India’s recent budget offers no panacea for the country’s infrastructure woes, but does contain policies that may stimulate new investment, says Prashanth Sabeshan of Majmudar & Partners
As India struggles to attract foreign investment, the recent budget – announced on 28 February against a backdrop of low industrial output and poor growth projections – has signalled the government’s commitment to securing investment for the infrastructure sector.
Financing strategies
The finance minister, P Chidambaram, encouraged the use of infrastructure debt funds (IDF) to provide long-term, low-cost debt for infrastructure projects. The IDFs uniquely float long-term bonds in both the domestic and international markets to channel investment into the sector. The repayment obligations are guaranteed under a tripartite agreement that is entered into by the IDF, the concessionaire and the grantor. This is a unique form of sovereign guarantee which provides a high level of comfort to international investors.
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The budget proposes that the India Infrastructure Finance Corporation (IIFCL), should offer credit enhancement to infrastructure companies in partnership with the Asian Development Bank (ADB). It also proposes that certain public sector institutions should be permitted to issue tax-free bonds of up to US$10 billion in the 2013-2014 financial year. Meanwhile, the rate of tax on interest paid to non-resident investors on rupee denominated long-term infrastructure bonds will be reduced to 5%.
As commercial banks refrain from taking the risk of providing capital to infrastructure projects, measures such as these should provide a much-needed boost for the sector.
The budget also proposes an infusion of US$2 billion into public sector banks. A further infusion of US$2.5 billion will take place during the 2013-2014 financial year in order to implement the requirements of Basel III, the global capital norms for banks. An all-women public sector bank has been proposed with an initial capitalization of US$200 million. It is hoped that much of this capital will find its way into the infrastructure sector.
New projects
The budget contains several proposals to allocate public funds to infrastructure projects. They include plans to construct 3,000 kilometres of roads in several states.
While noting the successful utilization of funds from the Rural Infrastructure Fund, the budget proposes that its corpus be increased to US$4 billion. Additional capital of US$1 billion is to be allocated to the National Bank for Agriculture and Rural Development to finance the construction of storage facilities for agricultural produce.
The budget proposes to increase India’s cargo handling capacity by building two new ports in West Bengal and Andhra Pradesh along with a new outer harbour at the port in Thoothukkudi in Tamil Nadu. Proposed capital infusions of US$1.15 billion and US$400 million for the Rural Housing Fund and the Urban Housing Fund respectively are expected to benefit the housing sector, while two new industrial corridors – Bangalore-Chennai and Bangalore-Mumbai – are expected to spur industrial growth.
Powering development
The budget proposes that the natural gas pricing policy should be reviewed so as to move from profit sharing contracts to a revenue sharing model that will be benchmarked against international prices. In addition, the budget mentions that a new policy on the exploration of shale gas in India is to be announced, that the national exploration and licensing policy is to be reviewed, and that exploration and licensing contracts will be cleared expeditiously.
With India increasingly reliant on foreign coal, the budget proposes to increase domestic production in partnership with Coal India on a public-private partnership basis.
Meanwhile, customs duties on bituminous coal and steam coal will be equalized – a 2% customs duty and a 2% countervailing duty will be levied on both kinds of coal.
The budget announced plans for the financial restructuring of state electricity distribution companies. Furthermore, power generation projects will be eligible to enjoy certain tax benefits from 31 March this year to 31 March 2014.
The budget emphasized the importance of renewable energy and proposed that the National Clean Energy Fund should provide low-cost finance to the Indian Renewable Energy Development Agency, which, in turn, should provide funds for viable renewable energy projects for the next five years. For the revival of wind energy projects, ₹8 billion will be allocated to the Ministry of Non-Renewable Energy to reintroduce generation-based incentives. This is a welcome development for all investors looking at this sector.
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Prashanth Sabeshan is a Bangalore-based partner at Majmudar & Partners. He acknowledges the contribution of Kritika Agarwal, an associate at the firm.
