Post Budget Analysis - Infrastructure Sector

Infrastructure is critical for the development of any country. It is focus on the various segments of infrastructure which is important for the sustainable growth.  It is said that a One Rupee invested in the infrastructure sector creates 10 times opportunities. So focus on the infrastructure is of utmost importance.

However the sector has been witnessing some sluggishness since past two years on account of various factors like higher interest rates, thigh liquidity situation. Even the Finance Minister in the speech stated clearly that lack of infrastructure is a major concern in India and there is grave need to remove infrastructure bottlenecks. This clearly indicates towards the attention and importance being provided to the infrastructure sector. We are also of the opinion that, while India continues to be one of the fastest growing economies, the pace of development is unlikely to continue unless it is supported by an equally robust development of its infrastructure.

As far as the Union Budget for FY13 is concerned, there seem to be a lot of potential for Infrastructure. Concrete measures for the growth of infrastructure in India have been taken as part of budget 2012-13 by creating adequate funding mechanisms. Rather the during the twelfth plan period, investment in infrastructure will go up to Rs 50 lakh crore with half of the same expected from private sector. The most positive factor is, total investment in infrastructure has increased from 5.7 % of GDP in 2007 to around 8.0 % in FY11. In FY13 budget aims for an increased growth rate between 9-10 %.

Issuance of Tax Free Bonds Doubled to Rs 60, 000 crore – Positive

Availability of finance has been a major concern for the infrastructure sector. To ease the funding requirements, government took steps in the previous budget only and planned to raise tax free bonds amounting to Rs 30000 crore for financing of the infrastructure projects. In the current union budget the same has been increased to Rs 60000 crore. This provides a much needed solace to the infrastructure players. Further, in order to provide low cost funds to some stressed infrastructure sectors, the rate of withholding tax on interest payments on external commercial borrowings is proposed to be reduced from 20 per cent to 5 per cent for three years.

FM has widened the ambit of Viability Gap Funding scheme by including new infrastructure areas like irrigation, Oil & Gas storage facilities, fertiliser and telecommunication towers. He also provided more avenues of raising funds with measures like relaxing ECB guidelines. As mentioned in the pervious budget Infrastructure Debt Fund with an initial size of Rs 8000 crore, has been launched earlier this month.

Enhanced Rural Infrastructure Fund Allocation – Positive

Enhanced allocation under Rural Infrastructure Development Fund to Rs 20,000 crore is a positive for the sector. Rural Development is a large project and can generate good opportunities for the smaller infrastructure players.

 Roads covering length of 8800 Km in 2012-13 with increased allocation – Positive

The Government has proposed to set a target of covering a length of 8800 kms under National Highways Development Project in FY13. Again, the allocation of the Ministry has been enhanced by 14 per cent to Rs 25,360 crore in 2012-13.

 Removal of Cascading Effect of DDT - Positive

It is further proposed to remove the cascading effect of Dividend Distribution Tax (DDT) in a multi-tier corporate structure. With a view to remove the cascading effect of DDT in multi-tier corporate structure, it is proposed that, if any company receives during the year dividend from subsidiary and that subsidiary has paid DDT (15 %), then dividend distributed by the holding company in the same year, to similar extent, will not be subject to DDT. We feel it is a positive for the sector as the move will benefit infrastructure companies that typically operate with an SPV model.

 Custom Duty Exemption on Imported Equipment’s - Positive

It is proposed that, full exemption from basic customs duty, Countervailing Duty and Special additional duty (SAD is being extended to equipment imported for road construction projects awarded by Metropolitan Development Authorities.  This will make a positive impact on the smaller infrastructure players.  Further the full exemption from basic customs duty on tunnel boring machines for all infrastructure projects is a positive move.

 Some Negatives

Concrete measures for the growth of infrastructure in India have been taken as part of budget 2012-13 by creating adequate funding mechanisms. However there are certain factors which may impact the infrastructure sector. The excise duty has been increased to 12 % from the levels of 10 %. This will lead to price increase in prices of raw material like Steel and Cement only eating away the margins going ahead. Further we expect the inflation to remain at higher levels going ahead. This does not create a very healthy scenario for the growth of infrastructure sector. Further the higher borrowing by the government to contain the fiscal deficit (Expected at 5.10 %) is expected to keep the interest rates at higher levels. We are of the opinion that unless and until the interest rate start falling, infrastructure growth is not expected to come smoothly.