Perennial constraints, usual suspects

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: In the midst of the current economic downturn, infrastructure is increasingly being projected as the future driver of growth and employment in the country. However, a lot needs to be done for this to turn into a reality. And the Union Budget 2009-10 will have to provide the much-needed impetus to the sector.

The Budget can enhance infrastructure development in a number of ways. It could increase allocations to different infrastructure sectors, provide fiscal incentives, facilitate the development of the domestic debt market and induce foreign investments into infrastructure. There are some issues that need to be given top priority in the Budget:

Will budgetary allocations to the infrastructure sector be increased adequately? The projected investment in the infrastructure sector as envisaged in the Eleventh Five-Year Plan is around $500 billion. While the private sector is expected to invest substantially, the dependence on government support through budgetary allocations to different infrastructure sectors has to be significantly more than previous budgets.

Will infrastructure SPVs be exempted from withholding tax? Exempting foreign borrowings by infrastructure companies or project SPVs from withholding tax requirements will reduce borrowing cost as the current market practice is to gross up the withholding tax.

Will there be similar tax treatment for listed and unlisted equity? Currently, capital gains on the sale of unlisted equity shares attract a much higher tax rate than listed equity shares. However, it is understood that unlisted equity would be the dominant source of equity capital in infrastructure, at least in the medium term. Similar tax treatment will make providers of risk capital indifferent between the two.

Will there be separate treatment for infrastructure holding companies? Most developers house their infrastructure investments in a holding company as a separate business from that of the parent company, and these holding companies get classified as NBFCs under RBI guidelines. This puts several restrictions like limits on bank borrowing, ECBs not allowed under the automatic route, FDI investment in these companies not allowed without RBI approval etc. Treating these firms as a separate class of NBFCs will help getting exemptions from such restrictions.