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The Budget for 2013-14 is likely to announce a slew of steps to boost private and foreign investment, especially in the infrastructure sector, along with income tax breaks for spurring savings to lift economic growth.
Some of the steps that are being considered include restoration of tax breaks for infrastructure bonds, waiver of withholding tax on the interest on foreign loans to mega projects, raising FII debt investment limits and re-energising the corporate bond market.
Sources said there is a strong case for restoration of the tax break of up to R20,000 for infrastructure bonds under Section 80CCF. The incentive was abolished in the last Budget even though the government allowed infrastructure financiers to float tax-free bonds totalling R60,000 crore during 2012-13. The retail participation in these bonds have been lacklustre this year due to the absence of the tax deduction.
There is a chance of exempting interest income from loans given to mega projects like the Delhi-Mumbai Industrial Corridor (DMIC) and Dedicated Freight Corridor (DFC), and infrastructure debt funds from the 5% withholding tax, sources said.
Considering that government’s gross market borrowing may near an all-time high of R6 lakh crore in 2013-14 and the clamour for long-term funds from private sector, the foreign investment limits in government, corporate and infrastructure bonds could be raised by $5-10 billion each in the next fiscal.
The budget may also announce setting up of a bond guarantee fund, which will help in credit enhancement of companies engaged in public-private partnership (PPP) projects in the infrastructure space.
“Many of these issues had come up for discussion during the finance minister’s interaction with foreign investors at road-shows in Hong Kong and other countries. Some of them could be implemented in the Budget,” said an official, who had accompanied the minister on the road-shows.
Many experts believe that the budget has to focus on reviving investment considering that the investment rate has fallen to 35% of GDP in 2011-12 from 36.8% in 2010-11. The investment rate cannot be raised significantly unless the government revives the savings rate, which has fallen to an 8-year low of 30.8% of GDP in 2011-12 from 34% in 2010-11.
Though much of the slowdown in investment was due to delay in land acquisition and forest clearances, sources said the finance ministry is serious in reviving private investment through a mix of policy initiatives including tax breaks, credit enhancement and re-energising the corporate bond market by incentivising bourses to launch trading platforms for retail investors.
“The Budget may announce setting up a bond guarantee fund,” an official close to the development said.
The proposed bond guarantee fund will help reduce the reliance on government guarantees for various projects, especially public-private partnerships and enhance fund flows to private companies.
While IIFCL has started a credit enhancement facility — a mechanism to provide partial guarantee to special purpose vehicles (SPVs) involved in infrastructure projects so that their bond ratings are raised to investment grade of “AA”, the government wants to institutionalise the facility through setting up of a bond guarantee fund. Such a facility will help infrastructure SPVs to sell their bonds to insurance companies and pension funds.
“We have already got 14 proposals for providing partial guarantee to bonds totalling R5,000 crore of infrastructure SPVs. IIFCL is working towards launching a regular credit enhancement scheme very soon,” said IIFCL chairman SK Goel. For instance, GMR has approached IIFCL for credit enhancement for their airport projects in Delhi and Hyderabad, he said.
The government is also in discussion with Asian Development Bank for partial credit guarantee facility that could help corporates raise rupee equivalent of $12 billion through bonds over the next three years, sources said.
India will require $1 trillion investment in infrastructure during the 12th Plan period (April 2012 to March 2017) to sustain over 8% GDP growth, but Indian banks may not be able to finance the entire amount considering the asset-liability mismatches and the permissible exposure limit in infrastructure lending. Equity financing is equally scarce for infrastructure projects, which is why the government is relying on corporate bond market to arrange most of the funds for infrastructure.