An assessment of the Union Budget is best done with reference to the set of expectations from it. For the infra sector, these expectations had crystallised by mid-February 2016. These related to betting on a 0.2% relaxation of the fiscal deficit target so as to create space for more public expenditure, with a tilt towards rural infrastructure. A PPP revival strategy was also expected through implementation of key recommendations of the Kelkar Committee report. A thrust on off-Budget funding mechanisms, a rejuvenation package for SEZs, and the capitalisation of a slew of new PSUs announced earlier in emerging areas like inland waterways, coastal shipping, renewables et al were in the expectations basket.
It now emerges that Budget FY17 has met the expectations on ‘rural infra’ and ‘PPP resetting’. It also appears to rely heavily on off-budget resource-raising.
The fiscal deficit relaxation, to around 3.7%, has not been done by the finance minister and he has been lauded for sticking to the fiscal deficit roadmap of 3.5%. In spite of this, the outlays for rural infra are transformational in nature—encompassing irrigation, watershed management, village electrification, rural roads and “rurban” market clusters. This is over and above the government’s big push on railways and roads together, of Rs 2.18 lakh crore.
The finance minister has also paid heed to the requests of the private sector for ameliorating the pain points of PPP and private participation in the country’s infra development. He has pressed five buttons to get a PPP revival process underway.
The first relates to the proposed Public Utilities (Resolution of Disputes) Bill which is expected to significantly address the issue of stuck liquidity of private construction companies in government projects.
The second is finally accepting the principle of renegotiation of PPP projects when ‘black-swan’ events strike across the life of any concession period. The finance minister has announced the publication of guidelines for renegotiation of PPP contracts.
Third, he has pushed for a new credit-rating mechanism for private infra projects which will, hopefully, recognise the decreasing risk levels as projects move from development to construction to operational stages. A new credit-rating architecture will both make the availability of long-term capital easier as well as bring down its cost.
Fourth, the FM has removed a significant irritant in the operationalisation of Real Estate Investment Trusts and Infra Investment Trusts by stipulating that dividends will no longer be taxed in the hands of the recipients.
Fifth, he has proposed for a far more practical structure for Asset Reconstruction Companies.
The scepticism prevalent amongst budget analysts is how the finance minister is going to achieve these large social and core infra outlays in the context of the 3.5% fiscal deficit discipline. The answer that suggests itself is that a large portion of the infra outlays have been planned from off-budget resource raising initiatives. These include infra funds leveraged with seed capital from the Budget (like the National Investment and Infrastructure Fund), tax-free infra bonds, international institutional and developmental funds and private capital under a friendlier PPP regime. All this bodes well for the infra sector and for pump-priming the economy.