The Budget's Backbone, And Of The Economy

The Budget increases spending on infrastructure. This is where the battle begins.
Anilesh S. Mahajanand twitter-logoShweta Punj | Print Edition: March 29, 2015
Minister of Road Transport and Highways Nitin Gadkari
It was our mistake that we did not realise the potential of the country's inland waterways. But now, we will put all our efforts to make this happen: Nitin Gadkari, Minister of Road Transport and Highways (Photo:

Responding to a recent debate on amendments to the Motor Vehicle Act in Lok Sabha, Transport Minister Nitin Gadkari said he gets stuck for 40 to 45 minutes in traffic at Dhaula Kuan, in south-west Delhi, while on his way to or from the airport. No wonder, then, that he was in an expansive mood when we met him on the evening of March 2. It was way past dinner time, and yet the minister showed no sign of sleepiness or fatigue.

And why would he? He had received a booster shot just two days before, in the Budget: more money to build more roads, even if that jam on Dhaula Kuan will have to wait for some time.

As Finance Minister Arun Jaitley announced an increase of Rs  70,000 crore in the government's spending on infrastructure to take it to a total of Rs 1.45 lakh crore for the next financial year, Gadkari's mind began to race. He brims with excitement as he talks about a bus that moves on water and road.

On his desk sits a wooden placard that says: "I like people who get things done." The quote is attributed to Gadkari himself. "I don't say anything that I cannot do," his voice adds.

Rs 20,000 CRORE
Annual inflow in the National Infrastructure Investment Fund

That will warm Jaitley's heart. The extra spending on infrastructure did not come from nowhere. Directly or indirectly, it cost a 30 basis point slippage in the fiscal deficit target for next year to 3.9 per cent of GDP.

Can Jaitley really make this amphibious thing fly? Maybe not, but he is not getting carried away by the idea. For he knows that the major part of the transport network will have to be roads. There is just Rs 200 crore allocated in the Budget for waterways.

Main initiatives
Main initiatives
As much as Rs 14,000 crore - a fifth of the increased allocation of Rs 70,000 crore - is for roads alone. This will be supplemented by the National Infrastructure Investment Fund, created with an annual allocation of Rs 20,000 crore. In addition, the Budget has allocated Rs 14,391 crore to construct roads in rural areas. The Budget also allowed infrastructure finance companies like the National Housing Bank (NHB) and Indian Railway Finance Corporation (IRFC) to issue tax-free bonds for projects like rail, road, irrigation, etc. Gadkari is also looking to raise Rs 40,000 crore from the market.

"Some of our PSUs may also contribute to this new fund. When the government decides to put its money where its mouth is, the world flocks to co-invest in such funds," says Power Minister Piyush Goyal. For his part, Goyal has to realise Jaitley's proposal to set up five new Ultra Mega Power Projects, each of 4,000 MWs, in the plug-and-play mode, where government agencies will take all clearances and ensure all linkages before the projects are auctioned.

Ratul Puri of Hindustan Power calls this a great opportunity. Since the National Infrastructure Investment Fund is a separate fund, it will be able to raise debt and, in turn, invest as equity in infrastructure finance companies like IRFC and NHB. "The infrastructure finance companies can then leverage this extra equity manifold. All this means more monies in the infrastructure sector," says Puri.

Where will all this money go? The target is to do 8,000 km a year, which will cost no less than Rs 20,000 crore. That's nearly 22 km a day. To put the ambition in perspective, just 4,000 km were built in the last few years. Now, 8,000 km is the target for just one year.


"Our focus is to save the lenders, so that the capital does not fly away from the road sector. The effort is to bring the investors' confidence back."


Transport Secretary

This will need lenders, which have gone away in recent years. The Narendra Modi government is ready to woo them back. Part of this wooing will be through speedy clearances. "Whichever project is ready next month, we are awarding today," says Transport Secretary Vijay Chhibber.

When Gadkari took charge, infrastructure projects worth more than Rs 8.8 lakh crore were stuck, including many of road construction. The balance-sheets of the companies concerned were full of red ink. Lenders were in distress and capital was drying up. The Reserve Bank of India insisted that the companies must pay interest to service the debt. The positive business sentiments around Modi's ascent to Prime Minister led to a surge in the stock market, allowing companies to improve their debt-to-equity ratio. A wave of consolidation took place in the infrastructure sector.

Gadkari used the opportunity to clean up. "Our focus is to save the lenders, so that the capital does not fly away from the road sector. We are not bothered about the companies. The effort is to bring investor confidence back," says Chhibber.

A cabinet approval is sought to alter the contracts with the concessionaire to restart stuck projects. "Sixteen projects can be completed but no one is willing to lend more. In cases where the lender is ready to allow the government to take first charge, we are seeking the Cabinet's go-ahead to put in money as debt," explains Chhibber. Similarly, the ministry is seeking permissions to allow concessionaires of pre-2009 projects to sell their equity. This may free them to reinvest in their other stuck projects.

The public-private partnership model, which has not really lived up to expectation, has been changed to make the government pick up 40 per cent equity and take on the traffic risk. The remaining equity will be annuity-based payment linked to construction and timeline. Annuity-based payments refer to assured returns at fixed intervals based on a contractor meeting construction obligations on schedule.

The big idea is hybrid annuity. The government is offering 13 new projects covering 2,100 km, in which the offer is to take up to 40 per cent viability gap funding, or VGF. This is a litmus test for Gadkari. In the last two years, his ministry could not disburse 21 projects. "The intention of the government is good and another positive is that they are listening," says the CEO of a company who does not want to be named.

The government is also giving incentives to contractors to finish projects on time. There are contractors who are now finishing projects months before time. States such as Rajasthan and Madhya Pradesh are working towards the government's agenda of connecting India through high-quality roads, but states like Bihar tend to be problematic as ever.

According to Gadkari, 78 per cent of the issues related to the road sector have been resolved. Forty unviable projects have been terminated. Road projects worth Rs 1.4 lakh crore have been cleared and a solution is being worked out for 26 projects.

The Budget allowed tax-free bonds for infrastructure projects such as rail, road and irrigation

No wonder Gadkari's ministry has come alive. The minister is known to pick up the phone to call his counterparts in other ministries to address issues arising out of coordination bottlenecks and solve, within minutes, problems that could potentially cause six-month delays. His officers have begun to believe that the cornerstone of India's growth story has to be connectivity through roads and highways and the country's links to the rest of the world through ports and inland waterways.

Inland waterways is an area that invariably makes Gadkari smile. In the last seven decades, India could transport just 0.2 per cent of its cargo through waterways. In Europe and North America water is the cheapest and safest mode of transport. Since Independence, India has developed only five commercial waterways. The plan is to develop 45 more.

"It was a mistake. We did not realise the potential (of inland waterways). But now our focus is to make this happen," says Gadkari.

The other important leg of the network will be the railways, where Suresh Prabhu is basking in the afterglow of a well-received Budget. He is ready to sign Rs 1,90,000 crore worth of agreements in the next week for railway projects.

A multimodal corporation has been set up for greater coordination between key infrastructure ministries. In nearly 90 per cent of the provisions announced in the Rail Budget, work has already begun. A helpline was launched within three days. The ministry - believe it or not - worked 20 to 22 hours a day to put together the Rail Budget, which clearly addressed structural issues.

Gadkari, meanwhile, can spend a bit more time thinking of that bus that swims in water.

(Follow the writers on Twitter at: @anileshmahajan; @shwetapunj)

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