By Neha Singh
Strong infrastructure enables a country and its corporations to be competitive while helping uplift people from poverty. Infrastructure is one of the most critical drivers for India’s growth journey as well as a balanced socio-economic development. From roads, ports, airports to power, water, health and tech, each needs to grow in a robust manner led by government investment and risk sharing, bold policy initiatives, PPP models and tax breaks particularly for private participation and necessary focus on skill development.
Recently the government has shown strong resolve in meeting our infrastructure deficit. The Government in the Union Budget 2021 has allocated US$ 32b towards transport infrastructure. The National Infrastructure Pipeline (NIP) projects currently stand at 9300 projects over 34 sectors with an estimated investment of about $1947.39b in 7400 projects. US$ 1.4t has been allocated by the government in infrastructure development until 2025. This should help us improve our ranking in the Global competitiveness Index where India stood at 68 in 2019.
In recent years we have shown tremendous progress in building better roads, faster. India also entered into key agreements with Japan, USA, Israel and others for necessary infrastructure in critical areas. The government is also aiming to invest US$ 750b in railway infrastructure by 2030.
Aviation has particularly seen very strong and positive developments in 2021. The successful disinvestment of Air India, launch of a new airline, Akasa, leap in the cargo sector, announcement of Asia’s biggest airport in Jewar (UP), an effective Drone policy and the return of Jet 2.0 are just some pointers of strong market dynamics and infrastructure developments. It also helps to have a strong player like Indigo which acts like a bulwark for the entire sector.
The aircraft passenger traffic is likely to reach 520m by 2037 for which India will need a fleet size of about 1800 aircraft by 2037. The growth in demand will need to be supplemented with necessary infrastructure and policy initiatives by the government with respect to airports, MROs, flying schools etc. In this context it is equally important that the industry benefits from the financing and leasing structures now available at GIFT – IFSC. There is demand of $120b investment in airport infrastructure.
While many infrastructure development bottlenecks have been gradually resolved, issues remain around policy stability, land acquisition and project funding among others.
Land acquisition for example has continued to be a challenge given the dynamics between centre and state and since the promulgation of Land Acquisition, Rehabilitation and Resettlement (LARR) Act 2013, it has become even more complicated since most states have come up with their own versions of the legislation (since its comes under the State List).
Some major cases such as Vodafone and Cairn Energy are rooted in the retrospective tax regime whereby section 9(1)(i) of the Income Tax Act, 1961 was made effective retrospectively as by the Finance Act, 2012. In December last year, the international arbitral tribunal constituted in the Cairn Energy matter held that India had failed to uphold its fair and equitable treatment obligations under the Bilateral Investment Treaty (BIT) and under the provisions of international law, by inter alia imposing the tax liability retrospectively. India was ordered to pay USD 1.2b to Cairn Energy in damages.
Multiple treaties to which India is a party is yet to be adopted in its domestic legal framework, thereby affecting funding. One such example is the implementation of the Cape Town Convention (CTC) – an instrument adopted by India in 2008 however it still doesn’t form a part of its legal framework which if adopted would have provided a straight 10% OECD discount to the end users – i.e., the airlines. CTC also provides security to the investors to repossess their assets including in a bankruptcy scenario. Funding of any nature needs to provide adequate, quick and viable security to the financier – which is addressed by CTC, however India is yet to take comprehensive benefit of this treaty/ convention.
If anything these lead to concerns about the reliance and predictability of laws in India and their adoption and enforcement, which in any dynamic is not a good market sentiment.
Since funding remains the biggest challenge in this sector, the government aims to partially address this by the creation of National Bank for Financing Infrastructure and Development, a very promising step indeed. The idea is to make the National Bank for Financing Infrastructure and Development (NBFID) as the primary development financial institution (DFI) for infrastructure financing by extending loans, attracting investment from private sector, organising and facilitating foreign participation, facilitating negotiation with government bodies etc. The government will also provide grants worth US$ 50b to NBFID by the end of the first financial year and will also provide guarantee at a concessional rate of up to 0.1% for borrowing from multilateral institutions, sovereign wealth funds, and other foreign funds.
India needs to get its infrastructure strategy right for it to be able to achieve the goal of a USD 5t economy by 2025. Underinvestment in the sector is, as discussed above, being partially addressed by the NBFID, PPP, relaxed FDI policy, tax breaks (in certain sectors) however long term private participation needs stability of policies, quick and reliable legal framework and strong insolvency and restructuring regimes which can safeguard private finance and thereby augment government initiatives.
(The author of the article is Associate Partner at Link Legal. Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)