Infra may get Atmanirbhar nudge in Budget as govt looks to spur growth

The biggest challenge for the infrastructure sector, especially in the power sector, is the financial stress arising from low demand or traffic and accumulated debt
The forthcoming Union Budget is expected to build on the Atmanirbhar packages announced in 2020, and there is likely to be an emphasis on increased infrastructure spending on building roads and maritime and rail-linked economic development.

The Ministry of Road Transport and Highways, for instance, has proposed to develop additional 60,000 km of national highways in the next five years, of which 2,500 km are expressways/access controlled highways, 9,000 km economic corridors, 2,000 km for coastal and port connectivity highways, and 2,000 km border road/strategic highways. The ministry also plans to improve connectivity to 100 tourist destinations and construct bypasses for 45 towns and cities.

The government would need to provide for at least a part of this, though it would continue to depend on the private sector for much of the investment. Arindam Guha, partner and leader, government and public services, Deloitte India, said the Union government’s estimated budgetary spend on infrastructure is likely to be around Rs 4.5 trillion in 2020-21. Any significant increase beyond 10 per cent year-on-year (YoY) may be difficult over the next three to four years, given the limited fiscal space available. “Given the total National Infrastructure Pipeline (NIP) outlay of around Rs 110 trillion, the central government budgetary spend is likely to range between 18-20 per cent, which is in line with NIP expectations,” he said.

Abhaya Krishna Agarwal, partner, government infrastructure, strategy and transaction, EY LLP, also expects infrastructure investment to remain a strong focus area in the Budget as the government looks to revive the economy after the pandemic hit.
“The Centre will be able to raise funds for projects across sectors identified under the NIP. However, states’ contribution in infrastructure investment could reduce as many are facing high fiscal deficits and liquidity issues. The government is likely to consider a balanced approach to rationalise states’ share in infrastructure investment in central schemes such as Jal Jeevan Mission (JJM) and AMRUT,” added Agarwal.

Agarwal said the government was also likely to announce some reforms to attract more private investment in the sector. “In roads, the BOT (build-operate-transfer) model could be revisited to de-risk projects from traffic variations, thereby making them more viable for the private sector. In railways, redevelopment of different categories of stations, including larger ones, would be fast tracked. Investments in High Speed Rail (HSR) and dedicated freight corridors are expected to be prioritised,” he said.
The highlight for the sector, however, would be the expected announcement of a development financing institution. Though Union Finance Minister Nirmala Sitharaman mentioned the creation of such an institution in the previous Budget, there hasn’t been much movement on this front. “The government should consider raising investment funding for the NIP through borrowings from overseas markets by issuance of overseas bonds through an SPV that could act as a mega development financial institution,” said Sanjay Aggarwal, president, PHD Chamber of Commerce and Industry (PHDCCI), in a pre-Budget memorandum to the government.

According to PHDCCI, the DFI could initially finance public sector infrastructure investments, and, as the economy picks up steam, could also finance private sector projects. “Financial as well as technical support extended by DFIs would help in efficient and timely infrastructural development,” said Aggarwal of PHDCCI. Foreign borrowing will allow the government to diversify its borrowings and significantly reduce dependence on the domestic market, leaving room for the private sector to raise capital, he added.

Guha said sectors like urban development, health, and education, where projects are under the jurisdiction of the state and even city governments, need additional focus. “In these sectors, suitable interventions may be considered like the central government providing a part of the initial risk capital, subject to specific structures and practices being adopted for asset monetisation, tariff rationalisation, etc.”

The biggest challenge for the infrastructure sector, especially in the power sector, is the financial stress arising from low demand or traffic and accumulated debt. Infrastructure projects typically are housed in a special purpose vehicle or a separate company. “Currently several projects are under stress and require fresh investment, the government could relax the requirement of maintaining 51 per cent shareholding in the SPV in order to set-off brought forward business losses [including loss arising due to capital expenditure claimed as a deduction under section 35AD of Income-tax Act, 1961 (‘the Act’)], and/or expand the definition of ‘industrial undertaking’ in section 72A of the Act to include infrastructure companies to facilitate reorganisation and utilise losses,” said Neetu Vinayak, infrastructure tax leader, EY.

Vinayak also said while the government recently exempted specified income of sovereign funds from investments in the infrastructure sector from tax it could further evaluate introducing tax holiday provisions like those granted to the real estate sector or reduced tax rate similar to the manufacturing sector to promote investment by private sector in new projects. “For raising immediate funds, entities in India could explore raising debt from foreign sources (such as ECB). Deduction of interest payments on such transactions could be restricted to 30 per cent of Ebitda, where conditions mentioned in section 94B of the Act are triggered. Currently, companies in the banking and insurance sector are excluded from aforesaid limitation and the exclusion could be extended to entities in the infrastructure sector as well,” she said.

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