Infrastructure Sector: Budget Expectations

Infrastructure is critical for the development of any country and includes various segments such as roads, railways, power and ports, all important contributors for overall growth. It is said that a rupee invested in the infrastructure sector creates ten-fold opportunities. In India, infrastructure development has, of late, picked up pace with rapid urbanisation and the influx of foreign investments. Also, liberalisation of foreign direct investment (FDI) regulations, extended tax holiday periods and the introduction of public private partnership (PPP) are some of the major factors that have led to the growth of this sector in India.

However, despite such efforts, the infrastructure companies are still finding it difficult to create value for the investors. There are many companies which could not revive themselves from the setback they faced during the global financial turmoil of 2008. Further, the performance of infrastructure companies on the bourses since the last budget has been quite dismal too. Most of the leading companies have been underperforming owing to various factors like higher interest rates making the projects unviable and the scarcity of long-term project funding.

The scenario in the last two years has been so bad that even the largest engineering player viz. L&T has had to reduce its new order book intake for FY12 to just 5 per cent from the earlier forecast of 15 per cent. Moreover, this is expected to remain stagnant. Adding to the problems has been the rising raw material prices that have affected the operating margins. In fact, the scenario turned so bad for companies like GVK, IVRCL and IRB Infra that they had to sell some of their stakes for raising funds.

Previous Budget Review

This is not to say that there have been no positive steps taken by the government. Rather, infrastructure has been one of the few sectors that have been looked upon very favourably in terms of policy decisions. Some of the announcements made in last year’s budget were:

• Allocation of Rs 2,14,000 crore for infrastructure in 2011-12.
• Issuance of infrastructure bonds of Rs 30,000 crore by government undertakings.
• Increase in the FII limit for investment in corporate bonds issued by infrastructure companies.
• Special vehicles in the form of notified infrastructure debt funds.
• Raising of rural infrastructure development fund to Rs 18,000 crore from Rs 16,000 crore.

The focus on infrastructure was clearly seen from the fact that the government allocated Rs 2,14,000 crore for the infrastructure sector. This was 48.50 per cent of the total planned allocation of the Union Budget 2011-12. But even with the keen attention of the government towards the infrastructure sector, the availability of long-term financing has always been an issue in this area. Some steps were taken to enhance the flow such as increasing the FII limits for investment in corporate bonds issued by infrastructure companies. As regards the issue of bonds of Rs 30,000 crore by the government undertakings, this seems to have gathered some momentum and its impact may soon be realised.

Meanwhile, tax benefit under Section 80IA for additional investment to the tune of Rs 20,000 in infrastructure bonds has been extended by another year. Therefore, it does seem as if the infrastructure companies have got more than what they had expected from the government. The sights are now set on what this year’s budget has to offer. Says an official of Simplex Infrastructure: “The Union Budget 2012-13 will present an important opportunity as it will also mark the onset of the 12th Five Year Plan. Hopefully, the budget will focus on withholding tax issues that have been marring infrastructure companies for a long time. Last year’s blow of increasing MAT from 15 to 18 per cent has had its effects on the overburdened sector. This would certainly need looking into by the finance minister.”

Current Budget Expectations

• Concrete steps to be taken towards the creation of a deep and robust debt capital market to make available long-term debt instruments for infrastructure.
• Allow banks to issue long-term tax-free infrastructure bonds and enhance the participation of banks, financial institutions and large NBFCs in infrastructure financing.
• Bring reforms in the insurance and pension sectors to tap them for infrastructure financing.
• Exempt infrastructure companies and SEZ units from MAT provisions.
• Exemption of interest earned by foreign lenders on overseas loans availed by Indian borrowers, similar to earlier provisions granted under Section 10(15)(f).
• Set up an expressway authority as envisaged in the 11th Five Year Plan document.
• Encourage the private sector to build storage facilities for agriculture goods by providing fiscal incentives.
• Grant infrastructure status to the aviation, telecom, healthcare and education sectors.

Conclusion

While there are many expectations from the Union Budget, not many may come true. However, there are expected to be indirect benefits from the measures the government is expected to take for inclusive growth. There could be increased allocation for the infrastructure projects, especially in the wake of the tax-free infrastructure bonds being raised by the various government bodies. Therefore, there is the likelihood of funds flowing into the system. Meanwhile, despite the demand for reducing MAT from 18 to 15 per cent, we do not see this as a possibility. With the interest rate cycle expected to reverse, we feel the borrowing cost may come down. But more efforts will need to be taken to make the funds available for infrastructure growth. All in all, expect some positive impact on the sector in the forthcoming budget.

Performance Of Infrastructure Scrips Since Last Budget