Budget 2018: The key takeaways from the Economic Survey 2017-18 released yesterday were not new facts but a reiteration of what are the most important policies and mechanisms that need to be looked at urgently by the Government of India. The three key issues that stood out were (i) The infrastructure investment gap pegged to be at approximately 526 billion USD by 2040 (ii) Stressed corporate balance sheets with the 525 cases admitted under the Insolvency and Bankruptcy Code (IBC) having a total underlying default of INR 128, 810 crores and (iii) The problems with land clearances to start greenfield i.e. new infrastructure projects. Not just the upcoming budget but government policies beyond the budget must urgently address these issues to ensure that India can attract the required infrastructure investments to further boost growth.
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To address the infrastructure funding gap, the government needs to frame tax policies that reward risk taking investors especially in “greenfield” projects. Tax policies such as allowing for high percentages of accelerated depreciation that creates tax incentives to spur new investment, commend themselves to spur global capital to invest in India. In the past, certain government policies have sent mixed signals such as frequent changes in tax policies and imposition of retrospective Corporate Income Tax over the years. The government must incentivize private capital to create the much-needed infrastructure that will deliver social and economic value. For instance, there should be a special focus on allowing fixed income coupon seeking investors to access unlisted infrastructure assets in India. Policies must make debt investments in Indian infrastructure competitive with respect to global asset classes. Very simply Indian policymakers must put on their “investing hats” and ask the questions that why would a global investor invest in Indian infrastructure versus US corporate bonds or Australian Mining companies. Besides the intrinsic value of the infrastructure assets, a significant amount of value is derived from tax policies and regulatory regimes, both of which can be improved by policymakers. Unless Indian investments are attractive on a relative basis to other global investments, India will struggle to attract the additional investment required to fund the massive infrastructure gap. It is important to realize that without potentially attractive rates return on assets it will be very difficult if not impossible to incentivize global investors to invest their capital in infrastructure creation in India.
The stressed corporate balance sheets and the subsequent drop in private investments where the ratio of gross fixed capital formation to GDP taken as a proxy for investments has declined from a peak of 35.6 percent in 2007 to 26.4 percent in 2017 is something the economy has been grappling with for a while now. The Economic Survey drove home the point that such slowdowns take much patience and policy innovation to resolve. Reforms such as the Insolvency and Bankruptcy Code (IBC) are reforms in the right direction. Going forward from there should be a two-fold target for bankruptcy resolutions :(i) Ways to expedite the process and (ii) Ways to improve the process in an Indian context with the learnings along the way. Lending standards across the credit markets need to be of higher quality. Spurring private capital investments as mentioned earlier will help wean off the public-sector banks from having to fund infrastructure projects in the country. This will lead to more specialized lenders in the market with greater capacity to measure and price risk. Diversification of risk through a broader lending base and specialists involved in the lending process will help reduce problems such as “moral hazard” that have plagued the Indian banking system.
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A transparent and fast method for land clearances should be put in place and once clearances are given, they should be irrevocable. Infrastructure development in just about any sector, faces delays around land clearances. Historically such delays have discouraged new investments in India and costs have spiralled higher for existing investments. A consistent and transparent policy around land clearances with the central and the state governments working in tandem is urgently required. Without consistency and transparency in this space it will be challenging to push for greenfield or new investments in infrastructure.
The Economic Survey drives home the point that India must make a concerted effort to attract much needed infrastructure funding. This will be done by both attractive tax policies and favourable regulations. The government’s job as a regulator and policy creation platform, is as important if not more than that as an investor and employer.
(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm.)