructure. (Fiscal deficit, the excess of expenditure over revenues, will now be reduced slower than earlier proposed, freeing up more money). Another source of funds will come about through the conversion of the excise duty on petrol and diesel of Rs. 4 a litre into road cess. This cess has been estimated to bring in Rs. 40,000 crore.

Mr. Jaitley said the bankruptcy law reform would be key to “improving the ease of doing business,” something the earlier Acts failed to do. The plan to make regulatory clearances easier involved creating a system with a pre-existing regulatory mechanism. This could be put in use to set up five new ultra mega power projects, each of 4,000-megawatt capacity. This should unlock investments to the extent of Rs. 1 lakh crore. Along with this, said Samir Kanabar, tax partner at consultancy EY, “The Land Acquisition Bill is also critical.” He said the national investment and infrastructure fund could help solve a long-standing problem that private infrastructure players faced, which was access to really long-term funding. Banks can, say, fund for a seven-year period but infrastructure players need 20-25-year loans.

This is how the Fund is intended to help: it will raise debt, invest as equity in infrastructure finance companies such as the Indian Railway Finance Corporation and the National Housing Board, which will then leverage this and advance long-term loans to private players. The Minister intends to allow tax-free infrastructure bonds for rail, road and irrigation projects. One of the key proposals is to rework public private partnerships. Some years ago, the model was seen as the answer for all infrastructure woes. But it has not worked. For the model to work, the Minister indicated the “sovereign will have to bear a major part of the risk without, of course, absorbing it entirely.”

Arvind Mahajan, head of infrastructure and government services, KPMG in India, said, “The proof will be in the implementation.” He, however, said, “More investment in infrastructure is definitely good for job-creation.”

A report by consulting firm McKinsey in 2013 said that infrastructure investment equivalent to 1 per cent of the gross domestic product could create an additional 3.4 million direct and indirect jobs in India.