Union Budget 2014: Infrastructure needs booster dose of incentives
G. M. Rao July 1, 2014Since assuming office the new government has shown positive intent and has taken some correct steps to bring the economy back on the fast growth path. The union budget is expected to be a catalyst in this direction. Infrastructure is one of the growth engines for uplifting the economy and the special emphasis of the present government on infrastructure is laudable.
Once infrastructure development is put in place, the economy is sure to grow and at a much faster pace. A study by the National Council of Applied Economic Research, for instance, shows that the modernisation of Delhi's airport contributed 0.45 per cent to the national GDP and 13.53 per cent to Delhi's GSDP in 2009/10.
Developed countries including the US and even China have focused on infrastructure development first and that has had a phenomenal impact on the overall economic development.
Most infrastructure projects are of long duration ranging from 25 to 60 years with very long gestation periods. Most projects also take a minimum of five years to stabilise operations. There is no cost effective financing available for the longer duration (25 to 30 years) which is the biggest challenge the sector is facing today. We require structural changes in the form of policies and reforms for sustainable long term growth of the sector.
-The world over, bond markets are used to finance Infrastructure. The absence of a developed corporate bond market in India like that in Europe and the US is affecting the growth of the sector. Indian infrastructure developers require 15 to 30 year bonds at fixed rates to finance their projects.
-For this we have to ease access to bond markets for private developers and provide credit enhancement by multi-lateral agencies and bank guarantees to enhance ratings. This would enable infrastructure companies tap the long term insurance and pension funds.
-We do not have development financial institutions and as of now only India Infrastructure Finance Co is assisting the sector in a limited way. Brazil, which is on par with India in terms of its size and economic development, has a dedicated institution known as 'BNDES' (Brazilian Economic Development Bank) which provide funds to the infrastructure sector at 30 to 40 per cent lower cost as compared to market rates. Development financial institutions providing long term funds at cheaper rates are essential to revive the growth sentiment and initiate Infrastructure development at a rapid pace.
-Today around 40 per cent of the adjusted net bank credit (ANBC) is for the priority sector (including agriculture). But the cost subsidisation given to it is offset by having higher lending rates for the balance 60 per cent.
-The infrastructure sector should be given special status and taken out of the 100 per cent limit of ANBC for the calculation of priority sector. Alternately the infrastructure sector itself may be given priority sector status. This will bring down cost of funds for the developer by two to three per cent.
-When Infrastructure sector was opened up the government gave ample tax incentives, such as exemption from minimum alternate tax and dividend distribution tax to attract private participation
-However, after some time the government began levying these taxes and the situation today is that an infrastructure company has to pay effectively around 44 per cent as corporate tax and DDT and 34 per cent as MAT and DDT of its earnings, which is the highest across the globe. This limits the amount of internal accruals that can be ploughed back in the business. If proper and adequate incentives and tax holidays are offered, the private sector will participate in the development of infrastructure in the country.
Given the mammoth requirement of $1 trillion investment for infrastructure in 12th Five year plan, immediate steps will have to be initiated along with reforms and structural changes. Faster decision making and understanding of issues by the new government will augur well for the sector going forward. Indian infrastructure developers are capable of creating world class infrastructure provided adequate sops are provided.