Union Budget 2020 India: While the measures to draw long-term investors and monetise assets are welcome, a few concerns remained unaddressed.
By Arindam Guha
Union Budget 2020 India: It was always expected that the government would have limited leeway in increasing infrastructure investments in Budget 2020-21, given the fiscal headwinds it is facing. However, it seems to have done a fine balancing act with the proposed outlay for infrastructure (including sectors like agriculture, rural development) increasing by 10-12% on a year-on-year basis.
One major ask from the viewpoint of infrastructure financing was to facilitate the deepening of the market for instruments like infrastructure & municipal bonds, infrastructure investment trusts, etc. through higher participation of long-term investors like sovereign wealth funds, pension funds and insurance companies as well as increased foreign investment from foreign portfolio investors (FPIs), etc. This requirement has been largely addressed by the Budget with returns for sovereign wealth funds from infrastructure investments being fully exempted from tax subject to certain conditions. Additionally, the investment cap for FPIs in corporate bonds has been increased from 9% of outstanding stock to 15%.
Coming to pension funds and insurance companies, one of the key constraints which prevents them from scaling up investments is that most infrastructure or municipal bonds/other infrastructure related instruments do not meet their threshold risk/credit rating requirements. Other countries like the UK, Australia, etc. have used mechanisms like surety bonds and credit enhancement guarantees to address this issue. Media reports suggest that the government is already in the process of introducing surety bonds for infrastructure projects being developed by it. On credit enhancement guarantees, the current limits available through agencies like IIFCL are quite limited. However, Budget 2020-21 has not announced any outlay to increase existing credit enhancement guarantee limits.
The National Infrastructure Pipeline (NIP), announced in December, identified asset and land monetisation through transfer to asset aggregators/private financiers as one of the strategies for increasing private investments in infrastructure. Budget 2020-21 has expectedly taken this forward with the railways proposing to use land available alongside its tracks to set up solar power generation facilities. Similarly, around 6,000 km of existing highways are proposed to be monetised by NHAI by 2024.
Budget 2020-21 has provided for viability gap funding support to set up warehousing infrastructure, healthcare facilities and medical colleges through public private partnerships at the district level, with the state government required to provide land for such projects. However, sectors like urban development have not been called out specifically and associated conditionality like land aggregation and supporting policy & institutional reforms to be undertaken by state (and local) governments have also not been highlighted.
Watch Video: What is Union Budget of India?
Finally, while Budget 2020-21 has highlighted initiatives like the proposed National Logistics Policy in the context of overall industrial and economic development, no specific measures to strengthen the existing regulatory framework in sectors like railways, urban infrastructure & water, etc. have been announced. To facilitate private investment in these sectors, there is a felt need for an independent regulator overseeing areas like tariff/user charge fixation; determination and mechanism for reimbursement of subsidies; specification and monitoring of service delivery levels; dispute resolution, etc. For sectors like urban & housing, water, health, etc. much of this regulatory capacity may need to be created at the state level.
The writer is Partner, Deloitte India