Budget 2018 is going to be Narendra Modi government’s last full budget prior to the 2019 general elections; there are talks in the media and many experts are of the view that Finance Minister Arun Jaitley is going to allocate a huge amount of money into infrastructure in this year’s Union Budget. This will adhere to the dual purpose of creating jobs and development in the country. We look at some of the key areas Finance Minister Jaitley would address on the infrastructure sector during this year’s Union Budget.
NPA issue of banks
There are a number of cases in the infrastructure sector which are facing stressful situations and many of these are under the resolution process involving Insolvency and Bankruptcy Code (IBC). Gaurav Karnik of Ernst & Young says, “I think some of the changes that could be brought by the finance minister could be to make the process of bankruptcy resolution under IBC much easier and tax friendly. There could be certain exemptions given on the valuations in Budget 2018. So you could transfer the assets at a value which are lower than the prescribed value because it is under IBC and there could be something about MAT credit which could be transferred along with other assets. These actions if taken during the Union Budget will help the process.”
A note from ICRA said, “A major part of the infrastructure financing is supported by the banking sector at present. Corporate and infrastructure sectors together account for less than 30% of bond issuances. Appetite for long term and papers rated below AA category is low. Deepening of the bond markets is required to support long-term infrastructure financing, especially given the twin challenges faced by commercial banks – asset-liability management and increasing share of stressed assets. Relaxation of rating threshold (lower investment grade) could encourage domestic insurance companies and pension funds to invest in bond issuances from the infrastructure sector.”
Allocation of more funds for Prime Minister Modi’s pet projects like housing for all, smart cities
Housing for all is a very important program for the Prime Minister and for the government of India. On that side, I think the focus of the government is basically on affordable housing. I think we will clearly see some emphasis on affordable housing to the extent that more funds would be allocated to this sector. The government is also looking to introduce Public-private partnership (PPP) model in the affordable housing space.Government is trying to have a partnership with the private sector and is looking at private capital to fund this affordable housing program. I think one of the asks of the real estate sector is that it should be granted infrastructure status. Already for affordable housing, infrastructure status has been given, but as a sector, I think it would be good if it could get that status.
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HDFC Securities in its pre Budget note said, “With a large number of infrastructure projects in pipeline such as Bharatmala, Sagarmala, Bullet train, Housing for all, Smart City development etc, we expect Budget to increase allocation towards roads, railways, housing and urban development.”
“The expectations from the Union Budget are substantial, as is every year. For affordable housing, there is a notable point for the Government to consider. As things stand, despite its far reaching scope, the PMAY subsidy is unable to reach a large portion of home buyers who are migrating to the peripheral areas of metros and other big cities in search of jobs. This is largely due to their ownership of pukka houses, in many cases ancestral homes, in their smaller home towns. The affordability of this home buyer thus reduces considerably, as he/she must be a first time home buyer to be eligible for the PMAY. Almost 50-60% of the housing demand goes untapped by the subsidy due to this. It would be interesting to see if the Government would address this subject and expand the reach of the subsidy, thereby accelerating its mission of Housing for all.” says Ashwini Hooda, Deputy Managing Director, Indiabulls Housing Finance Limited.
Amar Ambani, Partner & Head of Research, IIFL, says, “Notwithstanding the fact that the 2018 Union Budget would be wary of the general elections in the following year, the government would not like to turn overtly populist, going by its resolve thus far and notwithstanding the spends in staple areas like public infrastructure, agriculture, affordable housing, and mass employment, especially immediately preceding the election year.”
More road, railways, seaport, airport projects in Budget 2018
Budget 2018 could see the announcement of more road, railways, seaport and airport projects. HDFC Securities note states that the government could rely on non-budgetary sources of funding to fund the government’s ambitious programs in railways, roadways and waterways. Budgetary allocations for capital spending are likely to be supplemented by extra-budgetary sources of funds such as institutional finance and market borrowings of the CPSEs, Railways as well as the NIIF.
“Yes, clearly the government is very focused on infrastructure. For instance, Toll-Operate-Transfer (TOT) model is one such project which the government wants to implement to mop up some revenues. They have also announced plans for building highways, roads in India in a large way. So we could see some sort of allocation towards these aspects, whether this is on the port side or roadways, we will see in the Union Budget 2018. The main point is where will the revenue come from to fund all these infrastructure projects. So, as long as there is tax buoyancy which has been positive recently, then there could be some revenues from which Finance Minister Jaitley could spend on these projects. So it will be interesting to see how Arun Jaitley balances the revenues and the expenditure,” says Karnik.
“The total budgetary allocation (including PBFF, CRF and GBS) to fund the ambitious new highway development programme is estimated at Rs. 3,43,045 crore over FY2019-FY2022. Therefore, starting this Budget, the allocations to the Road Ministry are expected to increase substantially. In order to support the new programme, allocation to the MoRTH for FY2019 is expected to be in the range of Rs. 80,000-85,000 crore against Rs. 64,900 crore for FY2018,” noted ICRA.
“I think Finance Minister Arun Jaitley’s emphasis on infrastructure will be to use private capital and to that extent, I think there will be some more liberalization or more incentives for foreign capital to come and participate in Railways and Power sectors. I think that could be a way to fund these two sectors which you are talking about,” adds Karnik.
More funds for Bharatmala and Sagarmala projects
Sagarmala is very important as it involves linking of rivers and this will help in transportation of goods and reduce freight costs. It also helps in allocation of water resources more efficiently. Aneel Gambhir, Chief Financial Officer Blue Dart, says, “India lacks the availability of world-class cargo transit hubs, which has resulted in business shifting to other neighbouring countries. Development of dedicated freight corridors for both rail and road transport, which can provide better multi-modal transport (connecting airports) is yet to be conceptualised in the country. This should be partially addressed by the recently announced infrastructure project Bharatmala, connecting 550 districts to the National Highway and Sagarmala that aims to de-congest major ports as well as commission at least six new mega ports.”
“Again the question is there should be more movement on both these projects, but whether he will be able to allocate funds in the Union Budget 2018 is going to depend on how the budget numbers work out and how he plans to balance the fiscal deficit issue,” adds Karnik.
Concessions for Special Economic Zones
Over the years concessions such as MAT exemptions, dividend distribution tax exemption, have been taken away or reconsidered for Special Economic Zones (SEZs). “So the concessions that SEZs are asking are actually in line with what was envisaged when the SEZ concept was introduced many years ago. I think personally that MAT on SEZs may go and some other incentives may be brought back in the Budget 2018. On one hand we are asking for incentives, and on the other hand, we are trying to balance revenue collections with tax. I think lowering of tax rate would really help in mopping up revenues,” says Karnik.
“The industry also expects that the budget would propose to remove the minimum alternate tax for the players operating in the special economic zones of the country. To summarise, the industry anticipates more schemes under Make in India, Skill India, and Digital India initiatives, which would help in the boost of the upstream and downstream economic activities,” adds Gambhir.