The Union Budget serves several essential purposes for the infrastructure sector. First, it sets out the key goals of the government in more substantive terms and marks...
The Union Budget serves several essential purposes for the infrastructure sector. First, it sets out the key goals of the government in more substantive terms and marks a key and often first step to translate political and legislative intent into executive action. Second, it provides financial outlays which help kick-start and push such key initiatives.
Third, it lays out the means and modes for leveraging governmental funds through private sector investments. Finally, it lays out the taxation regime that would apply to investments in these critical sectors.
To start with, the energy sectors have very significant infrastructure and capital needs. In power the government has marked out an aggressive transition to renewable energy. This will require very large investment in generation, transmission and distribution facilities, amounting to over R4 lakh crore ($600 bn) in the next six years.
Consequently, measures on the fiscal front, especially for new and capital intensive technologies, are essential.
The government has already provided for tax breaks for technologies like solar in the form of accelerated depreciation. These now need to be extended to other technologies in the delivery chain including “smart” technologies covering networks, metering and controls. Incentives are also required to build a robust transmission and distribution backbone for a secure grid that can handle the variability of the wind and solar resources.
The sector still has significant stressed asset inventory in thermal and hydro power. A Stressed Assets Turnaround Fund under NIIF needs to be put in place for commercial and financial turnaround, upon which the revived assets can be auctioned transparently. In addition, stalled hydro projects in particular can be provided with special incentives, including potential viability gap funding.
The fuels infrastructure for coal and hydrocarbons needs modernisation, for which investments are required through the chain in production, transport and distribution, that too substantial investments. Opening up the coal sector for commercial mining would help augment coal availability and also mop up financial resources. For enhancing oil and gas availability, fiscal structures that attract and reassure investments are key to India’s energy security and a new round of NELP could be launched on that basis. A move to an ad-valorem cess for domestic crude instead of the specific rates applicable today would be fair and provide succour to the industry that is in considerable stress due to low crude prices. In addition, the Budget should clarify the prevalent confusion on tax holiday being available for gas production.
The government also needs to re-visit the gas pricing policy for promoting investments. The present pricing regime and the confusion on duty structures make investments a wholly unattractive proposition.
Creating a robust hydrocarbon pipeline infrastructure is also among the government’s key priorities. India has a massive deficit in gas pipelines, in part caused by a flawed bidding regime that placed excessive risk on pipeline developers. In line with what propelled the development of the roads sector, the Budget would be a good platform to propose a viability gap funding model for pipelines. The Budget would also be an appropriate platform to promote clean transport infrastructure through incentives for refinery modernisation to BS VI and also for creating gas infrastructure for highways for transport. Newer technologies like liquefied natural gas (LNG) based transport also need to be promoted through fiscal incentives. The benefits of Section 80 IA that provide critical tax incentives ought to be extended through the natural gas/LNG value chain.
Moving on to physical transport infrastructure, India’s deficit in roads, rail, waterways, and airports works substantially against the needs of a modern economy. The government is clearly seized of the matter and several initiatives have been announced by the respective ministries. However there is a need to do more. On coastal and inland waterways, for example, the present set of government incentives to stimulate the ecosystem do not go far enough and have not worked to take demand to the critical threshold. Policy measures for coastal shipping and inland waterways in the form of procedural simplification and incentives for warehousing, handling and evacuation infrastructure to reduce total logistics cost are essential and multi-modal logistics parks (MMLPs) need to be incentivised for this reason.
Finally, air connectivity is becoming an essential part of the transport infrastructure even in smaller locations. Incentives are required to enhance air connectivity within the country to Tier II and Tier III cities. There is a case for increasing VGF limits for regional airports, and exempting their construction from service taxes.
By Anish De
The author is Partner, Infrastructure and Government Services, KPMG in India. The views are personal